Managing Exports

Managing Exports

Navigating the Complex Rules,Controls, Barriers, and Laws

Frank Reynolds

JOHN WILEY & SONS, INC.

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Library of Congress Cataloging-in-Publication Data:

Reynolds, Frank, 1942–Managing exports : navigating the complex rules, controls, barriers, and laws /

Frank Reynolds.p. cm.

ISBN 0-471-22173-2 (Cloth : alk. paper)1. Exports—Management. 2. Export controls. 3. Export marketing—

Management. 4. Foreign trade regulation. 5. Exports—United States—Management. 6. Export controls—United States. 7. Export marketing—UnitedStates—Management. 8. Foreign trade regulation—United States. I. Title.

HF1414.4 .R49 2003658.8'48—dc21 2002014017

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

To Kitty and Bob, who, as usual, helped make it happen.

Contents

Preface xiii

Acknowledgments xv

Chapter 1 The Whole Export 1Who Is Who? 2Who Is Involved? 2What Is Involved? 4Evolution 5Linkages 6Meet in the Middle 9Don’t Forget the Buyer 13Don’t Forget the Other Trading Partners 16Don’t Forget the Facilitators 16Linkages 19Endnotes 19

Chapter 2 Export Control 20Who Is Involved? 20Bureau of Industry and Security Overview 23Export Administration Regulations 23Subject to the EAR? 23Some Useful EAR-Related Definitions 24Ten General Prohibitions 26Classification under the EAR 28EAR99 28Export Control Classification Numbers 28Export Control Classification Number Entry 30Unique Control Procedures 31Commerce Country Chart 32Summary 34

vii

Country Groups 35List-Based License Exceptions 35Transaction-Based License Exceptions 37Summary of License Exceptions 44Prohibited End-Users, End-Uses, and Enhanced

Proliferation Control Initiative 44Deemed Exports 46“Bad Guy” Lists, Knowing Your Customer,

and “Red Flags” 46BIS Export License Application 48Antiboycott 50Export Reporting and Clearance 51Record Keeping 52Export Control Compliance System 53Linkages 53Endnotes 55

Chapter 3 The Product 56Product Characteristics 56Product Design 58Product Presentation 60Packing 63Preshipment Inspection 64ISO Standards 65Country-Specific Product Standards 68Intangible Products 76Intellectual Property 77Linkages 79Endnotes 80

Chapter 4 Export Channels 81Indirect Exports 81Direct Exports 91Nonexport Channels 102Linkages 104Endnotes 105

Chapter 5 Export Marketing 106Where in the World 106

viii Contents

Who in the World 112How in the World 120Supporting Trading Partners 125Voluntary Standards Certification 126Potpourri 128Linkages 128Endnotes 129

Chapter 6 Export Pricing 130Costs 130Export Cost Analysis 138Markup 140Export Price Lists 142Currency 143Fine-Tuning 144Things To Avoid 145Preferred Duty Treatment 147NAFTA 148Countertrade 151Linkages 153Endnotes 154

Chapter 7 Terms of Sale 155What Incoterms Are 157Limitations of Incoterms 160Simplified View of Tasks 163The 13 Incoterms 2000 164Incoterms and Payment Terms 174Incoterms and Selection of Service Providers 175Incoterms and the Uniform Commercial Code 175Incoterms and U.S. Exports 177Linkages 178Endnote 178

Chapter 8 Insurance 179Surety 180Credit Insurance 183Cargo Insurance 184Inland Marine Insurance 186

Contents ix

Marine Cargo Insurance 187Other Export-Related Insurance 198Linkages 200Endnote 200

Chapter 9 Sales Contracts, Proforma Invoices, and Purchase Orders 201Sales Contracts 201Proforma Invoices 209Purchase Orders 212Linkages 219Endnotes 220

Chapter 10 Transportation 221Contracts of Carriage 222Performing versus Nonoperating Carriers 224Forwarders 224Shipper’s Letter of Instruction 226Third-Party Logistics Providers 229Air Transportation 233Marine Transportation 237Hazardous Materials 251Cargo Security 252Linkages 255Endnotes 256

Chapter 11 Documentation 257Form Design 258Proforma Invoice 259Commercial Invoice 259Packing List 263Shipper’s Export Declaration 265Generic Certificate of Origin 272North American Free Trade Agreement Certificate

of Origin 274U.S.–Israel Free Trade Agreement Certificate of Origin 277U.S.–Jordan Free Trade Agreement 280Other Country-Specific Documentation 281Linkages 287

x Contents

Chapter 12 Export Credit 289Types of Risk 289Sources of Information 292Terms of Payment 295Letters of Credit 298Forfaiting 312Documentary Collections 313Alternative Payment Methods 318Linkages 322Endnotes 323

Chapter 13 Keeping Current 324Government 325Your Own Industry 326Foreign Trade Organizations 326Basic Knowledge Sources 328Supplementary Knowledge Sources 330Reference Points 332Linkages 340

Index 341

Contents xi

Preface

“We have met the enemy, and they are us,” said Pogo the Possum. Nowhere isthis more true than in exporting.

Exporters walk a narrow line between ever-changing government regula-tions (ours and others), complex product standards, transportation changes,exchange rate fluctuations, and punitive import duties—all played out againstthe background of political and economic situations of about 200 countries.

Such was the situation on September 10, 2001. If possible, it has becomeeven less predictable because of what is becoming a sea of new regulations.

It’s sometimes amazing that foreign trade goes on at all. But it does, andexporters can still lawfully and profitably do business if they know what to lookfor and what to avoid.

The really good news is that answers to many export-related problems arewithin your grasp. I mean this literally: they are a well-placed phone call away,perhaps within your own company.

It’s amazing how much information is available in the other job functions ofeven modest-sized companies. For instance, do you realize that most of the cus-tomer-specific information you need for export control compliance “know yourcustomer” rules is probably sitting right in your credit department? If it isn’t,we’ll put it there and explain the rules to your credit, sales, and compliance peo-ple through this book’s collaborative approach.

Thirty-eight years of exporting, instructing, and consulting have gone intopreparing this navigation guide. Not only will it keep you out of trouble, but itwill aim you toward increased export profit through smarter use of existingresources.

Frank ReynoldsToledo, OhioJune 27, 2002

xiii

Acknowledgments

The author gratefully acknowledges the hands-on assistance of Robert Abra-hams, Director of the Commerce Department’s Toledo Export Assistance Cen-ter, whose wealth of foreign trade knowledge can be found in every chapter.

Catherine Callahan provided her usual excellent blend of support and criti-cism in abundant quantities—not to mention enough computer smarts to keepthis “bit-and-byte” illiterate going.

Many thanks also to those sources that kindly gave me permission to citeportions of their work in this book, particularly the Institute of Managementand Administration (better known as IOMA).

Finally, thanks to the United States Department of Commerce for havingthe useful programs that I described in this book and use every day.

xv

Chapter 1

The Whole Export

The most important difference between export and domestic trade is that inexport, sellers and buyers are located in different countries. This is so obviousthat it is often taken for granted and then, incredibly, overlooked.

A moment’s thought will reveal the tremendous implications contained inour opening statement. Because sellers and buyers are in different countries,they are subject to different regulations from different authorities and havedifferent procedures for settling disputes. Each country will observe its ownnational holidays. To some extent, their commercial practices will differ, aswill their product standards. Each country will probably have its own cur-rency.

These minimal differences apply to trade between the United States andCanada! If we go beyond our most similar trading partner and closest neighbor,we will probably encounter different languages, longer transportation to accom-modate greater distances, different types of electric power, exclusive use ofmetric units, significant differences in times and seasons, plus entirely differentsocial and economic cultures.

If this were not enough, the seller’s and buyer’s countries may belong todifferent common-market-type regimes. This may result in conflicting multi-national regulations and discriminatory treatment of products originatingfrom nonmember countries. Further, some countries, including the UnitedStates, embargo other countries. These prohibitions can range beyond theborders of an embargoed country to include its nationals wherever they maybe and may extend to other countries, institutions, or persons known to sup-port it.

Given these obstacles, it’s amazing that foreign trade exists at all. It doesfor a multitude of reasons, most of which will be addressed in this book.However, successful foreign trade requires care, particularly on the part of theexporter.

1

WHO IS WHO?

For simplicity, we will assume that the seller is also the exporter.This is normallythe case with two exceptions:

1. Some sellers engage specialized entities called export management compa-nies (EMCs) to handle their exports. Because EMCs typically do not taketitle to the goods they handle, they are not, strictly speaking, sellers. How-ever, their interests so closely match those of their seller-principals that wemay group them together.

2. Some buyers appoint purchasing agents to handle exports from their sell-ers’ countries. Because these are exports of goods that have already beenpurchased for the account of their overseas principal, the underlying salestransactions are really domestic business and are beyond the scope of thisbook.

Having accounted for these two exceptional circumstances, we will considerthe “exporter” and the “seller” to be the same party for the purposes of thisbook unless otherwise indicated.

There are two basic approaches that a manufacturer may use for exporting.It can handle its own exports; this is called direct exporting.As we’ve seen, it canalso engage an export intermediary, perhaps an EMC, to handle its exports.Thisis called indirect exporting. Many manufacturers use both approaches bydirectly exporting to established markets and use export intermediaries for newmarkets or for situations where the intermediary has particular qualifications.Once again, we will make a generalization for the sake of simplicity.Throughoutthis book, the “manufacturer” and the “exporter” will be considered to be thesame party.The only exceptions will be found in Chapter 2, which covers exportcontrol compliance, and in Chapter 4 where export channels are considered. Ifthis seems like an odd assumption, simply consider that most export intermedi-aries act as the manufacturer’s “export department,” because that is what theyeffectively do.

Combining the ideas of the two preceding paragraphs, we get a seller who isalso both exporter and manufacturer. Once again, for the sake of simplicity, wewill consider this party to be our seller throughout this book unless otherwisenoted.

WHO IS INVOLVED?

Successful exporting requires the participation of most business-related activi-ties found in most companies. Not only must the various departments becomeinvolved, but they must also relate to each other in different, and often closer,

2 The Whole Export

ways than is true of domestic business. This may require some “out-of-the-box”thinking, because most companies establish their operating procedures arounddomestic business models.

Let’s establish the key players and their job descriptions for use in our study.Most are given expanded roles to keep the number of players manageable:

• Sales. The basic sales functions are recruiting trading partners or end-userbuyers and communicating with them. We will also include marketing, sell-ing, quoting, order entry, and promotional activities in support of tradingpartners. Depending on the type of product, Sales may work through over-seas representatives and distributors in addition to its own staff.

• Credit. This department determines appropriate payment terms for cus-tomers (and their countries) and collects the accounts receivable. Creditusually engages credit-information providers, banks, and perhaps credit riskinsurers.

• Seller’s Bank. It can provide credit information on prospective buyers, andrecommend and help implement appropriate payment terms.

• Manufacturing. To the basic production function we’ll add product design,modification, and standards.We’ll also add export packing, because this taskmay be handled more readily by manufacturing personnel than by others.

• Purchasing. The basic responsibility is obtaining goods and services for reli-able delivery at competitive costs. In our study, this department does notpurchase transportation or cargo insurance because these functions aredone by Traffic.

• Traffic. This often-unsung department purchases and arranges all inwardand outward transportation. It also purchases cargo insurance. Trafficselects carriers and service providers (called freight forwarders) to fulfillexport shipping requirements.

• Forwarder. Described as a “travel agent for cargo,” this outside-serviceprovider arranges and documents export shipments.

• Compliance. This entity doesn’t exist in most companies but probablyshould. It is part of the legal department and is involved with regulatorycompliance, such as export control, as well as compliance with commitments(such as sales contracts) and corporate ethical policies. Equipped withsweeping powers, Compliance may stop any transaction at any time forreview by top management. As part of its export control and import com-pliance roles, this department also classifies items in both the HarmonizedSystem and the Commerce Control List (see Chapter 2).

• Buyer. Often neglected in explaining who does what, the buyer is probablythe most important player in exporting. Buyers place orders that addresstheir requirements, often including conditions imposed by their govern-ments. Some buyers insist on selecting carriers and forwarders, and this can

Who Is Involved? 3

create a contentious issue for well-informed sellers. Buyers may also engagepurchasing agents to handle exports from the sellers’ countries, but for thepurposes of this book we will consider such business to be domestic trans-actions rather than exports.

WHAT IS INVOLVED?

Now that we’ve seen the players, let’s consider what must happen for exports totake place. While the following steps are presented in what is normally chrono-logical order, they are not necessarily cause-and-effect driven.

A product or service must exist. Ideally, it will be of a kind that buyers arewilling to buy at a price they are willing to pay. It should comply with appli-cable mandatory product standards found in major foreign markets, such asthe European Union CE Mark, Mexican NOMS, Chinese CCC Mark, andso on. It should also accommodate other characteristics found in major mar-kets (see Chapter 3). Obviously, the product or service must be legally ex-portable (see Chapter 2). Someone, most likely the seller, must deal with theseissues before exporting can even be considered.

For the purposes of this book, we will use the term “product” to mean eithera good or a service. We will also differentiate between tangible and intangibleproducts. This will accommodate both services and a new breed of product—software capable of being both offered and delivered over the Internet.

Sellers and buyers must somehow come into contact. Sellers usually initiatecontact through established marketing channels (Chapters 4 and 5 will showhow this is commonly done).

Sellers and buyers must agree on how the product or service will be trans-ferred. Incoterms 2000® provide 13 well-defined scenarios that divide seller–buyer responsibilities in international sales of goods.We will see them and theirless-desirable alternatives in Chapter 7.

Sellers and buyers must agree on how payment will be transferred. As wewill see in Chapter 12, exporting offers more possibilities than the “openaccount” or “payment with order” terms one finds in domestic business. Somepayment terms commonly used for tangible exports are triggered by documents,a collective term for proof that specified events have happened. As we will seein Chapter 11, many export-related documents result from the performance oftasks as listed in the preceding paragraphs. For this reason, terms of sale andterms of payment should be considered together for anything other than openaccount or payment-with-order situations.

Some products require services such as installation, operator training, main-tenance, and repair. Sellers seeking to develop and increase export marketsanticipate and provide for these issues.

4 The Whole Export

EVOLUTION

Many companies begin exporting almost by accident. Their product was foundby an overseas buyer or its purchasing agent, or perhaps by an export interme-diary. Because business people who are inexperienced in export tend to be ner-vous, initial sales are often made on conservative terms of sale and payment.This, of course, makes purchasing difficult for the buyer, and the fact that suchbusiness happens at all says something good about the product.

As times goes by, the accidentally exporting seller becomes more comfort-able with such business. Sometimes, outside events happen to stimulate theseller’s interest. Possibilities include, but are not limited to, word of a competi-tor’s success in foreign markets, a promotional event sponsored by the U.S.Department of Commerce or a local chamber of commerce, or an overseasinquiry for a large potential deal. Perhaps the stimulus is negative—a depresseddomestic market or a foreign competitor’s appearance in the domestic market.There’s even the possibility that a domestic competitor’s success in exportingmakes it a greater threat domestically. Whatever the reason, the companybecomes motivated to start exporting on a more deliberate basis.

There are several possible paths available at this point. The company may“rent” an export department by engaging the services of an export intermedi-ary, as described in Chapter 4. It may establish its own export department, eitherby hiring an experienced export professional or by devoting the necessary timeand effort to learning how to build an export market on its own.There’s no rightapproach. Much depends on the level of interest, available resources and type ofproduct a company has, and how quickly it wants to penetrate overseas markets.It is also possible for a company to take several approaches simultaneously,engaging an intermediary for some parts of the world and going it alone forexisting or what it perceives to be easier export markets.

A well-qualified export intermediary can usually get a new-to-export prod-uct line rolling faster than even an experienced but newly hired in-house exportmanager can. This is particularly true if the intermediary handles product linesthat are complementary but noncompetitive, or if it has previously exported adirectly competitive line. After all, the intermediary has a staff that alreadyknows how to export. Still, as we will see in the next section, linkages must bedeveloped before exports run smoothly. Issues such as product modification,export packing, payment policy, and the applicable level of export control mustbe addressed.

An experienced export manager, our second possibility, already knows howto export—perhaps even how to export that very kind of product. However, heor she does not have an export-ready staff and must acquaint the seller’s domes-tic business people with the requirements of successful exporting. Unless ourexport manager is given sweeping power over all related disciplines, which

Evolution 5

seldom happens, this will necessitate selling the desirability of exporting to hisor her peers. This is no easy sell, given the intensive level of detail involved. Justto make things more challenging, there will invariably be someone in the com-pany who “knows somebody who lost a bundle at the hands of the foreigners.”Then, there’s the process faced by all new hires, that of earning one’s spurswithin the organization. Clearly, some positive linkages need to be forged.

The third possibility, learning to do it oneself, is slow and may also beextremely dangerous without expert guidance. Despite this, it too has advan-tages. First, the novice need not learn everything about exporting products of allkinds, just those that the company offers. Second, because this process takestime, it can be gradually introduced to all other concerned parties within theorganization, thereby reducing the risk of injured egos or turf battles. Finally,despite what many experienced exporters would have you believe, it is notrocket science. The new-to-export seller should establish strong linkages withqualified people who teach export basics. Such sellers should also seek out thebest outside service providers such as banks and freight forwarders and relyheavily on their judgment, particularly at the start. And they should educatethemselves by buying books such as this one.

Once a company becomes serious about exporting, its individual depart-ments will often modify their own departmental procedures to accommodateexports. That these tend to work well for their intended purposes comes as nosurprise, as they were developed by people who are expert within their own dis-ciplines. The problem is that each tends to focus only on the activities of thedepartment in which it was conceived. The result is a strange bucket brigade-type situation, where each party knows its own function, and perhaps the func-tion of the party located immediately next in the process, but does notnecessarily know where the fire is.

LINKAGES

For the purposes of this book, linkages are relationships among the partieswe’ve seen in the “Who Is Involved?” section of this chapter. Readers may addany others that fit into a company-specific situation.These relationships involvenot only knowing what each does, but also what information each needs andwhat information each has at its disposal.

Using the bucket brigade analogy, everyone realizes that Credit determinespayment terms. However, are the people involved in Compliance aware thatmuch or all of the buyer-specific information they need for export licensingdecisions can be found right in the credit files? As we will see in Chapter 2,export licenses are sometimes required because of the place where a product istransshipped from one carrier to another. Traffic, or the forwarder it employs,may be able to avoid this by selecting a different routing or carrier, but only if

6 The Whole Export

they are aware of the situation. Huge freight-cost savings are often possible ifproducts can be modified to take up less space for shipment, but this may hap-pen only if Traffic and Manufacturing are consulted (by Sales?). Speaking ofSales, does it ever consult with Manufacturing when promising latest shipmentdates or with Traffic when promising delivery?

Then there’s drawback, the potential of recovering substantially all of theduty paid on imported items that are reexported, either in the form they camein or when used as a material to make something else. This involves coordina-tion between Purchasing and Traffic, because drawback must be claimed by theexporting party but must reference the importation. Sales should also be inter-ested in any cost savings.

This writer, who has instructed hundreds of public and on-site seminars, isconstantly amazed at how little the employees of many huge household-wordcompanies know about what each other does. This isn’t a question of cross-training, simply a basic awareness of who does what and which tools each playerhas at its disposal.

As the title of this book implies, we will cover some methods of navigatingthe complex rules, controls, barriers, and laws found in exporting.To this end, weneed all the resources our companies have to offer. Otherwise, as the famouscartoon figure Pogo the Possum said:“We have met the enemy, and they are us.”

Each chapter will indicate some obvious places where one party may eitherassist or obtain assistance from another, such as:

• Sales—Credit

• Sales—Manufacturing

• Sales—Traffic

• Sales—Buyer

• Credit—Traffic

• Credit—Buyer

• Manufacturing—Purchasing

• Manufacturing—Traffic

• Traffic—Purchasing

• Compliance—Sales

• Compliance—Credit

• Compliance—Traffic

• Compliance—Buyer

Not surprisingly, many linkages are two-way streets, where each party hassomething of value for the other. The goal is to discuss each function in usefuldetail, and as a byproduct, to provide a bird’s-eye map of a “typical” exportingcompany. Just follow the linkages.

Linkages 7

Vincent G. Guinto is an export packer. In our job descriptions, his companywould be engaged by manufacturing to handle a particular order of items thatwould be sent to him from us and from our vendors for packing and consolida-tion. His JOC Week article beautifully illustrates the need for effective linkages.His concern is processing incoming bits and pieces for large export projects thathe receives piecemeal from his exporter customers and their outside vendors.However, the moral applies to shipments of all sizes and to all players in theexport process. Just substitute information for trucks and maybe Compliance,Credit, Manufacturing, Traffic, or even The Buyer for the procurement depart-ment or export packer.

Avoid Export Packing PitfallsWhenever a major engineer-procure-construct project is awarded, one of the firstevents to take place at the company awarded the contract is to hold a project kick-off meeting. During the meeting, the most important goals and objectives of theproject and each functional discipline are discussed and action items assigned. Atthese meetings, you normally hear the project manager state that the project mustbe completed on schedule and under budget, that delays, penalties, and liquidateddamages should be avoided, and that accurate drawings and documents must beused throughout.

Sometimes the traffic and logistics manager is invited to these meetings. How-ever, there are many times when attendance is limited as many people may want toparticipate and the conference room is not large enough.Thus, the traffic and logis-tic manager’s immediate supervisor, usually the procurement manager, may decideto take notes and provide information to his appropriate subordinates later. Thiscan be a fatal flaw if not handled properly.

Obviously, a primary concern of the project manager and the procurementmanager is to purchase equipment built to the appropriate specifications andshipped on time. Here is where I still see many companies operating as if they wereliving in the 1960s and 1970s. Their objective is to get material and equipmentshipped from their vendor on schedule, even if they have to sacrifice accuracy ofthe shipping documentation.

The next and key step for the project is to have the manufacturer ship thefreight to the export packer. This is the phase of the process that normally createsproblems that result in various costly delays. Any number of problems crop up atthis point. Trucks arrive with no prior notification given to the packer from themanufacturer, shipper, buyer, expeditor or traffic and logistics specialist, as thecase may be. Trucks arrive with no packing list or any documentation to properlyidentify the shipment. Trucks arrive after closing time at the packer. No accurateweights and dimensions are provided. The driver does not know the name of theproject, nor is it identified on the paperwork in the driver’s possession. No priornotification is provided that cranes may be needed to unload the cargo. No exportmarkings are provided to the packer. Finally, packages and items are not properlydescribed on the purchase order, nor do they agree with the line items on the pur-chase order. The packer often is told that the item is properly identified on a revi-sion to the purchase order, but the packer is not provided with the revision.

8 The Whole Export

Resolving some of these issues can take several days or even weeks, causingembarrassing and costly delays.

If root cause analysis could be done on many of these delays, the majoritywould reveal that the source of the delay lies in the procurement department ofthe company carrying out the project. Although it might do an excellent job ofacquiring the specified material, similar attention is not given to the shipping andpackaging clause in the purchase order. Assumptions are made that the vendor isin, or will be in, complete compliance with all the terms and conditions of theorder. But as experience has shown, this is not always the case.

The primary vendor, the one receiving the original purchase order, often willsubcontract a portion of the order or even involve a tertiary vendor. These sub-vendors will build products to required specifications, but will not be aware of theshipping and packaging requirements in the original purchase order other than theship-to address of the export packer. This creates the situation of product arrivingat the export packer without proper information.

And, of course, from the perspective of the procurement and project manager,the resulting delays always seem to be the fault of the traffic and logistics managerand his or her department.

In today’s business environment, a growing number of major companies areimplementing the Six Sigma program, which seeks to minimize errors throughouta company’s operations. I believe Six Sigma can solve many problems associatedwith the shipping and packaging process. If this program or other similar programslooking to improve the shipping documentation process is followed correctly, itwill be clear that major project cargo shippers must focus their attention on the up-front portion of the process. In other words, they must ensure that the shipping andpackaging requirements in their purchase orders are rigidly followed.

This will result in avoidance of delays, traffic and logistics cost overruns, andfinger pointing. At the end of the day, the problem rests with the entire procure-ment department team, and not just one specific function within that depart-ment.”1

MEET IN THE MIDDLE

Besides two-way communications between players that can obviously be ofhelp to each other, the possibility exists for sharing sources of multidisciplinaryinformation. The Journal of Commerce’s JOC Online web site (www.joc.com)and IOMA’s Managing Exports newsletter are two obvious examples, and youwill find more in Chapter 13. The following excerpts from Managing Exportsillustrate the point:

New Free FITA Service ‘Reviews’ International Trade WebsitesThe Federation of International Trade Associations (FITA) has launched a bi-monthly free service, “Really Useful Sites for the International Business Profes-sional” (www.fita.org). The Really Useful Sites e-newsletter can save export

Meet in the Middle 9

professionals both time and headaches by guiding them to the really useful inter-national trade websites while filtering out the “also-rans.”

John McDonnell, editor, profiles sites from FITA’s International Trade/ImportExport Portal, which is also a great source for trade leads, news, events, and some3,000 links (www.imakenews.com/eletra/go.cfm?z=fita,3464,43541,355).”2

Below is a small sampling from McDonnell’s reviews in the first issue of ReallyUseful Sites:

• U.S. Department of Commerce Export Portal (www.export.gov). This easy-to-use site has a wealth of information for U.S. companies looking to export. Bysimply clicking on the questions you want answered, you’ll find web-basedresources to help you. This site can help any business make a good start inbroadening its markets.

• ATMs Around the World. I can find out the locations of these ATMs in theTravel Section of FITA’s Global Trade Shop (www.fita.org/travel).

• Medical Conditions Around the World. Want to get an update on medical con-ditions in your country of destination before you leave? Go to the Center forDisease Control’s Blue Sheet (www.cdc.gov).

• Currency. Want to know how many U.S. dollars make Singapore dollars? Here’s a link to FITA/Oanda Currency Converter (www.oanda.com/convert/classic?user=blehrer).”3

Speaking of web sites, just look at the following list of uses excerpted from aManaging Exports article titled “32 Ways to Use the Internet to Improve ExportFunctions:”

1. Preparation of export documentation

2. Sending export documents

3. Tracking and tracing shipments

4. Researching potential customers’ credit

5. Banking functions

6. Export compliance

7. Shipping information, rate quotes

8. Marketing: research and leads

9. Currency exchange information

10. Sales

11. Locating agents, distributors

12. Checking on competitors

13. Overseas sourcing

14. Filing Shippers Export Declarations

15. Researching international customs

16. Quoting pricing

10 The Whole Export

17. Invoicing

18. E-mail

19. Contacting foreign government agencies

20. Customs management

21. Checking inventory

22. Advertising

23. Mileage makers, map makers

24. Product classification

25. E-business

26. Purchasing

27. International warehousing

28. Training personnel

29. Pricing and purchasing insurance

30. Translation

31. Travel information and advisories

32. Internal communication with sales staff4

As you can see, there’s something on the Internet for every player we’vementioned. However, it took a publication aimed at every export-related disci-pline to point this out. The same is true of the following survey:

Exclusive ME Survey Reveals 16 Export Pros’ Best Cost Saving TacticsWith world trade slowing, and corporate profits at many exporting firms taking ahit, a number of export managers have been receiving memos from top manage-ment mandating cost-cutting measures. Obviously, the CEO is not talking aboutsimple retrenchment, but instead wants greater efficiencies and lower costs alongwith continued aggressive efforts to grow the company’s international sales. Tohelp export professionals facing this situation, ME recently polled 16 export proson their most effective cost-cutting strategies. Our survey located such measures ineight areas of export administration and sales.

1. Cut Down Number of Forwarders

• “We selected one major freight forwarder with one backup,” explains theInternational Sales Manager at an Illinois food services company with 1,700workers. “As a result, we consolidated shipments and utilized contracts, andsavings came on commitments.”

• “We settled on one forwarder, due to its quick service and ability to handlequestions in a timely manner—which has resulted in significant savings,”says a Director of Exports at a 100-employee New York firm.

2. Implement Automation Solutions

• “We automated the shipping department’s generation of export documentsand utilized carrier software (which is free), saving many hours per week ofmanual documentation,” says the Logistics Specialist at a California tele-com products firm with 2,500 employees.

Meet in the Middle 11

• “Use of export documentation software has saved many hours andthousands of dollars,” says the International Trade Manager of a Virginiacompany.

3. Consider Open-Account Terms

• “Moving to open-account terms not only resulted in faster response time toorders, but resulted in less paperwork along with a reduction of costs asso-ciated with letters of credit,” says the International Customer Service Man-ager of a South Dakota exporter.

• “Selling on open account drastically reduced our use of letters of credit, sav-ing hundreds of dollars in L/C costs per order. We grew our customer baseand expedited order processing as well,” explains the Import/Export Man-ager at a 250-employee New York firm.

4. Utilize Government Export Programs

• “We have used the Ohio Trade Department offices in overseas markets todo the groundwork, finding new distributors, and saving us travel costsand personnel time,” says the Export Coordinator at a 1,500-employeecompany.

• “We initiated a drawback program, which returned $18,000.00 to the com-pany the first year,” says the Traffic Coordinator at a 33-employee Marylandindustrial goods exporter.5

[Note: drawback is the recapture of up to 99 percent of the duty paid on animported item that is subsequently exported. Certain conditions apply.]

5. Take Advantage of Cheap Technologies

• Use Internet, e-mail to move documents—serve customers—better, faster:The Director of a New Jersey export services company “switched fromcouriers to Internet e-mail to send documents. The time we’ve saved hasadded up to significant money savings.”

• The Export Manager of a 100-employee tooling manufacturer in Ohio has asimilar observation: “We are now using the Internet and e-mails as a pri-mary means of communicating with our customers.This has greatly reducedthe days to pay our invoices, thus requiring less manpower to follow up.”

6. Negotiate Lower Rates with Providers

• With the slowdown in international trade, forwarders and carriers are fight-ing for business. Take advantage of this “buyer’s market.”

• “We changed forwarders and renegotiated contracts through a bid process,resulting in substantial savings,” says the Traffic Administrator at a medicalequipment supplier in Missouri, with 500 employees.

• “By switching to another freight forwarder, we saved costs by 75 percent,”says the Import/Export Specialist at a California food service company with40 employees.

7. Improve Documentation Practices

• “By knowing what documentation is needed for a shipment to go smoothly,and generating it quickly, we saved money by preventing delays, returns, and

12 The Whole Export

lost customers,” explains the Export Manager of a home wood-productsexporter with a workforce of 80 in Wisconsin.

• “Ship and clear customs sooner—save on [the] manufacturing end:“Improving the accuracy and timeliness of shipping documents has allowedparts to ship sooner and clear customs much faster,” explains the LogisticsManager at an exporter of water-cleaning systems in Idaho with 1,000employees. “This change has saved $100,000 in tool down-time.”

8. Increase Staff Efficiency, Responsibility

• Save time, money; free up personnel:“By implementing a more streamlinedmethod of handling export orders, we have made them more routine, savinglarge quantities of time spent in every department throughout our facility,”says the Customer Service Manager at a textile chemicals form in NorthCarolina.

• “Through additional training we achieved greater staff efficiency and bettercustomer service—saving time and money” notes the Export ComplianceDirector at a 500-employee Ohio exporter of consumer goods.

Not every one of these strategies will fit your specific export department, butmany will. In addition, the experiences of these export pros can spark some cre-ative thinking on other tactics for reducing costs, while continuing to battle forexport sales in even more competitive global conditions.”6

While some of these suggestions are very practical, the larger issue is thatthey provide food for thought and discussion among all departments involved inexporting. This may lead to elevating linkages into effective interdepartmentprocedures. When this happens, everyone—including the buyer—benefits fromthe better, faster, less costly, and more efficient performance that invariablyresults.

DON’T FORGET THE BUYER

The one player who usually doesn’t get to meet in the middle with the others isthe buyer. However, all export plans amount to nothing without this all-important party. Consistent with reasonable profit objectives and risk threshold,sellers should try to make purchasing their products as easy as possible for hon-est, credit-worthy buyers. The buyer should be kept in mind when export-related policies and procedures are considered. After all, the seller and buyershould be on the same team. Both want the buyer to get the product and theseller to get paid.

Sometimes, overseas buyers have concerns that, although not obvious tous, may be extremely important to them. For instance, some countries issueimport licenses that permit importation only within a specified time period.Miss it, and the buyer will need to apply for an extension—by no means a sure

Don’t Forget the Buyer 13

thing. Fines and even confiscation of the goods are also possible. Late ship-ments can also increase the buyer’s cost for dollar-denominated sales if thelocal currency were meantime to drop in value. Incorrect product descriptionson shipping documents may cause customs clearance delays, hefty fines, andeven confiscation.

The attention given to a new purchase order often makes the differencebetween a smooth transaction and an order from hell. Savvy buyers go out oftheir way to state their requirements in their orders. Sadly, these are frequentlyoverlooked. All parties concerned at the seller’s company should check incom-ing orders for

• Product description (including any requested description for shipping doc-uments)

• Quantity

• Price, including any transportation or insurance costs included in the pricing

• Requested terms of sale

• Product availability as compared to requested shipment time

• Requested routing

• Any country-specific documentation requirements

• Requested payment terms

• The export control status of the buyer, the buyer’s country, and the orderedproducts

Each incoming order should also be matched with any quotation from which itcame. The same goes for the documentary requirements of any covering letterof credit (bank guarantee).

Any differences between the order and the seller’s understanding of thedeal should be promptly brought to the buyer’s attention. If there are none, theorder should be acknowledged, if possible with an estimated shipping date.Nothing, but nothing, irritates overseas buyers more than placing an order andreceiving silence in return. The thought process goes something like this: Havethey received it? If so, did they accept it? For that matter, have they alreadyshipped it, and are the goods incurring storage charges somewhere? Didn’t theirmothers teach them to say “thank you”?

It’s also a good idea to keep the buyer informed on the progress of ordersthat do not ship immediately. While obviously a must for products requiringpredelivery preparation on the buyer’s part, this is a good practice for allpending orders. Keeping the buyer in the loop demonstrates sincere interest.It also reduces the likelihood of any last-minute order cancellation, especiallyif the seller encounters unforeseen problems that delay promised shipmentdates.

14 The Whole Export

When shipment is finally made details such as carrier name and estimateddate and time of arrival should promptly go to the buyer. Sending nonnego-tiable copies of the shipping documents clearly marked COPY is another nicetouch. Consider following up air freight shipments with carriers for arrival con-firmation. After all, shipments made by air are by definition time-imperative.Finally, a brief thank-you letter a week or two after the shipment should havearrived is a beautiful gesture.

All this may involve a bit more care and attention than domestic customersnormally require. It is justified, because foreign buyers are naturally more ner-vous than their domestic counterparts. This is particularly the case with first-time buyers. There’s a payoff to sellers for this little extra attention. Mostcultures, and therefore most people, place a greater importance on relationshipsthan we do. Overseas buyers often display levels of supplier-loyalty that areincomprehensible to Americans. Treat them right, and competition will not eas-ily seduce them away.

The converse is true.What may seem to us as trivial errors or tolerable ship-ping delays can provide tremendous hardship and additional cost to buyers.Given enough problems, even customers of the biggest and best-known sellersof the best value-for-money products will go elsewhere where their business ismore appreciated. Lack of attention is often taken as hubris, and no one wantsto buy from an arrogant or disinterested seller. Given our huge domestic mar-ket and our relative lack of export-dependence, American sellers are morelikely to fall into this trap than are our foreign competitors.

Sellers that have not been paid before shipment have an extra incentive forpost-shipment follow-up. For instance, as we will see in Chapter 12,“sight draft-documents against payment” is a commonly used export payment term. Thegoods are shipped, but the covering documents are sent to a bank in the buyer’scountry rather than to the buyer.When done correctly, this procedure forces thebuyer to pay at the local bank in order to receive the documents that arerequired to claim the goods. It is the international equivalent of cash on delivery(COD). The problem is that unless such shipments are followed closely, smallproblems can become large. In most companies, Credit is the first to know, notbecause something happened but because something—payment—didn’t. Thisdiscovery could come weeks or months after shipment and may preclude reme-dies normally available if prompt action is taken.

Credit sometimes also provides a warning about unresolved supply prob-lems with buyers on open account terms, but again usually after the damage isdone. Buyers encountering problems normally contact Sales first, either directlyor through the seller’s local representative. If no satisfaction results, they willeventually get Credit’s attention by withholding payment. It can be embarrass-ing when a collection letter draws an irate buyer response that the wrong prod-uct was shipped and that several previous complaints to the seller’s localrepresentative remain unanswered!

Don’t Forget the Buyer 15

DON’T FORGET THE OTHER TRADING PARTNERS

As we will see in Chapter 4, some kinds of product are best sold through localrepresentatives, distributors, or even branch offices of the seller’s own company.These trading partners should be kept informed of developments that concernthem. This includes orders received from or shipment made to their territories,product updates, and pricing changes. Although they will probably do most oftheir communicating with or through Sales, they should also be provided withcontact persons in Credit, Traffic, and Compliance. Good local trading partnerscan act as the seller’s “eyes and ears,” by providing buyer-specific informationneeded by Credit for payment terms and by Compliance for export controlcompliance. Good trading partners can also assist with collection of overdueaccounts.They also often have first-hand knowledge of local transportation con-ditions that Traffic may find very useful.

The Internet has magnified the need to keep representatives and distribu-tors informed. Local buyers can often access the seller’s web site, therebyinstantly obtaining product information. It is embarrassing and can dangerouslyundercut the local trading partner’s position if local buyers get informationbefore they do. Because the Internet makes getting information easy, it tends tomask the services local trading partners bring to transactions that benefit sellersand buyers alike.

DON’T FORGET THE FACILITATORS

Freight forwarders, banks, and federal and state governments can assistexporters with shipping, financing, and locating suitable trading partners. Notonly can they help avoid problems, but they can advise on strategies for increas-ing business.

Freight Forwarders

Freight forwarders handle international transportation arrangements and thelion’s share of the documentation process.They also often help with freight costnegotiation and carrier selection. Depending on the terms of sale governinga particular transaction, the forwarder may work for either the seller or thebuyer.

Generally, sellers are best served when using their own forwarder. In Chap-ters 7 and 10 we will see strong arguments for sellers to use sales terms thatempower them to control main carriage transportation and forwarder selection.Forwarding is a heavily detailed low-profit business. In order to survive, for-warders usually handle more shipments than they can realistically manage.

16 The Whole Export

Their time and effort will first go to accommodate the interests of their repeatcustomers who, after all, provide ongoing income. For buyer-routed shipments,the forwarder’s repeat customer is the buyer, not the seller.

Most forwarders charge modest handling fees that barely cover their costs.They can do this because a substantial part of their income comes from com-missions (called “brokerage”) they receive from the carriers they select. Sincethe party that makes the booking gets the brokerage, carrier selection and for-warder selection go hand-in-hand.

Whenever possible, savvy sellers make offers including the cost of precar-riage and main carriage transportation, thereby increasing their chances of con-trolling carrier and forwarder selection. Incidentally, doing so also makes iteasier for buyers to arrive at purchasing decisions.

Sellers get these freight costs from either carriers or forwarders. Forwardersare well equipped to provide this information, because they are aware of whichcarriers serve which destinations and have a good feel for “typical” freight costs.They do not charge for this service, in the hope that business will result. Justlook at the following synergy at work here:

• Sellers must provide their forwarders with enough shipments to make theirbusiness attractive enough for the forwarder to search for competitivefreight costs, thereby increasing the odds of getting orders.

• Forwarders, for their part, must work to get competitive freight costs sotheir seller-customers can get orders, and must provide acceptable serviceand documentation to retain their business.

Of course, savvy buyers are also obtaining freight costs from their forwarders.The result is that carrier and forwarder selection can become a real taffy-pull.

Control of cargo routing is the coin of the realm in transportation. Carriersgive preferential freight costs to parties that control large numbers of ship-ments, very large shipments, or both. Parties controlling less cargo pay higherfreight costs, and thereby have less chance of controlling more. Savvy sellers tryto control as much cargo as possible, both to keep their prices competitivethrough lower freight costs and to capture as many shipments as possible fortheir forwarders.

There is tremendous consolidation in the forwarding industry. For instance,two huge companies, Air Express International and Danzas, are now indirectlyowned by the German Post Office. Not only are forwarders buying each other,but they are merging with carriers. Fritz is now part of UPS, and Tower is ownedby Federal Express. Most large forwarders have nonvessel-operating-common-carrier (NVOCC) operations, which effectively puts them in the ocean carrierbusiness. A similar situation exists with air cargo consolidation. The result isfewer but larger transport service providers, which increases the importance ofachieving large-shipper status.

Don’t Forget the Facilitators 17

Besides capturing as many shipments as possible for their forwarders, ship-pers strengthen this important relationship by paying their bills promptly. For-warders usually prepay shipping expenses for creditworthy customers and relyon prompt payment to recover these out-of-pocket costs.

Inevitably, all but the most dominant sellers will encounter some situationswhere the buyer will select the forwarder and carrier, usually because it obtainslower freight costs than the seller can get. This isn’t the end of the world, butit requires extra attention on the seller’s part. Besides the fact that buyer-appointed forwarders look out for buyer interest, there is greater potential forerror since they do not have the same familiarity with seller operations that thesellers’ forwarders enjoy. Filing the Shipper’s Export Declaration (i.e., reportingthe export) presents another awkward situation for sellers that normally dele-gate this task to their forwarder. Most forwarders are honest and do their bestto please everyone. Still, sellers cannot assume that the same amount of atten-tion to their instructions will come from service providers that do not owe themallegiance.

Regardless of which party appoints the forwarder, sellers help themselvesand the buyers by providing shipment-specific information as soon as it is avail-able. At a minimum, forwarders need to know weights, dimensions, shippingmarks, availability time and place, and any carrier preferences in order toarrange transportation. When applicable, they also need to know of any haz-ardous materials or export license restrictions, and whether they are to provideinsurance cover. Additional information, such as Schedule B classification andthe seller’s federal tax identification number may be required when the for-warder is requested to file the Shipper’s Export Declaration.

Banks

Competent international banking is a must for successful exporting. The mostobvious service is a place for overseas customers to wire transfer their pay-ments.As we will see in Chapter 12, banks also process letters of credit and doc-umentary collections, and arrange the purchase or sale of foreign currencies.They can often provide credit information on buyers and guidance on countryrisk. Some banks have even developed export receivable factoring programsthat incorporate credit insurance or other guarantee programs such as thoseprovided by the Small Business Administration and the Export-Import Bank.

Many commercial banks have international departments, which tend to beback-office functions. As exports often involve detailed processing, manydomestic banking account officers lack sufficient operational knowledge toexplain them to their customers. Conversely, the international officers who havethe operational knowledge often lack lending authority. Savvy exporters makeit a point to get acquainted with their banks’ international staff and determinehow any financing requests are handled before they are needed. Because banks

18 The Whole Export

are combining almost as quickly as forwarders, existing relationships should berenewed and sometimes replaced as acquiring banks merge international oper-ations.

Another service that banks can perform is providing information abouttheir customers to prospective foreign buyers. Sellers with good reputations canhelp the process along by providing the names, addresses, and contact personsof their banks of account to first-time buyers.

Governments

As we will see in Chapter 5, the federal government provides considerable assis-tance to exporters. It literally takes hours just to explore the possibilities on thenew government one-stop portal www.export.gov, and smart exporters do justthat. Most state and some municipal governments also offer export assistance,which is usually more focused on the needs of their local trade communities.However, it’s up to exporters to involve themselves as none of these agenciescan help you if they don’t know who you are and what you do.

One thing all government export assistance programs need is feedback.They do not operate on a profit and loss basis, and they rely on their clients totell them what works and what doesn’t.

We will now visit 11 function-related chapters, building interdepartmentallinkages as we go.

LINKAGES

• Everyone: Start the process of building linkages by sharing this book with acolleague in another export-related department once you have finishedreading it. Of course, if you can’t bear to part with it, there’s always the bet-ter alternative of ordering another copy.

ENDNOTES

1. Guinto, Vincent G., “Avoid Export Packing Pitfalls,” JOC Week, June 3–9, 2002,page 32.

2. “New Free FITA Service Reviews International Trade Websites,” IOMA’s Report onManaging Exports, Issue 2001-04, April 2001, page 2.

3. “New Free FITA Service Reviews International Trade Websites,” Op. Cit.4. “32 Ways to Use the Internet to Improve Export Functions,” IOMA’s Report on Man-

aging Exports, Issue 2001-05, May, 2001, pages 1, 7, 10.5. “Exclusive ME Survey Reveals 16 Export Pro’s Best Cost Savings Tactics,” IOMA’s

Report on Managing Exports, Issue 01-12, December 2001, pages 1, 13, 14.6. “Exclusive ME Survey Reveals 16 Export Pro’s Best Cost Savings Tactics,” Op Cit.

Endnotes 19

Chapter 2

Export Control

With few exceptions, U.S. Government, through various federal agencies, con-trols exports of:

• All items of U.S. origin, wherever in the world they may be

• Foreign-produced items incorporating more than a de minimis (a definedminimum) amount of controlled U.S.–origin material content

• Foreign-produced items that are directly produced from U.S. technology

• U.S. technology transfer, both here and abroad

The scope of export control is enormous. However, within this huge uni-verse, there are relatively few things that the government is sufficiently con-cerned about to require licensing. Most items and technology may be freelysupplied without prior government approval to all but a very few countries,users, and end-uses. The trick is to know what is restricted and how to complywith the applicable regulations.

In the context of export control, the term export means shipment or transferof commodities, software, and technology from the United States to a foreigncountry. Two terms broaden the meaning of export. Reexport means shipmentor transfer of commodities, software, and technology from one foreign countryto another. Deemed export means the transfer of technology to a foreign personwithin the United States.

WHO IS INVOLVED?

The following is a general overview of the U.S. Government agencies involvedin controlling exports, as well as the items they regulate, their phone and faxnumbers, and the legal authority under which they operate:

20

• The Commerce Department, Bureau of Industry and Security (BIS) han-dles controlled items that have strictly civil end-uses and most so called“dual-use” items having both civil and other end-use capabilities. Such othercapabilities include military and other strategic end-uses (e.g., nuclear). BIScontrols the lion’s share of exports, and this chapter will cover its proceduresin detail.1

• The Commerce Department, Patent and Trademark Office controls patentfiling data sent abroad. Contact: Licensing and Review Office, phone (703)306-5771, fax (703) 305-7658.2

• The Treasury Department, Office of Foreign Assets Control (OFAC)administers controls against certain countries that are the object of sanc-tions affecting not only exports and reexports but also imports and financialdealings. The list of parties it restricts, Specially Designated Nationals andBlocked Persons, can be found in Part 764 Supplement 3 of the ExportAdministration Regulations (EAR). Contact: Office of Foreign Assets Con-trol, Licensing, phone (202) 622-2480, fax (202) 622-1657.3

• The Department of State, Office of Defense Trade Controls regulatesdefense services and defense articles under its International Traffic in ArmsRegulations (ITAR) Contact: Office of Defense Trade Controls: phone(202) 663-2700, fax (202) 261-8264.4

• The Drug Enforcement Administration (DEA) regulates drugs (controlledsubstances) as well as chemicals and other precursors used to make them.Contact: International Chemical Control Unit or International Drug Unit,phone (202) 307-2414, fax (202) 307-7503.5

• The Food and Drug Administration (FDA) controls drugs (medicines), bio-logicals, permitted investigational drugs, and medical devices. Contact:Drugs, phone (301) 594-3150, fax (301) 594-0165 or for investigationaldrugs, Import Export Team, phone (301) 827-7373, fax (301) 594-0165, orfor medical devices Office of Compliance phone (301) 827-4555, fax (301)827-5192.6

• The Interior Department controls exports of endangered species. Contact:Fish and Wildlife Controls, Endangered Species, Chief of ManagementAuthority, phone (703) 358-2093, fax (703) 358-2280.7

• The Nuclear Regulatory Commission (NRC) controls nuclear materials andequipment. Contact: Office of International Programs, phone (301) 415-2344, fax (301) 415-2395.8 (Also Energy at (202) 586-9482)

• The Energy Department regulates natural gas and electric power. Contact:Office of Fossil Energy, phone (202) 586-9624, fax (202) 287-5736.9

• The Maritime Administration (MARAD) regulates U.S. flagged or U.S.manufactured vessels over 1000 gross tons. Contact: Division of Vessel

Who Is Involved? 21

Transfer, phone (202) 366-5821, fax (202) 366-3128, or Vessel Disposal,phone (202) 366-3954, fax (202) 366-2426.10

Unfortunately, divisions among these agencies’ domains are not always per-fectly clear. For instance, some dual-use items are controlled by State ratherthan Commerce. Further, controls sometimes overlap, so a given export may beregulated by more than one agency. Because export control complianceincludes dealing with the correct authority, it is best to check such gray-areatransactions with all likely agencies if in doubt.

The Customs Service’s presence at U.S. international gateway ports and air-ports makes it the last federal government agency to see outbound shipments. Itis authorized to inspect any export shipment and to detain questionable ones.Export control compliance also involves reporting.With certain exceptions thatwe will see later, most sizable exports must be reported to the CommerceDepartment’s Bureau of the Census Foreign Trade Division, regardless of whichagency controls the export.

The Wassenaar Arrangement is a range of export controls that are mutuallyagreed to and implemented by 33 countries. As all member countries enforcethese controls, it may be necessary for the United States Government to obtainpermission from other member governments for certain exports.The Wassenaarcountries are:

Argentina Greece Romania

Australia Hungary Russia

Austria Ireland Slovakia

Belgium Italy South Korea

Bulgaria Japan Spain

Canada Luxembourg Sweden

Czech Republic Netherlands Switzerland

Denmark New Zealand Turkey

Finland Norway Ukraine

France Poland United Kingdom

Germany Portugal United States

On the nongovernment side, a good general rule is that all parties to anexport, reexport, or deemed export are, to some extent, responsible for compli-ance. Obviously, the greater the direct involvement, the greater the responsibil-ity. If this sounds chilling, it shouldn’t. Government policy is to foster legitimateexports. Its intent is to keep the compliance burden at a minimum, consistentwith its mission of keeping U.S. goods and services from those whose objectivesrun contrary to our national interest.

22 Export Control

BUREAU OF INDUSTRY AND SECURITY OVERVIEW

Because most exports are within the BIS’s domain, its regulations should inter-est most exporters. The bulk of this chapter will focus on BIS.

BIS (formerly BXA) issued the following mission statement in July 2001—almost two months before the September 11th atrocities. It has been a handoutitem at their seminars ever since.

The Bureau of Industry and Security is to advance U.S. national security, foreignpolicy and economic interests. BIS’s activities include regulating the export of sen-sitive goods and technologies in an effective and efficient manner; enforcing exportcontrol, antiboycott, and public safety laws; cooperating with and assisting othercountries on export control and strategic trade issues; assisting U.S. industry to com-ply with international arms control agreements; monitoring the viability of the U.S.defense industrial base; and promoting federal initiatives and public–private part-nerships across industry sectors to protect the nation’s critical infrastructures.

BIS exercises its export-control authority through the Export Administra-tion Regulations (EAR), a comprehensive set of rules that weighs approxi-mately ten pounds. Its 27 parts and 3 appendices cover all BIS policies andprocedures, identifying which items, destinations, uses, and parties it restricts.Assuch, the EAR is the most important export control tool, and understandinghow it relates to one’s class of products is fundamental to compliance.

EXPORT ADMINISTRATION REGULATIONS

As previously mentioned, the EAR codifies BIS’s export control procedures,and covers most controlled items. Every U.S. company involved in exporting orproviding export-related services should have access to an up-to-date copy.Although the EAR is available at no charge at the BIS website www.bis.doc.gov,common sense indicates that a hard copy be maintained in-house. It may be pur-chased along with update supplements in either hard copy or CD-ROM from theSuperintendent of Documents (phone (202) 512-1800). For the remainder of thischapter, we will assume that readers have easy access to an up-to-date EAR.

SUBJECT TO THE EAR?

This is another way of asking whether an item being considered is within BIS’sdomain. In order to make this determination, it is necessary to answer the fol-lowing:

Subject to the Ear? 23

What is it?

Where is it going?

Who will receive it?

What will they do with it?

What else do they do?

The response to the first question will determine whether the item is underthe exclusive jurisdiction of a U.S. government agency other than BIS as listedin the “Who Is Involved?” section of this chapter. If in doubt, contact any otherlikely agencies or the BIS Office of Outreach and Educational Services at (202)482-4811. If another agency has exclusive jurisdiction, the item is not subject tothe EAR but to the controlling agency’s regulations.

The next point to consider is whether the item being considered is shippedfrom the United States or from another country. If from the United States, it iscalled an export. If from one foreign country to another, it is called a reexport.The following broad categories of items are subject to the EAR:

1. Everything exported from the United States not exclusively controlled byanother agency is subject to the EAR except publications and publiclyavailable technology and software.11

2. Reexported items are subject to the EAR if they originated in the UnitedStates or contain more than a de minimis amount of controlled U.S. mate-rial content or are a direct product of U.S. origin technology or software.The normal de minimis amount is 25 percent but drops to 10 percent forreexports to embargoed countries or certain countries considered sponsorsof terrorism.12

The matrix shown in Exhibit 2.1 found in EAR Part 732 Supplement 2addresses the “subject to the EAR question” in graphic form. The EAR’s juris-diction is very broad, but its controls are comparatively narrow.

SOME USEFUL EAR-RELATED DEFINITIONS

Assuming the item in question is subject to the EAR, we will need the followingbrief definitions. Most will be expanded and illustrated in upcoming sections ofthis chapter.

• Commerce Control List (CCL): Detailed information on those items sub-ject to the EAR that are of particular concern. Each entry describes theitems it covers and provides the reasons for control. (EAR Part 774)

24 Export Control

Some Useful Ear-Related Definitions 25

Exhibit 2.1 Am I Subject to the EAR?

another U.S. government Federal Department or Agency?

Does my export or reexport consist of prerecorded phonograph records, printed books,

pamphlets, and miscellaneous publications as described in the EAR?

Is my item of U.S. origin?

– origin

j

Is my item in the United States?

• Commerce Country Chart: A spreadsheet showing country names and var-ious reasons for control. (Supplement 1 to EAR Part 738)

• Denial Order: A restriction from access to U.S. exports placed on partiesthat have violated the EAR. (A list of such parties is found in EAR Part 764Supplement 2.)

• Development: Defined in the EAR as design.

• Export Control Classification Number (ECCN): A unique number for eachproduct-specific entry in the Commerce Control List. Each ECCN consistsof a single digit, a letter, and three additional digits (e.g., 2A292).

• Export License: Specific governmental permission to ship specified goodsto a specified consignee within a specified time.

• License Exception: Permission to ship without license goods that wouldhave otherwise required one. (EAR Part 740.)

• Production: How to make something.

• Prohibited End-Uses: Certain nuclear, missile, chemical and biological, andmaritime nuclear propulsion end-uses are prohibited. (EAR Part 744.)

• Prohibited End-Users: Parties engaged in prohibited end-uses, or partiesdenied access to U.S. exports such as those found on the Denied Persons list.

• U.S. Person: Any individual who is:

1. A citizen of the United States, a permanent resident alien of theUnited States, or a protected individual of the United States.

2. Any juridical person organized under the laws of the United States orany jurisdiction within the United States, including foreign branches.

3. Any person in the United States.

• Use: An item’s normal function.

TEN GENERAL PROHIBITIONS

Items subject to the EAR are also subject to ten general prohibitions. The fol-lowing transaction-specific facts determine your obligations under them:

• Classification of the item under the Commerce Control List (CCL). (TheEAR classification process will be covered in the next section of thischapter.)

• Country of ultimate destination.

• End-user.

• End-use.

26 Export Control

• Conduct, such as contracting, forwarding, or financing in support of a prolif-eration activity.

The task is to see how this information squares with the following ten gen-eral prohibitions, which we’ve paraphrased for clarity. (The exact text is foundin EAR Part 736.)

1. No export or reexport of controlled items to listed countries without alicense or a license exception if the item is controlled for a reason indicatedin the applicable CCL entry and the Commerce Country Chart indicatesthat a license is required.

2. No reexport without a license or license exception of foreign-made itemscontaining more than a de minimis amount (10 or 25 percent, depending onthe destination country) of controlled U.S. materials.

3. No reexport without a license or license exception of foreign-produceddirect products of certain U.S. technology or software to certain destinationcountries. (See EAR Part 736.2(b)(3)(i) for details on which technology orsoftware and which countries are prohibited.)

4. No actions prohibited by denial orders without explicit BIS authorization.

5. No exports or reexports for prohibited end-uses or to prohibited end-userswithout a license.

6. No exports or reexports to embargoed destinations without a license orlicense exception authorized in both EAR Parts 740 and 746.

7. No supporting of proliferation activities by any U.S. person.

8. No export or reexport through one of the following countries unless alicense exception or license authorizes export directly to such country orunless the export or reexport is eligible to such country without a license:Albania, Armenia, Azerbaijan, Belarus, Bulgaria, Cambodia, Cuba, Esto-nia, Georgia, Kazakhstan, Kyrgystan, Laos, Latvia, Lithuania, Mongolia,North Korea, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, andVietnam.

9. No violating terms or conditions of any license or license exception ororder issued under or made as part of the EAR.

10. No proceeding with transactions with knowledge that a violation of theEAR has occurred or is about to occur.“Proceeding” includes selling, trans-ferring, exporting, reexporting, financing, ordering, buying, removing, con-cealing, storing, using, loaning, disposing of, transporting, forwarding, orotherwise servicing.

General Prohibitions 1 through 3 and 8 are “list based” (i.e., they are basedon the Commerce Control List).The remaining six are “transaction based” (i.e.,based on the nature of the export transaction).

Ten General Prohibitions 27

CLASSIFICATION UNDER THE EAR

The Commerce Control List (CCL) is EAR Part 774. Its ten categories explic-itly annotate all items within the scope of the EAR that BIS wants to specifi-cally control. Such items as bicycles and ballpoint pens are not included becauseBIS has no wish to specifically control them. Published books are not included,as they are not subject to the EAR. You won’t find 50-caliber machine gunseither, because another agency has exclusive control over such items (the StateDepartment’s Office of Defense Trade Controls).

EAR99

Items that are subject to the EAR but are not included in the Commerce Con-trol List like bicycles and ballpoint pens are classified as EAR99. Because oftheir benign nature, EAR99 items satisfy General Prohibitions 1 through 3 and8, although the other prohibitions still apply. The only safe way to determinewhether an item is really EAR99 is to see whether it is listed in the CCL. Fur-ther, such determinations should be checked from time to time, as items may beswitched from EAR99 status to a higher level of control if BIS detects poten-tially sinister end-uses for them. The reverse is also true; sometimes an item’slevel of control is lowered to EAR99 status.

Since EAR99 items satisfy General Prohibitions 1 through 3 and 8, no exportlicense is required unless one of the other General Prohibitions is affected. Indi-cate this happy situation when reporting the shipment by showing EAR99 andthe processing code NLR (no license required) when you report the export.

EXPORT CONTROL CLASSIFICATION NUMBERS

Items found on the CCL are assigned a five-character Export Control Classifi-cation Number (ECCN). As we saw in the definition section, each ECCN con-sists of a single digit, a letter, and three additional digits.

First ECCN Character The first digit indicates which of ten categoriesapply:

• Category 0: nuclear materials, facilities, and equipment, as well as a merci-fully short list of oddball miscellaneous items (e.g., horses shipped by sea,handcuffs, and factories to manufacture shotgun shells)

• Category 1: materials, organisms, microorganisms, and toxins

• Category 2: materials processing

• Category 3: electronics

28 Export Control

• Category 4: computers

• Category 5: telecommunications and information security

• Category 6: sensors and lasers

• Category 7: navigation and avionics

• Category 8: marine

• Category 9: propulsion systems, space vehicles, and related equipment

Note: The word materials is used as a general-purpose term in Category 1.

Second ECCN Character Each category is subdivided into five groups rep-resented by a letter, which forms the second character of the ECCN:

• A: equipment, systems, and components

• B: test, inspection and production equipment

• C: materials

• D: software

• E: technology

Notes:1. In Group C, the word materials means “made from.”

2. As you can see from Group E, technology is controlled as well as com-modities. The General Technology Note found in EAR Part 774 Supple-ment 2 states that the export of technology that is required for thedevelopment, production, or use of items on the CCL is controlled accord-ing to the provision in each category. Technology required for the develop-ment, production or use of a controlled product remains controlled evenwhen applicable to a product controlled at a lower level.

Three Remaining ECCN Characters ECCN characters three, four, andfive are digits. For classification purposes, it is not important to know how theyare determined, so just accept them as given.

Finding Commerce Control List Entries

There are several ways of determining whether an item is listed in the CCL andlocating it if it is. The most obvious is the extensive index found in Supplement1 to EAR Part 774, which lists controlled items alphabetically and provides theirECCNs. Although this is often the fastest approach, one must take care tosearch for all possible synonyms that could be used as index names for the itemin question.

Export Control Classification Numbers 29

A second approach is to examine the item, determine which category andgroup apply, and delve into that part of the EAR. For instance, if you have anumerically controlled machine tool, you would probably realize that it wouldbe a materials processing item, which is category 2, and that it would be a pieceof production equipment, which is included in group B. This would get you to2B, which in this example would be a range of 27 pages containing 33 ECCNentries, of which all but a very few would obviously not apply. Of course, youwould not know the last three characters at the start, but it wouldn’t matter, asthey will be provided in the ECCN itself once you find the correct entry (whichhappens to be 2B991).

Combining these methods may sound like a “belt and suspenders”approach, but it adds a degree of safety. It is also time well spent, as items tendto stay put within their ECCNs.

Another approach is to request an ECCN classification from BIS. Their14-calendar-day reply period for completely and correctly submitted requestsis more a target than a commitment. Classification requests must be submit-ted on Multipurpose Application Form BXA-748P or its electronic equiva-lent. Each classification request is limited to six items, but exceptions arepossible for related items. Classification requests must be supported by anydescriptive literature, brochures, and precise technical specifications describ-ing the item in sufficient detail to enable classification by BIS. Applicantsmust suggest a possible classification with reasons or must explain those am-biguities in the CCL that prevent a classification attempt. For details, seeEAR Part 748.3.

Finally, there are vendors that offer CCL search engines or searching ser-vices.These can be real time-savers for people handling many classifications butdo not absolve the exporter from responsibility for getting it right.

EXPORT CONTROL CLASSIFICATION NUMBER ENTRY

Each ECCN heads a unique entry, which provides the following information:

• A general description of the items it covers

• One or more of the following abbreviations for the applicable reason orreasons for control, and any applicable Commerce Country Chart column(which we will cover later in this chapter):

AT: antiterrorism

CB: chemical and biological weapons

CC: crime control

CW: chemical weapons convention

EI: encryption items

30 Export Control

FC: firearms convention

MT: missile technology

NS: national security

NP: nuclear nonproliferation

RS: regional stability

SI: significant items

SS: short supply

UN: United Nations

XP: high performance computers

• Any of the five following list-based license exceptions, which we will coverin detail in the “List-Based License Exceptions” section of this chapter.

Shipments of Limited Value (LVS)

Shipments to Country Group B Countries (GBS)

Civil End-Users (CVS)

Technology and Software under Restriction (TSR)

Computers (CTP)

• A detailed description of the items controlled under the entry, including theapplicable units of measure (units, kilos, liters, etc.), any related controls, anyitem-specific definitions, and a detailed list of the items themselves. The listmay provide subdivisions (a., b., etc.) and even further breakdown (b.1., b.2.,etc.) as the type of item dictates.

UNIQUE CONTROL PROCEDURES

Assuming the item being considered is found in the CCL, its ECCN entry willdesignate the reasons for control. A few reasons have unique procedures forlicense determination, and this section will address them. The majority are cov-ered through reference to the “Commerce Country Chart,” which we will seelater in this chapter.

Items controlled by the Chemical Weapons Convention (CW) require notonly a licensing decision but 45 days prior notice of export, plus annual report-ing. These few items are covered in EAR Part 745.

Computer (XP) controlled items are specially covered in EAR Part 742.12.Encryption (EI) controlled items are covered in EAR Part 742.15.Short Supply (SS) items are controlled because of scarcity, since exports

could cause availability problems for U.S. industry. These few items are coveredin EAR Part 754.

Significant Items (SI) are “hot section technology” for the development,production, or overhaul of commercial aircraft engines, components, and sys-tems. Export licenses are required for all destinations except Canada.

Unique Control Procedures 31

ECCN 0A983 and 5A980 items require an export license regardless of thedestination country. EAR Parts 742.11 and 742.13 provide information onlicensing policy for these items.

ECCN 0A982, 0A985, 0A988, 0A989, 0A999, 0B986, 0B999, 0D999, 0E982,1A999, 1B999, 1C355, 1C995, 1C998, 1C999, 1D999, 2A994, 2A999, 2B999,2D994, 2E994, 3A999, and 6A999 items require licenses for so few destinationsthat their names are included within the entries themselves.

COMMERCE COUNTRY CHART

Items controlled for antiterrorism (AT), chemical and biological weapons (CB),crime control (CC), firearms convention (FC), missile technology (MT),national security (NS), nuclear nonproliferation (NP), and regional stability(RS) reference the Commerce Country Chart.

As you can see from Exhibit 2.2, the Commerce Country Chart is a spread-sheet. All countries are listed in alphabetical order in the left-hand column. Allreasons for control that reference the chart are listed in headings of their ownwith one or more columns.An item’s reason or reasons for control and applicablecolumns come from the ECCN entry. If an X is found in any of the applicablecontrol columns next to the destination country, a license or license exception(which we will cover later in this chapter) is required. Otherwise, no license isrequired, provided there are no adverse circumstances as found in General Prohi-bitions 4 through 7, 9, and 10 (e.g., denied person or prohibited end-use/end-user).

Notes:

1. For items controlled for more than one reason, the same exercise must bedone for every applicable reason.

2. “Destination country” is the country where the goods end their journey.However, to comply with General Prohibition 8, shipments transiting cer-tain countries where vessel or aircraft unloading takes place must bechecked against the Commerce Country Chart from two standpoints:

— Their actual destinations

— Whether a license would be required for the transiting country if itwere the ultimate destination

The reasoning is that the shipment could easily be detained while transiting.Where practical, it may be easier to route shipments around such transit pointsthan to deal with this issue.

Use Exhibit 2.2 to see how the following examples illustrate how the Com-merce Country Chart interfaces with the information found in ECCN entries.

Example 1: ECCN 3B001 covers equipment to manufacture semiconduc-tors, and shows two reasons for control: NS column 2 and AT column 1. A

32 Export Control

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shipment going to Denmark would not require an export license, as there is noX in either the NS column 2 or AT column 1 boxes.The fact that there is an X inthe NS column 1 box is irrelevant.

Example 2: The same item with a Djibouti destination would require eithera license or a license exception because there is an X in the NS column 2 box.

Example 3: ECCN 3A981 covers polygraphs and shows crime control col-umn 1 as the only reason for control.The Czech Republic and Denmark are theonly countries on the page for which an export license or license or a licenseexception would not be required, as all other countries have an X in the CC col-umn 1 box.

Note: Cuba isn’t included in the Commerce Country Chart at all. It, andother countries under U.S. embargo, is covered in EAR Part 746.

If there is an X in any applicable box, the process must continue by seekingan exception. Failing that, an export license is required. If there is no X in anyapplicable box (or prohibited transiting shipment), General Prohibitions 1through 3 and 8 are satisfied. If no other General Prohibition is affected, nolicense is required. Indicate this happy situation by showing the ECCN and theprocessing code NLR (no license required) when reporting the export.

SUMMARY

As we’ve already been exposed to considerable detail, let’s review what we’veseen by subjecting the item being considered to the following questions andanswers.

1.Is it under the exclusive control of another agency? See the “Who Is Involved?”section in this chapter for a list of the other possible federal agencies.

2. If not exclusively controlled by another agency, is it within the scope of theEAR? See “Subject to the EAR?” section in this chapter. If it is within theEAR, it is subject to the Ten General Prohibitions found in the section ofthe same name in this chapter.

3. Is it listed in the CCL? See “Classifications under the EAR” section in thischapter. If it isn’t, EAR99 applies, which means that it automatically satis-fies General Prohibitions 1 through 3 and 8. If it is listed on the CCL, referto the individual ECCN entry for applicable reasons for control.

4. Does the ECCN entry indicate a unique reason for control? If so, follow theprocedures shown in the “Unique Control Procedures” section in this chap-ter. If not, note the reasons for control and the applicable column numbersand proceed to the Commerce Country Chart.

5. X in a box? Select the destination country (or if transiting a specially con-trolled country, it and the destination country) and check all applicable

34 Export Control

reasons for control for an X in the applicable column. No X means there isno license required to satisfy General Prohibitions 1 through 3 and 8. An Xin an applicable box means we must continue the process as either a licenseexception or a license is required.

COUNTRY GROUPS

BIS groups certain countries with similar characteristics into several lists calledCountry Groups.There are five, designated A through E. Group A is subdividedinto A1, A2, A3, and A4, and includes “regime members”—countries that sharethe same philosophy about restricting proliferation of dangerous items. CountryGroup B is the general free world. Group C is reserved for possible future use.Group D lists countries of concern: D1 for national security, D2 for nuclear, D3for chemical and biological, and D4 for missile technology. Group E1 countriesare considered terrorist supporting, and Group E2 countries are under unilat-eral U.S. embargo. A country may be listed in more than one Country Group,and there may be more than one subdivision within a group. The completeCountry Groups are found in EAR Part 740 Supplement 1.

LIST-BASED LICENSE EXCEPTIONS

We have arrived at this section because the item being considered is listed in theCCL, the reason for control relates to the Commerce Country Chart, and thereis an X in one or more applicable reason-for-control columns on the chart.

There are five so-called list exceptions that when used correctly can over-ride an X in one or more applicable reason-for-control columns. Each comeswith its own restrictions, which must be scrupulously observed. Only one licenseexception is required to overcome each X, so if more than one applies usewhichever is easiest to administer.

List-based license exceptions are referenced within each ECCN entry.Three—LVS, GBS, and CIV—will always be addressed even if they do not applyto items covered by the entry. The other two, TSR and CTP, will be shown onlyfor technology and software or computer entries, as they cannot possibly applyto anything else.

Caveat: The following presentations of the list-based exceptions are simpli-fied. Be sure to check the actual regulations in EAR Part 740 before using them.

Shipments of Limited Value (LVS)

This exception authorizes the export and reexports in a single shipment of eligi-ble commodities as identified by limited-value shipments (LVS), accompanied

List-Based License Exceptions 35

by a dollar value limit in the ECCN entry. This license exception is available forall destinations in Country Group B, provided that the net value of the com-modities included in the same order and controlled under the same ECCNentry does not exceed the specified LVS dollar value limit for that entry.

An “order” is defined as a communication from a foreign party (or its rep-resentative) of the intention to import commodities from the exporter. Thekind, quantity, and selling price(s) must be finalized. Order values must notexceed the LVS dollar amount, and may not be split to duck under it. “Value” isdefined as the actual selling price of the commodities included in the order thatare controlled under the CCL number, less shipping charges. (Alternatively, itmay be the current market price for the same commodities to the same type ofpurchaser in the United States.)

There is no limit to the number of times LVS may be used, but the total dol-lar amount to the same ultimate or intermediate consignee for the same ECCNmay not exceed 12 times the dollar value limit within a single year.

Restrictions apply for components or spare parts controlled for encryption(EI) reasons under ECCN 5A002.

Commodities may be reexported under LVS, provided that they could beexported from the United States to the new destination country under thisexception. (Before using this exception, refer to EAR Part 740.3.)

Shipments to Country Group B Countries (GBS)

License exception GBS permits exports and reexports to Country Group B ofcommodities controlled for national security (NS) reasons only. GBS applies tocommodities only, not to technology or software. Where applicable, the ECCNentry will indicate GBS-yes. (Before using GBS, see EAR Part 740.)

Civil End-Users (CIV)

License exception civil end-users (CIV) authorizes exports and reexports con-trolled for national security reasons (NS) only.Where applicable, the ECCN entrywill indicate CIV-yes.This exception applies only when the items are destined forcivil end-users for civil end-uses in Group D1 countries except North Korea. CIVmay not be used for exports and reexports to military end-users or for known mil-itary end-uses. (Before using CIV, see EAR Part 740.5 and Supplement 1.)

Technology and Software under Restriction (TSR)

License exception technology and software under restriction (TSR) permitsexports and reexports of technology and software controlled for national secu-rity (NS) reasons only. Where applicable, the ECCN entry will specify TSR-yes.This exception applies only to shipments destined for Group B countries, and

36 Export Control

written assurance is required from the consignee before it may be used. (Beforeusing TSR, see EAR Part 740.6.)

Computers (CTP)

License exception computers (CTP) authorizes exports and reexports of com-puters and specially designed components for them, exported or reexported aspart of a system for consumption in Computer Tier countries as provided inEAR Part 740.7. Where applicable, the ECCN entry will specify CTP-yes.

Related equipment controlled under ECCN 4A003.d and g is authorizedunder this license exception only when exported or reexported with these com-puters as part of system.

This license exception may not be used for export or reexport items that willenhance the computer beyond the eligibility limit allowed to the destinationcountry or for graphic accelerators or coprocessors, or computers controlled formissile technology (MT) reasons. Other restrictions apply.

Before using CTP, refer to 740.7 for lists of eligible countries with their max-imum permitted capabilities, eligible computers, National Defense Authoriza-tion Act notification requirements, restrictions, and reporting requirements.

TRANSACTION-BASED LICENSE EXCEPTIONS

We’ve arrived here because we are still faced with much the same situation as inthe beginning of the previous section. The item being considered is listed in theCommerce Control List, the reason for control relates to the Commerce CountryChart, there is an X in one or more applicable reason-for-control columns on thechart, and we did not find an applicable list-based license exception. It is still pos-sible to avoid applying for an export license, as there are 11 more transaction-based license exceptions to consider.

These license exceptions are called transaction based because the particu-lars of the transaction itself rather than a reference within the ECCN entrydetermine whether they apply. Some are very specific, and others accommodatea number of possible items. In all cases, qualifying conditions must be satisfied.

Caveat: The following presentations of the transactions-based exceptionsare simplified. Be sure to check the actual regulations in EAR Part 740 beforeusing them.

Key Management Infrastructure (KMI)

License exception key management infrastructure (KMI) authorizes the exportand reexport of certain encryption software and equipment, subject to reporting

Transaction-Based License Exceptions 37

requirements and classification under a technical review.This exception is avail-able for all destinations except Country Group E1. For details on software andconditions, see EAR Part 740.8.

Temporary Imports, Exports, and Reexports (TMP)

License exception temporary imports, exports, and reexports (TMP) authorizestemporary exports and reexports, exports and reexports of items temporarily inthe United States, and exports and reexports of beta test software.

Temporary Exports This covers certain exports and reexports for tempo-rary use abroad subject to various conditions and exclusions. Commodities orsoftware exported or reexported under this exception must be returned to thecountry from which they were exported as soon as practicable, normally notlater than one year from the date of export unless they are consumed ordestroyed in the normal course of authorized use abroad.

Eligible commodities include tools of trade (except to Country Group E2 orSudan), kits consisting of replacement parts (except to Country Group E2),exhibition and demonstration materials (except to Country Group E1), inspec-tion and calibration equipment (except for Country Group E2, Sudan, or Syria),containers, broadcast material, items for assembly in Mexico, news media, andtemporary exports to a U.S. subsidiary, affiliate, or facility at a Country Group Bdestination.

No commodity or software, except for news media, may be exported orreexported under this exception to Country Group E2. The same applies toCountry Group D1 except for tools of trade and kits of replacement parts.Thereare additional restrictions for commodities and software for use in sensitivenuclear activity. (Before using this exception, see EAR Part 740.9(a).)

Exports of Items Temporarily in the United States This covers export-ing foreign origin items temporarily in the U.S., including items moving in tran-sit, items imported for display at U.S. exhibitions, return of unwanted importshipments, or those refused entry.There are numerous conditions to this licenseexception reflecting the item and the destination country. (Before using it, referto EAR Part 740.9(b).)

Exports of Beta Test Software This covers exports and reexports to eligi-ble countries of user-installable beta test software intended for distribution tothe general public. All countries except Country Group E2 are eligible, exceptfor encryption software. Additional conditions apply and importer assurancesare required. (Before using this exception, refer to EAR Parts 740.9(c).)

38 Export Control

Servicing and Replacement of Parts and Equipment (RPL)

License exception servicing and replacement of parts and equipment (RPL)authorizes exports and reexports associated with one-for-one replacement ofparts or servicing and replacement of equipment.

Parts This covers the export and reexport of one-for-one replacement partsfor immediate repair of previously exported equipment. Items that improve orchange the basic design characteristics are not eligible.

Parts may be exported only to replace parts contained in commodities thatwere legally exported from the United States, legally reexported, or made in a for-eign country incorporating authorized U.S. origin parts. No replacement partsmay be exported to repair a commodity exported under an export license thatrestricted subsequent parts exports. No replacement parts may be held abroad asspares for future use.This cannot be used for Country Group E1 to repair aircraft,or for commodities controlled for national security (NS) reasons. Additionalrestrictions apply. (Before using this exception, refer to EAR Part 740.10.)

Servicing and Replacement This covers the export and reexport of itemsthat were returned to the United States for servicing and the replacement ofdefective or unacceptable U.S.–origin commodities or software.

Servicing means inspection, testing, calibration, or repair, including overhauland reconditioning but not improving the basic characteristics. When the ser-viced commodity or software is returned, it may include any replacement orrebuilt parts necessary to its repair and may be accompanied by any spare part,tool, or accessory that was sent with it for repair. Any commodity or softwarelegally exported to Country Group D1 countries (except the People’s Republicof China or North Korea) that is sent to the United States or a foreign party forservicing may be returned under this license exception to the country fromwhich it was sent if both of the following conditions are met:

1. The exporter must be the same person to whom the license for the serviceditem was originally issued.

2. The end-user, end-use, and other particulars for which the license was orig-inally issued have not changed.

No repaired commodity or software may be exported or reexported to coun-tries in Country Group E1 under this exception.

Replacement covers exports or reexports of commodities or software toreplace defective or otherwise unusable items under the following conditions.The commodity or software being replaced must have been previously exported

Transaction-Based License Exceptions 39

or reexported under a license or authorization granted by BIS. No replacementsfor equipment worn out from normal use or to be held for future use areallowed.The replacement may not improve the basic characteristic of the equip-ment. No shipment allowed to Country Group E1 countries or anywhere elsefor the use of their nationals. Special conditions also apply to exports to Coun-try Group B and D1 countries. (Before using this license exception, refer toEAR Part 740.10.)

Governments, International Organizations, and InternationalInspections under the Chemical Weapons Convention (GOV)

This license exception authorizes exports and reexports for internationalnuclear safeguards, for U.S. government agencies or personnel, for agencies ofcooperating governments, and for international inspections under the ChemicalWeapons Convention.

Exports and reexports to the International Atomic Energy Agency (IAEA)and the European Atomic Energy Community (Euratom), and reexports byboth agencies for official safeguard use are permitted with some restrictions.(Before using this license exception, refer to EAR Part 740.11(a).)

Exports and reexports of daily necessities in quantities sufficient for per-sonal use are permitted for use of U.S. government personnel and agencies.Exports and reexports for the official use of U.S. government agencies are alsopermitted. Exports and reexports of items consigned to and for the official useof any agency of a cooperating national government within the territory of anycooperating government are also permitted with certain restrictions. For thepurpose of this exception, a “cooperating national government” is defined asthose listed in Country Group A1 plus the national governments of Argentina,Austria, Finland, Hong Kong (treated as a separate country for this purpose),Ireland, New Zealand, Singapore, South Korea, Sweden, Switzerland, and Tai-wan. (Before using this license exception, refer to EAR Part 740.11(b).)

Exports and reexports are also permitted to and by the Organization for theProhibition of Chemical Weapons (OPCW) for official international inspectionand verification under the terms of the Chemical Weapons Convention. Exclu-sions and restrictions apply. (Before using this license exception, refer to EARPart 740.11(c).)

Gift Parcels and Humanitarian Donations (GFT)

Gift Parcels This license exception authorizes exports and reexports of free-of-charge gift parcels by an individual (donor) addressed to an individual or toa religious, charitable, or educational organization (donee) located in any desti-nation. The gift parcel must not be for resale.

40 Export Control

Additional restrictions apply, particularly to Cuba. (Before using this exception,refer to EAR Part 740.12(a).)

Humanitarian Donations This license exception authorizes exports andreexports by groups or organizations of free-of-charge donations to meet basichuman needs, defined as those requirements essential to individual well-being.

Commodities and software controlled for national security (NS), chemicaland biological weapons (CB), nuclear proliferation (NP), missile technology(MT), and crime control (CC) reasons are not eligible. Additional restrictionsand detailed record keeping requirements apply. (Before using this licenseexception, refer to EAR Part 740.12(b).)

Technology and Software—Unrestricted (TSU)

This license exception authorizes exports and reexports of operation technol-ogy and software, sales technology and software, software updates (bug fixes),“mass market” software subject to the General Software Note EAR Part740.13(d)(2), and unrestricted encryption source code. Note that encryptionsoftware is not subject to the General Software Note.

Operation Technology and Software This is defined as the minimumtechnology necessary for the installation, operation, maintenance (checking),and repair of those products lawfully exported under a license, license excep-tion, or NLR (no license required). This does not include technology for devel-opment or production and includes use-technology only to the extent requiredto ensure safe and efficient use of the product. Individual entries in the softwareand technology subcategories of the Commerce Control List may furtherrestrict the export or reexport of operation technology. Operation softwaremust be in object code.

Operation technology and software may be exported or reexported to anydestination to which the equipment for which it is required has been or is beinglegally exported or reexported. Additional restrictions apply. (Before using thislicense exception, refer to EAR Part 740.13(a).)

Sales Technology This is defined as data supporting a prospective or actualquotation, bid, or offer to sell, lease, or otherwise supply any item. It may beexported or reexported provided that it is a type customarily used for this pur-pose. It may not disclose the detailed design, production, or manufacture tech-nology, or the means of reconstruction or either the quoted item or its product.

Sales technology may be exported or reexported to any destination, butdoes not imply approval of any resulting license application. (Before using thislicense exception, refer to EAR Part 740.13(b).)

Transaction-Based License Exceptions 41

Software Updates These are defined as intended for and limited to correc-tion of errors (“fixes to bugs”) in software legally exported or reexported(called “original software”). These may be exported or reexported to the sameconsignee to whom the original software was exported or reexported but mustnot enhance the functional capacities of the original software. Exports and reex-ports are permitted to any destination to which the original software had beenlegally exported or reexported. (Before using this license exception, refer toEAR Part 740.13(c).)

General Software Note “Mass-Market” Software This authorizes exportsor reexports of mass-market software subject to the General Software Note(EAR Part 774 Supplement 2).

Mass-market software is available to all destinations except Country GroupE1 for user-installable software that is generally available to the public. Addi-tional restrictions apply. (Before using this license exception, refer to EARParts 740.13(d).)

Unrestricted Encryption Source Code Unrestricted encryption sourcecode controlled under ECCN 5D002, which would be considered publicly avail-able under EAR Part 734.3(b)(3) and which is not subject to an express agree-ment for the payment of licensing or royalty for commercial production or sale ofany product developed with the source code is released from encryption (EI) con-trols. It may be exported or reexported without review under license exceptionTSU.This may be used only provided written information of the Internet locationor a copy of the source code has been submitted to BIS by the time of export.

Object code resulting from the compiling of source code that would be con-sidered publicly available may be exported under TSU if the requirements ofEAR Part 740.13(e) are otherwise met and no fee or payment is required forthe object code. See EAR Part 740.17(b)(4)(i) for treatment of object codewhen a fee or payment is required.

No source code or products developed from it may be exported to Cuba,Iran, Iraq, Libya, North Korea, Sudan, and Syria. Additional restrictions apply.(Before using this license exception, refer to EAR Part 740.13(e).)

Baggage (BAG)

This license exception authorizes individuals leaving the United States eithertemporarily or for longer-term and crew members of carriers to take to any des-tination certain classes of commodities and software described in EAR Part740.14. These items are generally described as personal and household effects,vehicles, and tools of trade. They must be owned by the individuals or immedi-ate family members, intended for their appropriate use, and cannot be intendedfor resale. Additional restrictions apply. (Before using this exception, refer toEAR Part 740.14.)

42 Export Control

Aircraft and Vessels (AVS)

This license exception authorizes the departure from the United States of foreign-registry civil aircraft on temporary sojourn in the United States and of U.S. civilaircraft for temporary sojourn abroad. It also covers the export of equipmentand spare parts for the permanent use on a vessel or aircraft and exports to ves-sels or planes of U.S. or Canadian registry. There are many definitions andrestrictions not covered here because of this exception’s limited applicability.(Before using this license exception, refer to EAR Part 740.15.)

Additional Permissive Reexports (APR)

This license exception covers reexports from Country Group A1 and cooperat-ing countries, provided that they comply with export authorizations of theexporting country and are not controlled for nuclear proliferation (NP), chemi-cal and biological weapons (CB), missile technology (MT), significant items(SI), or crime control (CC) reasons.

For the purpose of this license exception, cooperating countries are Austria,Finland, Hong Kong (treated as a separate country for this purpose), Ireland,New Zealand, South Korea, Sweden, and Switzerland.

Eligible reexport destinations include Country Group B countries that arenot also included in Country Groups D2, D3, D4, or Cambodia, or Laos. Thecommodity being reexported must be controlled for national security (NS) rea-sons only and must not be controlled for export to Country Group A1. Reex-ports to Country Group D1 countries other than Cambodia, Laos, or NorthKorea are also permitted but only for items controlled for NS reasons.

This license exception also covers reexports to and among Country GroupA1 and cooperating countries of all commodities except those controlled fornuclear proliferation (NP) and missile technology (MT) reasons. Items must beconsumed or used in A1 or cooperating countries. There are additional restric-tions and conditions. (Before using this license exception, refer to EAR Part740.16.)

Encryption Commodities and Software (ENC)

This license exception authorizes the export and reexport of encryption itemsclassified under ECCNs 5A002, 5D002, and 5E002. No exports are permittedunder this license exception to Cuba, Iran, Iraq, Libya, North Korea, Sudan, orSyria. Reporting requirements apply.

After a mandated review procedure by BIS, exports and reexports ofencryption items classified under ECCNs 5A002, 5D002, and 5E002 areauthorized to any end-user located in the countries listed in EAR740 Supple-ment 3 except for exports of cryptanalytic items to government end-users.

Transaction-Based License Exceptions 43

(Cryptanalytic is loosely defined as code breaking.) For other countries, signifi-cant restrictions exist.

This license exception contains conditions that are too technical for generalinterest and are not referenced here. (Before using it, refer to EAR Part740.17.)

Agricultural Commodities (AGR)

License exception agricultural commodities (AGR) permits the export andreexport of agricultural commodities to Cuba, provided the transaction meetsfive criteria and three restrictions. These, as well as the required prior notifica-tion and processing procedures for this exception, are found in EAR Part740.18. As Cuba is under U.S. embargo, interested parties are urged to read thissection carefully before taking any action.

SUMMARY OF LICENSE EXCEPTIONS

The preceding two sections are full of detailed and often tedious descriptions.Fortunately, they aren’t as bad in practice as they must now seem. Mostexporters will use only a few and will use them frequently enough to develop afamiliarity with the procedures. License exceptions are really a short-cut, com-pared to the time-consuming alternative of needlessly applying for many exportlicenses.

Our coverage of every license exception includes a caveat referring readersto the applicable EAR part or parts. There are four good reasons for doing so.First, our coverage is in summary form because many are of limited interest andsome include industry-specific terminology incomprehensible to outsiders. Sec-ond, the rules for license exceptions change frequently. Third, countries may beadded to or removed from various Country Groups as their relationships withthe United States change. Finally, the exporter is primarily responsible for thecorrect use and documentary compliance for these exceptions.

Although using a license exception may be an option, export control com-pliance is not. An X in a reason-for-control box must be addressed.

Exhibit 2.3 provides an overall review of how we got here.

PROHIBITED END-USERS, END-USES, AND ENHANCED PROLIFERATION CONTROL INITIATIVE

EAR Part 744 requires that besides the license requirements specified in theCommerce Control List, a license is required if you know the item will be used

44 Export Control

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45

in certain prohibited activities. Restrictions differ and are individually cited ineach EAR prohibited end-use section: 744.2 for nuclear, 744.3 for missiles, 744.4for chemical and biological, and 744.5 for maritime-nuclear propulsion.

In addition to reciting prohibited end-uses, EAR Part 744 includes the Enti-ties List as Supplement 4. Listed parties are prohibited from access to someEAR controlled items without a license, but may under certain circumstanceslawfully obtain others.The requirements and license review policy are given foreach listed party.

Part 744.6 describes related restrictions on certain activities of U.S. per-sons, which brings us to the Enhanced Proliferation Control Initiative (EPCI).EPCI is a catchall provision that applies to all items covered by the EAR,regardless of whether they are EAR99 or found on the Commerce ControlList. It applies whenever any U.S. person knows or is informed that a particu-lar export will be used in weapons of mass destruction as mentioned before.Through EPCI, BIS can deny an export license for reasons other than citedreasons for control (called “crossover denial”). Because General ProhibitionTen states that U.S. persons may not proceed with a transaction with knowl-edge that a violation of the EAR has occurred or is about to occur, everythingmust stop pending a BIS decision. Such “knowledge” need not be positive butincludes high probability and precludes a conscious disregard or deliberateavoidance of facts. “Informed” can happen orally, through the Federal Regis-ter, a BIS written information letter, or as we will see in the next section, byinclusion of a party to the transaction in the Denied Persons, Unverified, orEntities Lists.

DEEMED EXPORTS

The release of technology or software subject to the EAR is included in theEAR definition of export. This includes release in a foreign country or to a for-eign national in the United States. The deemed export rule does not apply topersons lawfully admitted for permanent residence in the United States or topersons protected under the Immigration and Naturalization Act. See EARPart 734(b) “Export and reexport” for details.

In addition to becoming informed as mentioned in EPCI, U.S. persons involvedin export have an obligation to know their customers and to watch for so-called“red flags.”

46 Export Control

“BAD GUY” LISTS, KNOWING YOUR CUSTOMER,AND RED FLAGS“ ”

“Bad Guy” Lists

BIS issues three lists of parties whose access to items covered by the EAR iseither restricted or prohibited. As mentioned in the previous section, the EntityList restricts access to some or all items without BIS prior approval, which mayor may not be granted. The Unverified list consists of parties on which the gov-ernment has been unsuccessful in completing a prelicense check or postship-ment verification.While it isn’t an absolute prohibition, parties on this list are tobe treated as having red flags (which we will discuss later in this section). TheDenied Persons List, Supplement 2 to EAR Part 764, is stronger medicine.Denied persons have been found guilty of serious EAR violations—in fact,some of their addresses are federal correctional institutions. General Prohibi-tion Four explicitly covers actions prohibited by denial orders, and it is unlikelythat BIS would provide any authorizations.

The Treasury Department’s Office of Foreign Assets Control issues a list ofits own titled Specially Designated Nationals and Blocked Persons. Listed par-ties include agencies of countries and parties whose assets have been frozen,known drug dealers, terrorists, and persons or institutions known to be frontingfor such folks. While not part of the BIS export controls, it is included in theEAR for convenience as Supplement 3 to Part 764.

The State Department’s Office of Defense Trade Controls issues a List ofDebarred Parties with whom trade in items it regulates is prohibited as part ofits International Traffic in Arms Regulations (ITAR).This is not included in theEAR but may be viewed along with the entire ITAR at www.pmdtc.org. Inresponse to the September 11 terrorist attack, the State Department’s Office ofthe Coordinator for Counter-terrorism created a new list titled “Terrorist Orga-nizations” as part of the USA Patriot Act. Details may be found in the FederalRegister, December 7, 2001, Volume 66, Number 236, Pages 63619-63620.

Knowing Your Customer

While exporters aren’t expected to be detectives, both BIS and common sensedictate that we know with whom we are dealing. As far as BIS is concerned, thepoint is knowing who the overseas party is so anyone on a “bad guy list” can beavoided. It is also a concern that the overseas party not be involved in prohib-ited end-uses. BIS does not provide specific guidelines on how one learns abouttransaction parties. Such information may come from established overseas salesrepresentatives and distributors or even from the party itself. It may also befound in the kind of credit report that most prudent firms get on all their trad-ing partners, both here and abroad. (In fact, the Commerce Department itselfprovides such reports.) While a credit report won’t tell you that a company isn’tengaged in missile technology, it should indicate what the business does and

“Bad Guy” Lists, Knowing Your Customer, and Red Flags 47

what products it makes or handles, which is usually good enough for compli-ance. Firms shown to be suppliers of military-related products or items havingobvious prohibited applications should be scrutinized further.

Red Flags

Red flags indicate warning, which is exactly what BIS had in mind when issuingSupplement 3 to EAR Part 732. Suspicious customer behavior may indicatepotential EAR violations. Typical red flags include:

• Buyer appearing on the Unverified List

• Buyer ordering high-tech items that are inappropriate for its normal activity

• Product incompatible with the technical level of the stated destination country

• Product incompatible with the stated destination country’s electric power

• Packing inappropriate for shipment to stated destination country

• Requirements of stated destination country (such as preshipment inspec-tion, consular documentation, etc.) that are typically addressed by sellersare ignored

• Buyer refuses routine startup assistance or on-site training

• Buyer offering cash for purchases that usually require financing

• Buyer unfamiliarity with the product’s performance characteristics

• No information available on the buyer

• Buyer refuses to provide transportation details

While these do not necessarily indicate wrongdoing, they do call for satis-factory explanations.

BIS EXPORT LICENSE APPLICATION

We have reached this point because our product is subject to the EAR, con-trolled to the destination country, and we couldn’t find a license exception, orhave encountered a prohibited end-user/end-use, or some other reason that canbe addressed only by a BIS export license.

There are two possible types of BIS export licenses: Special ComprehensiveLicenses and the more familiar standard export license.

Special Comprehensive Licenses (SCL)

Special comprehensive licenses (SCLs) permit multiple exports and reexportsof BIS-controlled items to and from the same preapproved consignee over a

48 Export Control

four-year period. The conditions for an SCL are very demanding because iteffectively places the day-to-day responsibility for most EAR compliance on anon-U.S. person. For this reason, SCLs are normally used only where strongseller-buyer relationships exist, as with importing distributors of items that fre-quently require BIS licenses. (For more information, refer to EAR Part 752.)

Export Licenses

This is the kind of license most often used for transactions between parties thatdo not have extremely close relationships or do not have large numbers of BIS-controlled exports and reexports.

Who May Apply Only a person in the United States may apply for a licenseto export items from the United States. For seller-routed export transactions,the applicant must be the exporter, defined as the U.S. principal party in inter-est (PPI) with authority to determine and control the sending of items out of theUnited States. (Exception: for encryption license agreements see EAR Part750.7(d).) For buyer-routed export transactions, the U.S. PPI or the duly autho-rized U.S. agent of the foreign PPI may apply for a license to export items fromthe United States. For reexports, the U.S. or foreign PPI, or the duly authorizedU.S. agent of the foreign PPI, may apply for a license to reexport controlleditems from one country to another.

“Principal parties in interest” is defined in the EAR as those persons in atransaction that receive the primary benefit, monetary or otherwise, from thetransaction. Generally, the principals in a transaction are the seller and thebuyer.

Application The form used for BIS license applications is BXA 748P Multi-purpose Application or its electronic equivalent. Copies may be obtained fromlocal U.S. Department of Commerce Export Assistance Centers or by faxedrequest to BIS Washington, DC (202) 482-3617 or either California office (949)660-9347 or (408) 998-7470.

All license applications must include sufficient information to enable BIS tomake a decision. Depending on the reason for control, the consignee and thedestination, either a Statement by Ultimate Consignee and Purchaser or anImport or End User Certificate may be required. Applicants should refer toEAR Parts 748 and 750 for details on what is required for their products, con-signees and destinations. A recent BIS publication titled Successful Approvalsof Export License Applications is also useful and may be obtained through theBIS web site www.bis.doc.gov.

Completed applications may be sent to BIS by mail at P.O. Box 273, Wash-ington, DC 20244, by courier at U.S. Department of Commerce, 14th Street &Pennsylvania Ave., Room 2705, Washington DC 20230, or electronically. The

BIS Export License Application 49

Simplified Network Application Process (SNAP) enables applicants to sendlicense applications and commodity classification requests directly to BIS viathe Internet in a secure environment. For details, check BIS’s website or contacttheir Export Counseling Division at (202) 482-4811.

Normal processing time for complete and correct application averages 30days, and applications requiring interagency review take longer. Applicationsmade on an emergency basis receive faster processing but curtailed validity, asopposed to the normal 24 months (or 12 months for short-supply controlleditems).

Some licenses are issued with conditions, which must be strictly observed.Delivery verification is required on a selective basis for licensed shipments.

ANTIBOYCOTT

United States law forbids participation in boycotts that it does not sanction.Thispolicy is enforced by both BIS and the Treasury Department.

BIS’s antiboycott regulations are found in EAR Part 760, and are broadlydefined as:

• Refusal to do business

• Discriminatory actions

• Furnishing information about race, religion, sex, or national origin

• Furnishing information about business relationships with boycotted coun-tries or blacklisted persons

• Furnishing information concerning association with charitable and fraternalorganizations

• Participating in letters of credit or purchase orders that contain prohibitedrestrictions

Not only must U.S. persons refrain from such practices, but they must alsoreport each request to BIS using form BXA-621P, even if the export is not con-summated.

U.S. antiboycott regulations have been in force for over twenty years. Mostboycotting governments and their citizens realize that requests sent to U.S. firmsfor such prohibited actions go unanswered, and the practice has been largelyabandoned. However, requests for prohibited certifications turn up in purchaseorders and letters of credit from time to time. Because most other countries donot have antiboycott legislation, businesses and banks in boycotting countriesuse two sets of forms—those purged of prohibited verbiage for the UnitedStates and those including it for everywhere else. Sometimes, the wrong paper-

50 Export Control

work is inadvertently issued in the boycotting country, causing a violation onthis side.

Although negative certifications of race, religion, sex, national origin, orrelationship with boycotted parties are forbidden, positive certifications arepermitted. One may certify that an item was made in the United States, orshipped on a Norwegian-flagged vessel, etc. These provide buyers in boycottingcountries assurance that their goods will not be confiscated. Further, buyershave a right to know that their goods will not transit an unfriendly country, lestthey be seized. Finally, there is some forbidden verbiage, such as “goods origi-nating in X country are prohibited,” that is provided for informational purposesbut does not require any certification. Although these instances must bereported, the documents in which they are included (often letters of credit) mayoften be legally used. If in doubt, check with BIS or the nearest Export Assis-tance Center.

Treasury Department antiboycott regulations, called the Tax Reform Act of1976 (TRA), are found in Section 999 of the Internal Revenue Code. Theyrequire that IRS Form 5713 International Boycott Report summarizing trans-actions with Bahrain, Iraq, Kuwait, Lebanon, Libya, Oman, Qatar, Saudi Ara-bia, Syria, United Arab Emirates, and the Republic of Yemen be filed withfederal tax returns. For more information, contact Mr. David Joy, Office of theGeneral Counsel, Department of the Treasury, phone (202) 622-1945.

Parties doing business with boycotting countries should become familiarwith EAR Part 760 and the Internal Revenue Code Section 999. The EAR hasmany examples illustrating real-life situations.

EXPORT REPORTING AND CLEARANCE

All shipments must be cleared for export before leaving the United States.Shipment-specific reports called Shippers Export Declarations (SEDs) arerequired for most commercial shipments. The reason for any shipment notrequiring an SED must be indicated on the accompanying paperwork. All ofthis data is made available through the carriers to U.S. Customs at the port orairport of departure, and Customs can detain any shipment that it believes maybe improperly exported. In addition, some federal government agencies havetheir own requirements.

Regardless of which government agency controls the shipped items, theCensus Bureau is in charge of export reporting. Its Foreign Trade Statistics Reg-ulations (FTSR) are found at the end of the EAR and indicate when, by whom,and how SEDs must be filed. Information filed in SEDs is held in strict confi-dence.

Directions on completing the SED are found in Chapter 11.

Export Reporting and Clearance 51

SED reporting involves classification of items by Schedule B numbers thathave nothing to do with the Commerce Control List. Rather, they relate to theHarmonized Commodity Description and Coding System (HS), an interna-tional system used by many countries for reporting exports and imports. Sched-ule B numbers have ten digits, of which the first six come from the HS while thelast four are assigned by the U.S. government.Therefore, for items classified cor-rectly, the first six digits of the Schedule B number will be familiar to importersand their governments in many countries. They will also be familiar to the U.S.Customs Service, as its tariff schedule is also based on the HS.

The Schedule B book groups similar items together into 96 classificationchapters and provides instructions for correct classification. The first two digitsof an item’s Schedule B number indicate the chapter in which it is found, thesecond two the heading within that chapter, and the third two the subheadingwithin the heading.

Schedule B classification assistance is available from Department of Com-merce Export Assistance Centers, and the entire Schedule B Book is availableon line at www.census.gov/foreign-trade/schedules/b/index.html.

Lately, export clearance has been streamlined by electronic SED filingunder the Automated Export System (AES). Approved filers may submit theirexport data to the Customs computer, thereby avoiding hang-ups or finesbecause of late paperwork. Further, certain prequalified AES filers may filetheir electronic SEDs up to ten days after the goods leave the United States. Formore information on electronic SED filing contact the Census Bureau atwww.aesdirect.gov or by mail at Automated Export System Branch, Bureau ofthe Census, Foreign Trade Division, Room 3145, Building 3, Washington, DC20233.

RECORD KEEPING

EAR Part 762 contains BIS’s record keeping requirements, which apply in addi-tion to those of any other government agency. The list is long and includes allexport control documents and transaction-specific memoranda, notes, correspon-dence, contracts, invitations to bid, accounting and financial records, and anyrestrictive trade practice or boycott documents and reports.For a complete list, seeEAR Part 762.2 and EAR Part 772 (definition of “export control documents”).

The retention period is five years from whichever of the following comes latest:

• The export

• Any known reexport, transshipment, or deviation

52 Export Control

• Any other termination of the transaction

• For any restrictive trade or boycott matters, the date the boycott-relatedrequest or requirement was received.

EXPORT CONTROL COMPLIANCE SYSTEM

Surprisingly, with the exception of comprehensive export license holders, BISdoes not require exporters to maintain an export control compliance system.This isn’t as good as it may sound, because BIS’s stated position is “We expectyou to comply. How you do so is up to you.” Fortunately, they don’t leave itthere, but provide helpful guidelines called an “Export Management System.”

Every exporter needs some kind of export-control compliance procedure,although some can literally be written on the back of an envelope. All thebicycle factory needs to know for its EAR99 product is not to ship to bad peo-ple or bad places, and both report and decline any boycott-related requests.Still, even it would need access to the “bad guy” lists, a list of embargoed coun-tries, and to know enough not to ship to any buyer named the “People’s Poison Gas Factory.” Beyond bicycles, the need for compliance proceduresmultiplies.

BIS offers several good publications and matrices for setting up an ExportManagement System. Start with the easiest, Export Management System—Sum-mary of the Guidelines, available from most Commerce Department ExportAssistance Centers or the BIS website: www.bis.doc.gov. As a first step, anyoneserious about exporting should have continuous access to the current EAR.

LINKAGES

The entire company will benefit if whoever handles export control compliance(in this book, the Compliance Department) freely communicates with the fol-lowing disciplines:

• Compliance: Advise sales of embargoed countries and any products forwhich export licenses may prove difficult to obtain.

Provide Sales, Credit, and Traffic with information on boycott-relatedverbiage.

Classify all products appearing in the CCL.Classify and provide accurate Schedule B numbers for all products to

Sales, Purchasing, and Traffic.Determine the export status of all orders referred by Sales.

Linkages 53

• Credit: Provide Compliance with buyer-specific information. Advise Com-pliance of any boycott-related verbiage appearing in letters of credit.

• Manufacturing: Compliance needs technical characteristics of products,and sometimes even their subassemblies and components, for EAR classifi-cation. This can possibly become a two-way street if manufacturing canmake its products more exportable by substituting benign components forthose presenting licensing problems.

• Purchasing: If the exporting company also imports, its duty costs are basedon the import tariff classification number.As an accuracy check, the first sixdigits should be compared to Schedule B numbers for exports of similaritems. Further, recapture of duty paid on imports that are subsequentlyreexported either as they came in or as part of a further manufactured prod-uct is possible. Called drawback, this procedure involves accounting forboth imports and exports. The fact that their respective classifications aresimilar at the six-digit level makes this task easier.

• Sales: Gather information for Compliance about new prospective cus-tomers to facilitate licensing decisions, and acquaint any overseas represen-tatives and distributors with the need to do so. Compliance can point outunlicenseable situations, embargoed countries,“bad guys,” etc. early enoughto avoid wasting time and effort on impossible dreams. Obtain correctSchedule B number classification numbers from Compliance, as the first sixdigits will be familiar to customers and their governments in countries usingthe Harmonized System. This can enable customers to quickly determinethe appropriate costs for duty and taxes, and learn of any other regulationstheir governments may impose.

Any questionable boycott-related language should also be referred toCompliance for review and possible reporting. Inform buyers about what-ever restrictions apply to subsequent transfer. Failure to do so not only evi-dences a lack of due diligence on the exporter’s part, but creates additionalrisk for the buyer. Unauthorized reexports is a major reason for foreigncompanies appearing on the Denied Persons list.

• Traffic: Provide the forwarder with accurate Schedule B numbers obtainedfrom Compliance. Many carriers base their price lists on the HarmonizedSystem, so at least the first six digits may be useful in freight cost negotia-tion. Forwarders should also be cautioned to avoid routing shipmentsthrough problem countries to avoid otherwise unnecessary licenses.

Advise Compliance of any negative boycott-related transportation ver-biage before shipping.

• Buyer: As far as the U.S. government is concerned, its control does not endwith the export.Whether they know it or not, and whether they do anythingabout it or not, foreign buyers are at least in theory bound by U.S. exportcontrols.

54 Export Control

ENDNOTES

1. 15 CFR Parts 710–774.2. 37 CFR Part 5.3. 31 CFR Parts 500–590.4. 22 CFR Parts 120–130.5. 21 CFR Parts 1311–1313.6. 21 USC Part 301 et seq. for drugs and biologicals and medical devices. 21 CFR Parts

312.1106 for investigational drugs.7. 50 CFR Parts 17.21, 17.22, 17.31, and 17.32.8. 10 CFR Part 110.9. 10 CFR Parts 205.300-590 for gas and power. 10 CFR Part 810 for nuclear.

10. 46 CFR Part 221.11. See EAR Part 734 Section 3(b) for a detailed list.12. See EAR Part 734 Section 4 for details.

Endnotes 55

Chapter 3

The Product

Throughout this chapter, the term product will be used to mean “the thing beingsold.” It will include both goods and services and may be tangible, intangible, ora combination of both. Not only does this approach eliminate unnecessary dis-tinctions between goods and services, but it is also consistent with the Interna-tional Organization for Standards ISO 9000 series standards, as we will see laterin this chapter.

Many products have both tangible and intangible components. For instance,a freight forwarder’s product usually includes paper documents that resulteither from oral shipping arrangements that were made on the phone or per-haps from equally intangible electronic message units. A manufacturer’s prod-uct might include a tangible item plus assistance with installation and operatortraining. Carriers provide a product called transportation, which is usually rep-resented by either a paper document or an electronic message unit.

PRODUCT CHARACTERISTICS

Obviously, sellers attempt to provide products that they believe buyers will findattractive enough to purchase. Two characteristics—price and quality—arebasic, and apply to just about every kind of product imaginable.We will considerprice in Chapter 6 and will examine quality here. For simplicity, we will definequality as any attribute found in a product other than price. This is admittedly avery broad definition, but it has the advantage of making us focus on character-istics that we often take for granted in domestic business.

Consider some obvious quality-related attributes a product may have byusing the laptop computer on which this manuscript is being written:

• It supports programs that most users are likely to need and has sufficientcapacity to handle updates. Most people would consider this very important.

56

• It comes with a rather comprehensive warranty from a household-wordmanufacturer, supported by a 24/7 assistance phone number—features thatinterest most people.

• It has easy-to-read English language instruction manuals and on-screentutorials that computer novices find very attractive.

• It is small and lightweight, but has a reasonably large screen and keyboard.Its long-life battery gives over three hours running time between charges.These features are important to the traveling businessperson.

• It has a built-in 50–60 HZ power adapter, extremely important to users whotravel to parts of the world where 50 HZ is used exclusively.

• There are several really useful accessory items available, like docking sta-tions, which enable users to employ the computer as a desktop at work andat home.

• It was made to order, which was a mixed blessing. A buyer may select fea-tures that are particularly important. The downside is that delivery takes 30days.This is acceptable because the seller promptly acknowledges order andkeeps buyers updated with weekly e-mails, and provides complete detailswhen the computers are finally shipped.

• Although these computers are manufactured in the United States, manyof the components are imported. It probably isn’t possible to manufacturecomputers exclusively from U.S. components, but if it could be done, sucha claim might influence buyers who are strongly motivated to “buy Amer-ican.”

• It is black, which makes no difference to most people for a portable com-puter purchase. (This could possibly be important to folks who detest blackor those who exclusively reserve the color for important uses such as reli-gious rituals.) However, color could be a much more important issue for adesktop computer.

While these characteristics seem obvious to anyone shopping for a com-puter, the manufacturers themselves cannot always tell which are more impor-tant.There are many competing influences involved in product design.With ourlaptop computer example, performance must be reconciled with unit size andweight, which in turn influences keyboard size. These compromises do not al-ways result in ideal products, as anyone who has ever shopped for a laptop wellknows.

The computer industry is extremely focused on global markets. Instructionmanuals and commonly used consumer software are widely translated, anddual-voltage power adapters are standard for most laptops. However, manyother types of products do not reflect the same “worldly wise” outlook, and thismay create real problems in developing export markets.

Product Characteristics 57

PRODUCT DESIGN

Ask any foreign manufacturer with export ambitions which product charac-teristics are most important, and the answer will probably be those consid-ered important in the United States. Because the huge U.S. market is soimportant, foreign manufacturers tend to cater to our preferences. This canmask the fact that their products were probably specially designed or modi-fied to get that way, and that U.S. products may require similar treatment forexport markets.

Size

Tangible products must be shipped, and freight charges may add significantlyto the overall cost in an overseas market. This is particularly true for coun-tries, such as European Union member states, that impose import duty on thevalue of imported products as well as the cost of freight to get them there.As shown in Chapter 10, international transportation charges are usuallybased on a relationship between cargo size and weight. Since the freight cal-culation formulas are different for ocean and air, manufacturers seekingexport markets should determine which transport mode they will use mostoften and make the appropriate criteria available to their product designers.For instance, although ocean shipping containers differ, the safe interiordimensions for all “standard” cargo containers are 7 feet 6 inches wide by 7feet 6 inches high by either 19 feet 6 inches or 39 feet 6 inches long. Largercontainers (called high cube) are available, but not from all carriers or for alldestinations.

Is this significant? Just ask the U.S. small boat manufacturer whose 7 foot 6inch-wide boats captured significant overseas markets because of the 25%freight cost advantage it enjoys over its competitors’ 8 foot-wide products. Infact, export-minded manufacturers often use a degree of local assembly byimporting distributors in large overseas markets. Not only does this keep freightcosts down, but it opens the door for local substitution of noncritical compo-nents whenever doing so helps increase profit.

Electrics

The 60 HZ electric current used in the United States and much of the West-ern hemisphere puts us in the minority. This is a real problem. Producing in50 HZ can be costly for Americans, as these components are far more expen-sive here than in countries where 50 HZ is standard. Where practical, dualvoltage should be designed into products, at least those deemed to haveexport potential.

58 The Product

Metrics

The United States, Liberia, and Myanmar are the only three countries that do notmandate the metric system, and the others will probably change before we do.Our incompatible measuring systems put U.S. products at a huge disadvantage inworld markets. Since our domestic market far outweighs our exports, much prod-uct design is done in what was once called English measurements (which the U.K.itself dropped). We cope to some extent by “metricating,” that is, converting ourquaint measurements into their metric equivalents. However, the results are veryobvious. We can also print our instructions and labels in both metric and Englishmeasures, but other countries will not permit this indefinitely. (The EuropeanUnion came close to prohibiting it two years ago.) Perhaps the greatest problemis after-sale service and repair, as metric tooling does not fit nuts and bolts madeto our standard measurements. Some forward-thinking manufacturers are quietlymaking changes, so there is hope. Meanwhile, enclosing an inexpensive tool withproducts having U.S. fastenings can be a practical short-term solution.

User Characteristics

While all people may be created equal, we are not all built the same. Productsintended for physical use should be designed with the end-user’s characteristicsin mind.A “size-medium”American is likely to be somewhat larger than a “size-medium” Korean. This includes toddlers, and a disposable diaper manufacturerlearned the hard way that bigger isn’t always better in Japan. Labeling forapparel and similar products should also be market-specific, as different size-rating systems exist. For example, a U.S. woman’s dress size six would be aneight in the United Kingdom and a thirty-six in France.

Nation-specific characteristics also exist. Jeep sales to Japan dramatically in-creased once the factory began offering right-hand drive versions.

Export Control

Some products may be altered to preclude sinister secondary uses, therebyreducing their applicable levels of control. The same result can sometimes beachieved by substituting a component subject to a high level of control with aless-critical alternative. Refer to Chapter 2 for an explanation of the differentlevels of export control.

Origin

The United States has three agreements that provide reduced import duty forproducts that qualify as U.S. origin: the North American Free Trade Agreement

Product Design 59

(NAFTA) with Canada and Mexico, the U.S.–Israel Free Trade Agreement, andthe U.S.–Jordan Free Trade Agreement.All, particularly NAFTA, have product-content origin tests for preferential duty treatment. It may be that merely sub-stituting a few NAFTA-origin parts for those not originating within NAFTAcan get a product through such a test. The benefits of preferred duty treatmentoften far outweigh any extra cost incurred in the substitution.

Caution: U.S. sellers seeking preferential duty treatment must be able todemonstrate that their products truly qualify and must certify this by complet-ing a required document.This is particularly true for NAFTA, where origin testsare strictly applied and enforced by all three governments. See Chapter 11 foradditional information and the required certificates of origin.

Mexico has special procedures for imports of certain non-NAFTA productsas described in the preshipment inspection section of this chapter.

PRODUCT PRESENTATION

The way a product is presented may have a significant influence on its success inforeign markets. Some of the following topics are regulation issues, some arecosmetic, but all are common sense.

Language

Most of the world’s population does not speak English, a fact often lost onAmericans because so many of our foreign business contacts do. Besides theobvious need to advertise in a language that potential buyers easily understand,language is critically important for product instructions and labels.

Instructions Anyone who has purchased an inexpensive product made by asmaller foreign manufacturer has likely encountered poorly translated instruc-tions. While sometimes hilarious, they could easily be dangerous if taken liter-ally. For any user instructions, directions, or warnings, avoid the temptation ofgetting low-cost translations from friends or visiting students. Certified transla-tions done by professionals cost more, but can be well worth the cost by keepingyou from looking foolish or getting into legal trouble if a foreign customer isinjured or even seriously inconvenienced while following your instructions.Since markets may have strong regional dialects and local idioms, it may be nec-essary to have several versions of the same language. Local trading partners canhelp by adding appropriate local idioms.

“Double-blind” translations can assure accuracy. The text is first translatedfrom its source language to the desired foreign language. The foreign-languageversion is then re-translated back to the source language by another translatorwithout reference to the original, and the results are compared.

60 The Product

Most countries require that instructions be in the local language. The Euro-pean Union requires that they be in the language of the end-user.

Labeling Most countries have consumer-product safety laws that requiremany kinds of product to be labeled in the local language. In Canada, manyproducts are labeled in both English and French. The following excerpts from aManaging Exports article titled “Customs Broker Defines Labeling Require-ments for Exports to Mexico” explains what our other next-door neighborrequires. The expert interviewed, Edmundo Elias-Fernandez, is a Mexican cus-toms broker with the Mexico office of the law firm Baker and McKenzie.

“Mexico,” explains Elias-Fernandez,“imposes labeling requirements for consumerproducts imported into Mexico. The law does not, however, require the informa-tion to appear on the label at the time of importation, but only at the time theproducts are sold to customers.” Exporters must be fully informed of theserequirements, however, because even if your buyer takes responsibility for pro-ducing such labeling after importation, the only source for the detailed infor-mation required is the exporter. Elias-Fernandez summarizes these labelingrequirements for goods imported into Mexico as follows:

• The place of origin and locations where the products can be repaired must beprovided, as well as instructions for use and warranties where applicable.

• All information contained on the product or labels, containers or packaging—and any related advertising—must be in Spanish. Parallel translations intoSpanish are permissible.

• Price must be expressed in pesos.

• Units of measurement must be metric.

• Legends that restrict or limit the use of the products must be obvious, clear,true, and unambiguous.

• If the products have a deficiency, or are used or reconstructed goods, the con-sumer must be warned and these circumstances must be pointed out on theproducts themselves and on the corresponding containers, delivery documents(notas de remision), and invoices.

• The legends guaranteed or warranty or any other equivalent legend can only beused when it is indicated what the warranty or guaranty consists of and themanner in which the consumer can make them effective.

• When products or services are, in accordance with the applicable legal provi-sions, considered potentially dangerous to the consumer or damaging to theenvironment, the supplier must include instructions that warn against theharmful characteristics and explain clearly their recommended use or functionand the possible effects of their use or application outside the recommendedparameters.

Elias-Fernandez explains that minimum information that must appear on theproduct label includes the name of the product (unless identifiable at first sight),

Product Presentation 61

the quantity, the country of origin and the name and address of the importer. Thismust be displayed on the label in Spanish, although it may be in another languageas well, provided the Spanish text is at least the same typographical size and pro-portion and displayed in a way that is equally obvious. He notes that most signifi-cant exporters to Mexico have or are in the process of preparing originalpackaging in Spanish, in part for marketing reasons.

“There are procedures to submit a label to SECOFI (Secretariat of Commerceand Industrial Development, Alfonso Reyes No. 30, Col. Hipodromo-Condesa,C.P. 06140, Mexico, D.F.; 52-5-729-9100; fax: 52-5-729-9343),” says Elias-Fernandez,“in order to obtain a ruling confirming that the labeling requirements will be met.Since there are new labeling requirements, it is recommended that such a ruling beobtained.”

In accordance with NAFTA, Mexico, the United States and Canada developedrules that are to be used to determine the country of origin of goods importedfrom another NAFTA country for “marking” purposes (the NAFTA MarkingRules), “There has been some confusion in Mexico with respect to the concept ofmarking of imported goods,” explains Elias-Fernandez. “Mexico does not havemarking requirements in its customs legislation as do the United States andCanada. Rather,” he notes, “there are requirements to label products with theirplace or country of origin contained in product labeling legislation” as discussedabove.1

Packaging

We’ll define packaging as the way an item is presented for sale. For tangibleproducts that are not sold in bulk, this would probably be a container (carton,can, etc.). For intangibles, it would probably be some sort of description apartfrom the product, and would therefore border on advertising.

Many countries have consumer protection regulations similar to our truth-in-packaging laws. These may cover such issues as the size of a package com-pared to its contents, the detail required in descriptions of contents, and theaccuracy of illustrations on the package itself.

Packaging graphics may influence desirability. In the United States, an old“flag-etiquette” taboo against decorating packaging to resemble our flag hasbeen largely abandoned. In fact, many consumers seem unaware that it everexisted. Red, white, and blue is everywhere one looks, especially since Septem-ber 11, 2001.The same is not true of all countries, and packaging in national flagcolors may turn off some overseas buyers. Other colors can exert negative reac-tions by their associations with death, local political parties, or former colonialrulers.

Names must be carefully selected. Some countries have local slang connota-tions for otherwise perfectly acceptable words. Horror stories abound, likeChevrolet NOVA = no va = Spanish for “doesn’t go.” Be careful in selectingnames of local characters. The American owner of a Mexican factory who

62 The Product

thought using an Indian word as a brand name would be a nice touch neverimagined that the result would be “God chewing gum.”

PACKING

We will define packing as the outer protective covering used to protect ship-ments in transit. Proper packing is critical for export shipments, given the factthat they often involve more than one carrier and have longer transit times.

Cargo traveling by vessel requires almost heroic export packing as it is fre-quently picked up and put down, exposed to contact with other heavy cargo, andspends days or weeks at ports or on the water, often at extreme temperaturesand high humidity. Even containerized vessel shipments require careful loadingto keep cargoes from shifting in transit. Containers should be sealed to avoidpilferage (or at least indicate that it has taken place) and for cargo security rea-sons. Moisture barriers and desiccants are a must for all vessel shipments.

Air cargo also requires moisture protection. It also subject to condensationcaused by abrupt changes in temperature and altitude.

Some countries have restrictions on packing materials. Australia and NewZealand have long regulated imported wood packing, out of concern that it mayharbor nonnative pests that could devastate their pristine environments. In themid-1990s the United States discovered that Asian Longhorn Beetles weremaking their way here from China in untreated wood-packing materials. Regu-lations requiring treatment certification for all wood-packing materials in ship-ments originating from China quickly followed. While this may have limited the problem here, it caused Brazil to impose similar regulations on shipmentsoriginating from the U.S. for fear of pass-through contagion. The Brazilianregulations were suspended but may be reimposed if we experience morelonghorn-beetle outbreaks.

The pinewood nematode presents the greatest packing problem for U.S.exporters because of the number of countries involved and the widespread use(and reuse) of inexpensive coniferous-wood materials. This insect is native toNorth America, and its discovery overseas has resulted in foreign-governmentrestrictions on all coniferous packing materials originating here. Full details areavailable from the U.S. Department of Agriculture Animal and Plant HealthInspection Service at (301) 734-5491, website: www.aphis.usda.gov.

We will see a copy of an APHIS phytosanitary certificate in Chapter 11.There are also other sanitary and phytosanitary-certification requirements thatcountries impose for a variety of reasons. Most are product-specific and are sim-ilar to our Food and Drug Administration regulations governing imports offoodstuffs or medical products. Information on such regulations may usually beobtained from industry associations, consular offices of importing countries, andthe U.S. Department of Commerce.

Packing 63

PRESHIPMENT INSPECTION

Although the reasons may vary, preshipment inspection may be defined as anexamination of goods prior to shipment. Depending on the reason, an inspec-tion agency is usually appointed by the seller, the buyer, or the buyer’s countryto handle this task.

Mandatory Preshipment Inspection

Approximately 50 countries require that certain import cargoes be inspectedprior to shipment. Some require inspection for all shipments, while others limitthe requirement to shipments over a certain value or of a certain kind of goods.As this is extremely country-specific, it is covered in detail in Chapter 11 wherewe discuss the resulting document—a clean report of findings.

Mexico has instituted a regulatory procedure for preshipment inspection ofnon-NAFTA eligible goods that are subject to antidumping and/or countervail-ing duty. These products, primarily textiles, apparel, and footwear require so-called “hard certification” documentation confirming their origin. Since thisdoes not apply to NAFTA-eligible goods, it is not an impediment to tradeexcept when such goods are imported and then reexported to Mexico.

For exports to Mexico of restricted imports from the following countries:

Cambodia

China

Laos

North Korea

Taiwan

Vietnam

contact Bureau Veritas, Miami, FL, phone (305) 593-7878, website www.bureauveritas.com/anglais/welcome.htm, Intertek Testing Services, Miami, FL,phone (305) 513-3000, website www.itsglobal.com, and SGS, Miami, Fl, phone(305) 592-0410, website www.sgsgroup.com/sgsgroup.nsf/pages/home.html. De-tails on exports to Mexico of restricted imports from the following countries:

Bangladesh

Cyprus

Hong Kong

India

Indonesia

Korea

64 The Product

Macao

Malaysia

Pakistan

Philippines

Singapore

Sri Lanka

Thailand

are available from the Mexican Ministry of Commerce & Industrial Develop-ment (SECOFI) at Alfonso Reyes 30, Colonia Condesa, Mexico City 06170 DF,Mexico, phone (52-5) 729-9101.

Optional Preshipment Inspection

Sellers and buyers sometimes include preshipment inspection in their sales con-tracts, even when it is not required by government regulations. This is usuallydone for quality assurance reasons. Depending on their relationship and kind ofproduct, the parties may agree to use an independent inspection agency, a pur-chasing agent representing the buyer, or even an employee at the seller’s quality-assurance department. When no government regulations are involved, sellersand buyers are free to agree on whatever kind of inspection and level of detailbest suits their purposes.

ISO STANDARDS

Founded in 1947 and headquartered in Geneva, Switzerland, the InternationalOrganization for Standardization (a.k.a. International Standards Organization,or ISO) develops voluntary technical standards that have international accep-tance. Most ISO standards are very specific and were best known to engineersuntil 1987. At that time, a new series of quality management standards, calledthe ISO 9000 series, captured the attention of the business community world-wide. These have seen a major update in 2000. In 1996, ISO issued anotherwidely used family of standards, this time aimed at environmental concerns.

ISO 9000 Series

The ISO 9000 standards provide requirements for quality-management systems.Rather than addressing product quality, they work on the premise that consis-tent products will result from consistent management of a company’s activities.While ISO 9000 standards provide requirements that quality systems mustmeet, they leave it to each organization to determine how they will be met.

ISO Standards 65

Once a company develops an ISO 9000-based quality system, it may engagean authorized quality-system certification body to obtain a conformity certifi-cate. Once obtained, such certification is subject to periodic review and audit.

It should be noted that ISO itself does not undertake conformity assess-ments or issue ISO 9000-compliance certification. These are done by quality-system certification bodies that themselves have been accredited by nationalaccreditation bodies.

The following points should be kept in mind regarding ISO 9000:

• An accredited quality system certification body, not ISO, will issue any suchcertificate over its own mark, not that of the ISO.

• ISO 9000 certification does not directly speak to product quality, but to con-formity of a company’s procedures.

• Since ISO 9000 standards can be applied to the quality-management systemof most any company, they provide a platform to which product-specificstandards can be added. This is why some product-specific regulationsrequire that an ISO 9000 certified quality control system be in place.

Original ISO 9000 Series As originally issued, the ISO 9000 series con-sisted of three models for certification purposes. The broadest, ISO 9001, pro-vided requirements for companies whose activities included development,design, production, installation, and servicing. ISO 9002 was limited to produc-tion, installation, and servicing, excluding design and development. ISO 9003applied to organizations not engaged in design or process control, purchasing,or servicing, but those that inspect and test to determine product compliancewith specified requirements. ISO 9004 was not itself a model, but provided theguidelines for quality-management systems.

Although commonly used, the shorthand term “ISO 9000 certification”really meant “certification against ISO 9001, 9002, or 9003 as determined by anaccredited quality certification body.” Individual certifications indicated whichISO model (9001, 9002, or 9003) applied.

The ISO 9000 series received a major revision in 2000. The nearly 230,000companies throughout the world that have achieved certification under the oldmodels may continue to use it for three years from the revision’s December 15,2000 publication date. Transition help is available from accredited quality sys-tem certification bodies or direct from the “Transition Planning Guidance forISO 9001:2000 (Document ISO/TC 176/SC 2/N474R) on the ISO Web site www.iso.ch.

ISO 9000:2000 Series The new series took effect with its publication onDecember 15, 2000. After a three-year “coexistence” period, they will becomethe sole ISO 9000 standards on December 15, 2003.

66 The Product

According to ISO’s website publication ISO 9000—Frequently Asked Ques-tions, the purposes of the revision were:

• Emphasizing the need to monitor customer satisfaction

• Meeting the need for more user-friendly documents

• Assuring consistency between quality management system requirementsand guidelines

• Promoting the use of generic quality measurement principles by organiza-tions, and enhancement of their compatibility with ISO 140012

The changes are substantial, the greatest being the merging of the three pre-vious ISO 9000 models into one, now called ISO 9001: 2000. The previous 20quality system requirement elements were also merged into four: ManagementResponsibility, Resource Management, Process Management, and Measure-ment, Analysis and Improvement. Management system principles are nowshared with the ISO 14000 series (which we will see in the next section).

The resulting ISO 9000:2000 core series will consist of three documents:

1. ISO 9000: 2000—Quality Fundamentals and Vocabulary

2. ISO 9001: 2000—Requirements

3. ISO 9004: 2000—Guidance for Performance Improvement

ISO 14000 Series. The following extract from ISO’s website “Where ISO14000 came from and who is behind it” explains the nature of this environment-related standard.

What? ISO 14000 grew out of ISO’s commitment to support the objective of ‘sus-tainable development’ discussed at the United Nations Conference on Environ-ment and Development, in Rio de Janeiro, in 1992. Who? ISO launched the newtechnical committee, ISO/TC 207 Environmental management, in 1993.

Today, delegations of business and government experts from 55 countries par-ticipate actively within TC 207, and another 16 countries have observer status.3

The 18 documents in the ISO 14000 family provide a wide portfolio todeal with both specific environmental challenges and the implementation ofenvironmental-management systems standards.They closely interface with ISOquality-management standards, since the ISO 9000 series 2000 revision sharesthe same management-system principles.

Publication of Certified Compliance with ISO 9000:2000 and 14000ISO realizes that companies that have invested time, effort, and money toobtain compliance naturally want to advertise their achievements. To avoid

ISO Standards 67

confusion or misrepresentation, ISO has published guidelines titled PublicizingYour ISO 9000 or ISO 14000 Certification (ISBN 92-67-10278-8) available fromtheir Sales Department, ISO Central Secretariat, Web site www.iso.org, or byemail to: sales@iso.ch.

COUNTRY-SPECIFIC PRODUCT STANDARDS

Most countries, including ours, have product standards for health, safety, con-sumer protection, and similar public-policy reasons. While not designed astrade barriers, they have the potential to impede trade when not backed bygood science.

The U.S. government provides programs for testing and certification ofgoods for which these procedures are normally required.The following agenciesmay be accessed at their websites:

• The Food and Drug Administration (FDA) handles drugs, biologicals, med-ical devices, and animal drugs. www.fda.gov.

• The Agriculture Department Animal and Plant Health Inspection Servicehandles animals, plants, and agricultural products both entering and exitingthe United States. (www.aphis.usda.gov)

• The Agriculture Department Federal Grain Inspection Service (FGIS)handles all grains and grain-based products, rice, peas, beans, and lentils.(www.usda.gov/gipsa)

• The Agriculture Department Food Safety and Inspection Service (FSIS)guarantees that meat and poultry products are properly labeled and U.S.inspected and approved. (www.fsis.usda.gov/ofo/export/explib.htm or www.fsis.usda.gov/index.htm)

• The Agriculture Department Agricultural Marketing Service, in coopera-tion with state government agencies, offers official grading or inspection forquality of manufactured dairy products, poultry and eggs, meat, and freshand processed fruits and vegetables. Grading is based on U.S. grade stan-dards developed by the Department of Agriculture for these products.(www.ams.usda.gov/index.htm)

• The Commerce Department National Marine Fisheries Service (NMFS)Inspection Service offers a range of services to assist U.S. fishing industrybusinesses actively engaged in exporting fish and fishery products includingexport certification. (http://seafood.nmfs.noaa.gov)

Standards have become increasingly important as tariff barriers dropthrough negotiations, and procedures exist for World Trade Organization mem-ber governments to challenge any they believe to be unreasonable. U.S. sellers

68 The Product

that find their market access blocked by what they believe to be unreasonableor arbitrary standards, or lack of foreign government implementation of tradeagreements, may obtain help from the Office of the U.S. Trade Representative(USTR). Visit their website www.ustr.gov for details.

U.S. companies can obtain early warning of new or proposed foreign govern-ment standards by registering with the National Institute of Standards and Tech-nology (NIST)“ExportAlert!”program.For information and on-line registration,visit their Web page http://ts.nist.gov/htdocs/210/NCSCI/export-alert.htm. Onceyour product has been registered,NIST will send bulletins on upcoming standardschanges and will provide full details on request for those of particular interest.

This chapter will cover two entirely different well-developed bodies of stan-dards used by two of our largest trading partners, the European Union andMexico. They are noteworthy because of their complexity. We will also mentionwhat is known at the time of this writing about proposed new standards forChina. Other countries, like Saudi Arabia, have well-developed standards oftheir own. Savvy sellers check with their buyers whenever in doubt about prod-uct standards, particularly when entering new overseas markets. Foreign con-sulates located here and the U.S. Department of Commerce Export AssistanceCenters can also help. It is through prior knowledge and compliance that sellerskeep themselves and their buyers out of potential trouble.

European Union

The European Union (EU) is a group of fifteen countries that have agreed toadhere to duty-free treatment of each other’s products, a common external tar-iff for non-EU products, and a growing body of uniform rules and product stan-dards. The following countries are EU members: Austria, Belgium, Denmark,Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,Portugal, Spain, Sweden, and the United Kingdom. There are plans to increaseEU membership to include more countries throughout the decade.

Conformite Europeene (CE) Mark EU regulations require that certaintypes of tangible products meet standards called Product Directives. Thesestandards prevail throughout the EU, and replace any previous national stan-dards that member countries may have previously enforced. All covered prod-ucts must be certified, regardless of origin. Certification procedures vary,depending on the type of product. All certified products must be appropriatelylabeled with the CE Mark in order to be legally imported or sold within the EU,as well as in Iceland, Liechtenstein, and Norway.

Product directives now cover an estimated 50 percent of tangible productscommonly exported to the EU from the United States. The following list comesfrom the Guide to the Implementation of Directives Based on the New Approach

Country-Specific Product Standards 69

and the Global Approach as found on the European Union website www.europa.eu.int:

• Low voltage equipment• Simple pressure vessels• Toys• Construction products• Electromagnetic compatibility• Machinery• Personal protective equipment• Non-automatic weighing instruments• Active implantable medical devices• Gas appliances• Hot water boilers• Civil explosives• Medical devices• Potentially explosive atmospheres• Recreational craft• Lifts• Refrigeration appliances• Pressure equipment• Telecommunications terminal equipment• In vitro diagnostic medical devices• Radio and telecommunications terminal equipment4

The following excerpts from a Managing Exports article titled “Seven Stepsto Qualifying for CE Marking in European Union” provide a guide to under-standing and compliance. In addition to EU member countries, these commentsalso apply to Iceland, Liechtenstein and Norway.

The EU describes the CE Mark as a “passport” allowing exporters to circulateproducts freely within the internal market of the EU. Although CE marking isintended to be primarily for inspection purposes by EU member state inspectors,many consumers have come to perceive it as a quality mark. As a result, the CEmarking “seal of approval” can increase your competitive edge. EU membernations have so far taken the road of monitoring and educating exporters of goodsnot in compliance, rather than taking legal action. Impounding or return-to-originof your export products is obviously a costly disaster. Financial penalties are inplace, and national customs authorities always have the option of applying them.

Unfortunately, the directives are notoriously confusing—and undergo frequentupdates. The EU does not publish a list of products covered by the directives, so

70 The Product

U.S. exporters are responsible for determining the applicability of the EU direc-tives to their products. Export managers are advised to seek advice, attend semi-nars, and do their research thoroughly.

Why CE Marking?The goal of the EU standardization program is to streamline technical harmo-

nization and the development of standards for certain product groups.Four directives (Machinery, Medical Device, Electromagnetic Compatibility,

and Low Voltage) cover essential safety or other performance requirements, andare published in the Journal of the European Commission (EU Web site, http://europa.eu.int). Three European standards organizations, CEN, CENELEC, andETSI, are mandated by the EU to develop CE marking standards.

7 Steps to Obtain CE Marking1. The first step for U.S. export pros is to obtain copies of the EU Directives to

judge whether they apply to your company’s product. In cases where morethan one directive may apply, the CE Mark can only be affixed if the productcomplies with all of the appropriate provisions of all of the directives applica-ble to the product.

2. The only agencies authorized to approve products for CE marking are ‘Noti-fied Bodies’ that serve as independent test labs, appointed by the EU. Select aNotified Body whose area of expertise matches your product. Since pricingvaries considerably, obtain price quotes for testing and certification—andmake sure the Notified Body accepts documents in English.

The Official Journal of the European Commission publishes a complete list-ing of Notified Bodies. In addition, 16 CE Marking consulting firms affiliatedwith EU-competent Notified Body labs or EU Notified Bodies are listed onthe Web site of the Commerce Department’s Trade Information Center (www.tradeinfo.doc.gov). Click on Country Information, then European Union,then CE Mark/Standards, Consulting Companies.

3. Determine whether your company is eligible for the Commerce Department’sTrade Adjustment Assistance program, which pays up to 50% of outside CE-Marking consultant or Notified Body costs.The program is administered by 12regional Trade Administration Agencies (TAAC). For contact information,visit www.ita.doc.gov.

4. Depending on the level of risk associated with your product according to EUdirectives, arrange for tests, audits, or additional certification by the NotifiedBody. A Conformity Assessment Procedure applicable to your product willoutline the acceptable conditions available to you in obtaining CE Markingcertification.

5. In most cases, you will be required to develop a technical file documenting andverifying the testing. This record must be available on demand.

6. The exporter must prepare a Declaration of Conformity listing the directivesthe product meets and the exporter or manufacturer’s name, address, and sig-nature.

7. Once certification is obtained, the CE Mark must be affixed to the product, toits data plate or, where this is not possible or not warranted on account of the

Country-Specific Product Standards 71

nature of the product, to its packaging, if any. The CE Mark must also beaffixed to the accompanying documents. The CE Mark must be affixed visibly,legibly, and indelibly. Where special provisions do not impose specific dimen-sions, the CE Mark must have a height of at least five millimeters.

Self-Certification OptionExporters of products with minimal risk as outlined in the EU directives can exer-cise the self-certification option. Note, however, that some products, such as med-ical devices or dangerous machines, require third-party review or assessment by alaboratory in the United States that is designated by the EU as a competent labo-ratory. Self-certification involves the following steps:

1. Test your product to determine its conformance to the appropriate legalrequirements and construct a corresponding technical file that can be located,if required, in Europe with your authorized representative or importer.

2. Affix the required CE Marking to your product before shipment to Europe.

3. Prepare a Declaration of Conformity and append it to the bill of lading. TheDeclaration must contain product identification, the European Directivescomplied with, standards used to verify compliance with the Directives, nameof Notified Body if required. It must be signed on behalf of the manufactureror the authorized representative and identify that signatory and provide themanufacturer’s name and address. If you do not have a representative in theEU, you can issue the Declaration of Conformity to the importer.

4. The Declaration of Conformity and technical files need only be written inEnglish; however, instruction manuals need to be in the local language of theend user.For More Information:

• European Commission: http://europa.eu.int.

• European Commission Web site for companies that wish to do business in the EU: http://europa.eu.int/business/en. This site explains public pro-curement, intellectual property rights, technical standards, funding oppor-tunities, Single Market rules, general advice and feedback, and practicalinformation.

• SWBC Europe: www.SWBC.nl Netherlands, fax 011-31-294414687; e-mailinfo@swbc.nl, Free information desk for CE Marking questions.

CE Marking Resources:

• ‘New Approach’ Web site (www.NewApproach.org) includes:

1. Directives and Standards

2. CENELEC (European Committee for Electro-technical Standardiza-tion)

3. CEN (European Committee for Standardization)

4. ETSI (European Telecommunications Standards Institute)

5. EFTA (European Free Trade Association)

72 The Product

• Delegation of the EU to the U.S. (www.eurunion.org/legislat/index.htm)includes Guide to the Implementation of Directives Based on NewApproach and Global Approach.This guide provides useful How-To infor-mation for CE Marking, including responsibilities, conformity procedure,notified bodies, and market surveillance.

• Commerce Department Contact for CE Mark: Office of the EuropeanUnion and Regional Affairs, 202-482-4496; fax 202-482-2897.

• U.S. Mission to the European Union: Office of the Commercial Counselor(APO AE 090724), 40 Blvd. Du Regent, B-1000 Brussels, Belgium, 011-32-2-5133830; fax 011-32-2-5131228.

• NIST Standards Information Program (SIP), http://ts.nist.gov includes

1. National Center for Standards Certification Information (NCSCI);

2. Publications on Standards and Conformity Assessment Activities;

3. Standards Assistance and Management Information Contact: NCSCI,Office of Standards Services, NIST, Gaithersburg, MD 20899; 301 975-4037; fax 301-926-1559.5

U.S. companies can also obtain early warning of new or proposed foreigngovernment standards by registering with the National Institute of Standardsand Technology’s “Export Alert!” program as mentioned earlier in this chapter.

EU Consumer Goods Product Warranty Directive The European Unionenacted a Warranty Directive that took effect on January 1, 2002.The full text isavailable from the EU’s EUR-Lex Web site www.europa.eu.int/eurlex/lif/dat/1999/en_399L0044.html. The following excerpts are from an October 5,2001 bulletin from the U.S. Mission to the European Union that was circulatedto the U.S. trade community through the Commerce Department’s ExportAssistance Center network.

New EU Product Warranty Directive to Take Effect 1/1/02The European Union approved legislation on May 25, 1999 that was intended toharmonize the guarantees offered by professional sellers of consumer goodsthroughout the EU (1999/44/EC—to simplify, we’ll refer to it as the Product War-ranty Directive). This legislation requires a warranty of at least two years from thedelivery of goods. Sellers whose products are found not to conform to the “con-tract” between the buyer and seller at the time the goods were delivered arerequired to replace or repair the nonconforming goods free of charge; reduce theprice of the goods; or release the consumer from the “contract.” The law will takeeffect as of January 1, 2002.

There are a couple of important points to note.First, the law cannot be applied extraterritorially.Second, unless proven otherwise (e.g., in a civil proceeding), any lack of con-

formity which comes apparent within six months of the delivery of the goods is tobe presumed to have existed at the time of delivery, unless this presumption is

Country-Specific Product Standards 73

incompatible with the nature of the goods or the lack of conformity. This meansthat the buyer has a maximum of six months to establish that the goods do not con-form to the contract. Further, the burden of proof is on the buyer.

The third point to remember is that case law will ultimately interpret the grayareas.

This Product Warranty Directive was not meant to change your liability, it wasintended to harmonize the consumer protection rules within the EU. However, thereality is that the standard may have been raised in some Member States not previ-ously providing a minimum two-year warrantee, and implementing legislation willvary from Member State to Member State. On this latter point, this Directive set aminimum standard. Member States are free to adopt more stringent regulation, solong as it does not contradict the Product Warranty Directive. For these reasons,U.S. exporters should contact the national authorities in the Member States towhich they export to discuss how implementation of the Product Warranty Direc-tive will effect their exports. Member States have until the end of this year (2001) tosubmit their implementing legislation to the Commission for review.6

Mexican NOMS

Mexico is another important export market that maintains its own set of prod-uct certification requirements. Called NOMs, these official regulations speak toboth product standards and the labeling requirements we saw earlier in thischapter. For Mexico, it is the Harmonized System tariff classification that deter-mines whether a given product is subject to one or more NOMs.

Managing Exports interviewed Eduardo Reyes Diaz-Leal, Director of theMexico City–based consulting firm Bufete International de Cambio, andEdmundo Elias-Fernandez, the Mexican customs broker we met in the labelingsection of this chapter. Excerpts from the article,“Latest Changes to NOM Cer-tification for Exports to Mexico,” follow:

“Certification of NOM compliance and labeling,” explains Diaz-Leal, “are two ofthe most common forms of nontariff requirements mandated under Mexico’s For-eign Trade Law.”

“NOMs serve a number of purposes,” says Elias-Fernandez, “including regula-tion of specifications and characteristics of products and processes that may con-stitute a risk to the safety or health of individuals or the environment. NOMs alsoensure consumers get information so they can make informed choices.” Yourgoods may not be subject to a NOM—or not subject yet. If they are, however, youneed to be aware of your obligations.

Exporter Obligations“Manufacturers of products subject to a NOM must maintain quality control sys-tems consistent with the requirements of the applicable NOM,” says Elias-Fernandez. “They must also verify the specifications of the product or service and

74 The Product

any processes used, employing appropriate laboratory equipment, and testingmethods to objectively determine the fulfillment of such specifications.” If NOMsare applicable to the export product, your customer—the Mexican importer—must obtain NOM certification prior to importation.

NOM certification is generally obtained based on periodic testing of the productto ensure it complies with the specifications of the applicable NOM or NOMs. Sam-ples of the product must be temporarily imported into Mexico for testing to be per-formed by a laboratory licensed by the Mexican government. Once test results andcertifications are in place, an application must be filed with the official certificationagency, and if all requirements are satisfied, the NOM will generally be issuedwithin seven business days (see resources listed below for more information).

“The most important recent change in the law,” notes Elias-Fernandez,“directly affects foreign manufacturers exporting their products to Mexico.” Priorto the introduction of these new procedures, each importer had to obtain separatetest reports for the products to be imported to apply for NOM certification.“Now,”he explains, “if there is more than one importer of a product produced by a singleforeign manufacturer, each individual importer still needs to obtain a NOM cer-tificate, but can do so based on test results plus a certification of the quality controlsystem provided by the foreign manufacturer.”

If your customer imports your product into Mexico without required NOM cer-tification, it could be subject to fines of 70 to 100 percent of the commercial valueof the products as well as seizure of the goods.

For further information:

• SECOFI, Mexico (Secretariat of Commerce and Industrial Development).Contact: phone 52-5-729-9100; fax 52-5-729-9343.

• U.S. Department of Commerce. Ivan Rios monitors the NOM program at theU.S. Embassy in Mexico City (fax 52-5-566-1115). Provide accurate six-digit HSclassification number for product and you will be informed of your NOM sta-tus and how to address it.”7

Chinese Standards

Effective May 1, 2002, a testing regime for certain products became effective.Products that have been approved may display the CCC Mark, which effectiveMay 1, 2003, will be required for the sale or import of regulated items found inthe following 19 categories:

1. Electrical wires and cables (5 items)

2. Switches for circuits, installation protective and connection devices (6items)

3. Low voltage electrical apparatus (9 items)

4. Small power motors (1 item)

5. Electric tools (16 items)

Country-Specific Product Standards 75

6. Welding machines (15 items)

7. Household and similar electrical appliances (18 items)

8. Audio and video apparatus excluding broadcasting and automotive acousticsitems (16 items)

9. Information technology equipment (12 items)

10. Lighting apparatus, 36V and above (2 items)

11. Telecommunication terminal equipment (9 items)

12. Motor vehicles and safety parts (4 items)

13. Tires (3 items)

14. Safety glass (3 items)

15. Agricultural machinery (1 item)

16. Latex products (1 item)

17. Medical devices (7 items)

18. Fire fighting equipment (3 items)

19. Burglar alarms (1 item)

Readers interested in any of these categories should contact the nearest U.S.Department of Commerce Export Assistance Center and refer the Interna-tional Trade Specialist to the International Market Insight titled “New StandardSystem—China Compulsory Certification” for details.

The CCC certification standards replace a previous regime called the CCIBGreat Wall Mark. Like its predecessor, CCC certification applies to bothimported and domestically produced goods.

At the time of this writing (mid-2002) details on the certification processwere not available. U.S. foreign service personnel in China advise that the Chi-nese government prefers to deal with certification on a case-by-case basis.Hopefully, this may not be as difficult as it sounds, since the CCC is replacing apreexisting certification program.

INTANGIBLE PRODUCTS

Intangible products present some unusual challenges as they are not physically“delivered” the way tangible products are. Two methods come to mind: trans-mission of computer programs, drawings, engineering data, and so on over theInternet and delivery of service-type products such as product installation andtraining. The first requires only that the seller and buyer have compatible com-puters and software. The second involves either someone from the seller’s com-pany visiting the buyer, a buyer visit to the seller, or both. A seller planning toactually work overseas should carefully check whatever regulations the buyer’scountry may have concerning working visits, as well as any local income tax

76 The Product

issues. Traveling on a tourist visa may seem to be the most expeditiousapproach, but improper documentation can present real problems, especiallyshould the buyer become dissatisfied while the seller’s personnel are present.

As mentioned in Chapter 2, suppliers of items subject to export licensesmust be careful as to information they share with foreign buyers, even withinthe United States (deemed exports).

INTELLECTUAL PROPERTY

While often overlooked, authorization to use patents, copyrights, trademarks,and service marks is also a sort of intangible product sale. The United Statesdoes not participate in all of the reciprocal agreements, owners of such intellec-tual property should obtain assistance from competent legal counsel. Mean-while, here are some resources.

As its name implies, the World Intellectual Property Organization (WIPO)is an international organization dedicated to the use and protection of intellec-tual property. Its Web site www.wipo.org contains useful definitions.

The U.S. Patent and Trademark office maintains an excellent website(www.uspto.gov). Its “Related Web Sites” page links to the intellectual propertyoffices of 33 countries plus the European Patent Office and the WIPO.

Trademarks are of particular interest as so many companies have one,regardless of whether they also own patents or copyrights. Jaylene M. Sarracino’sarticle, “Small Business Primer to Filing for Trademarks in a Foreign Coun-try,” provides a unique perspective. The author, now living in Israel, is a U.S.attorney and former Trademark Examiner for the U.S. Patent and TrademarkOffice.

Practically anyone can file for and own a registered trademark for just about anygood or service imaginable. Even individuals or small businesses with the need touse only one trademark (name brand, design, logo, slogan, or combination thereof)can benefit from the protection that registration offers. A registered trademarkprovides public notice as to the origin and source of a product or service offerslegal protection for creative efforts and most importantly, establishes a propertyinterest.

Filing in the U.S. is still the first choice among businesses; however, filingabroad is a smart undertaking for those that sell their goods or services outside theU.S. For instance, the protection of trademarks for software and electronic goodsand services is necessary in many countries because of the high volume of U.S.investment in research and development in this sector. The protection of intellec-tual property rights (IPR) has become a top priority for many U.S. companiesoperating or selling outside of the United States. The following is a primer thatestablishes the basics of filing a trademark virtually anywhere in the world. Thisarticle should not be relied upon in place of good legal counsel.

Intellectual Property 77

Filing a Trademark ApplicationThe process for filing a trademark application in many other countries is very sim-ilar to that in the U.S. Most applicants seek representation by a local intellectualproperty lawyer for legal advice, and also to have the required local contactaddress on the application. Usually, contacting a foreign attorney or law firm isunnecessary. Rather, finding a U.S. law firm with an existing arrangement in thecountry in which you are seeking to register is the least expensive way to find theright IPR representative. If you prefer to find a foreign firm directly, the Depart-ment of Commerce U.S. and Foreign Commercial Service maintains lists of lawfirms that can be requested by fax or email.

Costs for filing a single class trademark application vary, but usually range from$800–$2,000 for a smooth filing with few obstacles to publication and registration.A U.S.–based attorney in conjunction with foreign counsel will give you a cleareridea of the costs associated with your particular trademark. To minimize yourcosts, be prepared to answer some specific questions. For starters, have in mind therange of products or services you wish to use the trademark with and a good ideaof what you want the trademark to look like. If you already have a trademark thatis registered in the U.S. you will need to provide a copy of the originally filed appli-cation to your lawyer. If you already use the trademark but have not filed for reg-istration, know the date of the first sale. In addition, if there is a design element toyour mark, have the image on transferable medium, such as a disk.

Keeping Your Costs LowMost important to cutting costs is to have some idea whether you are the only userof the proposed trademark. In fact, the most common but easily avoidable legalobstacle is when someone else has previously filed, or holds, a registration to thesame mark as yours for the same or similar goods or services. To aid your attorneyyou can easily conduct what is called a “common law” search by searching the U.S.Patent and Trademark Office (USPTO) online trademark database (www.uspto.gov), surfing the Internet, checking phone books, trade journals and other productlistings, such as Thomas Register. Tell your attorney of any findings and be pre-pared to assist in further investigation of these potentially similar marks to keepyour costs lower.

The Filing ProcessThe trademark application process begins by filing with the appropriate govern-ment authority. The process is called “prosecuting a trademark” and entails com-munication between the trademark authority and your representatives. Followingthe filing, the application is reviewed by an examiner. Once the examiner finds thatthe application has no defects or that all defects have been properly addressed, theapplication is passed for publication. It is rare for a trademark application to haveno defects. If defects are found, the examiner issues an official report or “action” tothe attorney of record detailing the defects and statutory deadline for response. Inmany countries, an examiner is obliged by law to issue at least two actions beforemaking a rejection final. When the corrective actions are not sufficient and therejection by the examine is made final, only an appeal will get the mark reviewedagain.

78 The Product

However, if all defects are resolved then the application is passed to publica-tion, which can take several months. Depending on the country, the mark is thenpublished in the official trademark reporter to allow a time period for the public tosubmit comments. If comments concerning your mark are received, they will beconsidered before the mark can continue. If the mark passes publication un-scathed, it will move on to registration.

Once registered, the mark can be safely marked as registered by using the reg-istration symbol or the ®, as a subscript to your mark. This demarcation givesnotice to the world that you are rightfully using the word, phrase or design as a law-ful trademark for the goods or services to which it is attached.

Maintaining Your TrademarkContinued maintenance of your trademark registration is an important responsi-bility of trademark ownership. Many countries have requirements for maintaininga trademark registration. Careful attention should be paid to deadlines for such fil-ings, as the dates differ from jurisdiction to jurisdiction.

Many businesses not only maintain the registration of their trademarks in use,but also actively protect their marks from improper use by other entities. Thesetrademark owners do so by hiring law firms or ‘trademark watch’ firms to ensurethat no one except authorized users are using their trademarks in conjunction withcertain goods and services.

ContactFor more information on U.S. lawyers and law firms, go to the American Bar Asso-ciation website at www.abanet.org and click on ‘General Public Resources’ or referto your phone book for the Bar Association in your respective city or state.”8

LINKAGES

When it comes to product, linkages abound. The following departments aredirectly involved:

• Sales. Keep track of country-specific product standards, compliance certifi-cations and marking, instruction languages, preshipment inspection, andelectric current characteristics. These are normally advised by Buyers andby overseas trading partners such as representatives and distributors. Besure to communicate these to Manufacturing, which may, in turn, need toinform Purchasing.

Keep overseas trading partners involved about company policy concern-ing the use of trademarks and other intellectual property.

• Traffic. Keep track of any required preshipment inspections and keep theforwarder advised on when and where they are to take place as well as anynecessary freight cost verification.

Linkages 79

• Manufacturing. Make sure that any country-specific labeling or packagingregulations are observed.

Keep typical user characteristics and freight cost economies in mindwhen designing or modifying products.

Export control compliance and preferential origin product content andcertification issues may involve also Compliance, Manufacturing, and possi-bly Purchasing.

Make sure technicians performing installation or servicing work over-seas are properly documented.

• Compliance. Make sure that all origin certificates are accurate, particularlythose required for preferential duty treatment under free trade agreements.

ENDNOTES

1. “Customs Broker Defines Labeling Requirements for Exports to Mexico,” IOMA’sReport on Managing Exports, Issue 00-02, February, 2000, pages 4–6.

2. International Organization for Standardization Web page www.iso.ch/iso/en/iso9000-14000/iso9000/faqs

3. International Organization for Standardization Web page www.iso.ch/iso/en/iso9000-14000/tour/

4. “Guide to the Implementation of Directives Based on the New Approach and theGlobal Approach” pages 12-13, EU Website www.europa.eu.int.

5. “Seven Steps to Qualifying for CE Marking in the European Union,” IOMA’s Reporton Managing Exports, Issue 00-08, August 2000, pages 1, 7, 10, 11.

6. “New EU Product Warranty Directive to Take Effect 1/1/02,” U.S. and Foreign Com-mercial Service, U.S. Department of Commerce, as distributed nationally throughCommerce Export Assistance Centers. © European Communities, 2000. Guide to theImplementation of Directives Based on the New Approach and the Global Ap-proach.

7. “Latest Change for NOM Certifications for Exports to Mexico,” IOMA’s Report onManaging Exports, Issue 00-01, January, 2000, pages 2–3.

8. Jaylene M. Sarracino, “Small Business Primer to Filing for Trademarks in a ForeignCountry,” Export America, Volume 2, Number 5, March 2001, pages 16–17.

80 The Product

Chapter 4

Export Channels

Products may be exported either directly by their producers or indirectly byothers. Throughout this book, we have been using the most common situationwhere the producer (manufacturer) sells its goods directly overseas, therebyperforming the roles of seller and exporter. This overall assumption will notapply to the first section of this chapter, Indirect Exports, which covers the rolesof export intermediaries that operate in the seller’s country.

INDIRECT EXPORTS

The general term indirect exports applies to situations where the producer doesnot directly sell and export its product to overseas buyers. Instead, intermedi-aries step in and assume the role of exporter. Such intermediaries may work forproducers, or buyers, or may themselves be principals to the transactions. Thereare five basic kinds: export trading companies, export management companies,export merchants, confirming houses, and nonconfirming purchasing agents.

Export Trading Companies (ETCs)

Export trading companies (ETCs) handle the entire export process for one ormore suppliers. Such suppliers are often manufacturers, but they may also bewholesalers that command very low pricing, provide a great variety of products,or both. In this section, we will use the term supplier to accommodate both man-ufacturers and wholesalers.

ETCs do it all: locate overseas trading partners (or buyers for products soldon an end-user-direct basis), present the product, quote on specific inquiries,receive and acknowledge incoming export orders, place corresponding orderson their suppliers, arrange for shipment from their suppliers’ facilities to over-seas destinations, and pay the suppliers on normal domestic terms of payment.

81

This may be very attractive to suppliers that are not familiar with exporting. Asfar as an ETC’s suppliers are concerned, such business is almost domesticbecause the ETC assumes the export shipment and payment risks. As far as theoverseas trading partners or buyers are concerned, the ETC acts as though itwere the suppliers’ export departments. In fact, this is exactly how many ETCsrepresent themselves. Since ETCs and their suppliers must closely cooperate tomake exports happen, their interests should often be nearly identical, and this isindeed the case with good relationships.

ETCs typically derive their profit from the markup between the prices theycharge and the prices they pay their suppliers, rather than from sales commis-sions. Some promise their suppliers to keep their markup within an agreedrange to avoid pricing the product out of markets.

Many ETCs export for more than one supplier, and often handle comple-mentary though nonconflicting product lines. For instance, a rather successfulETC specializing in the marine trades handles four U.S.–made pleasure boatlines—one aluminum, one for offshore fishing, one for family cruising, andone line of houseboats. None directly conflict, and it is possible to establish adifferent exclusive importing dealer for each line in every major market.When this ETC sends personnel to support existing dealers or find new onesat overseas boat shows, it writes off the costs against four different productlines. It has also quadrupled the chances of success in entering new markets ascompared to either individual pleasure boat manufacturers’ in-house exportdepartments or other ETCs that export only one line of pleasure boats. Sinceit is so vitally concerned with marine exports, this ETC can justify spendingthe time and effort needed to keep absolutely current with government man-dated boat standards in major overseas markets. This enables it to keep itsU.S. suppliers informed, so any new required modifications can be quicklyaddressed.

This ETC is often more efficient and cost-effective than the alternative of aboat manufacturer’s in-house export department. It must be to survive. Afterall, it competes not only with other ETCs but also with rival manufacturers’in-house export departments whose actual costs are often buried in generaloverhead.

Since ETCs are responsible for building and maintaining viable export mar-kets for their suppliers’ products, they usually find that the greatest expense intaking on a new product line comes in the first two years. Business resultingfrom even highly successful promotions may lag expenses by about the sametime frame. Therefore, in order to justify taking on a new line, most ETCs insiston an arrangement enabling them to benefit from repeat business for at leastlong enough to recover their costs and turn a reasonable profit. Exclusivity con-tracts of up to five years are not uncommon.

Naturally, suppliers want to make sure that their products receive adequate

82 Export Channels

attention and that the ETC is competent. Otherwise, they run the risk of beingtied for years to a non-performing relationship. Guaranteed minimum quanti-ties are often proposed as a safeguard. However, determining fair quantitiesmay be difficult, since at the start of the relationship neither the supplier nor theETC has a really solid idea of how the export market is likely to develop.This isparticularly true of product lines that are not only new to export markets butalso incorporate new technology, designs, or features. Still, some degree ofmutual assurance should be possible. No ETC worth its salt wants to retainunproductive product lines for which sustained efforts have failed to produceprofitable markets.

Some questions that experienced ETCs often ask of potential suppliers are:

• How many years has the supplier been in business? A start-up supplier maybe risky unless the ETC is reasonably sure it will survive the critical first fewyears. On the other hand, if the firm is mature and well established, one maywonder why it hadn’t considered exporting sooner.

• Has the supplier previously attempted exporting? If so, was it direct orthrough another intermediary?

1. Sometimes, suppliers attempt to export directly and then realize thatthey lack the resources to do so effectively. This could be a favorableanswer, as the supplier would then understand what is involved andtherefore have reasonable expectations of the ETC. It could also be anunfavorable answer if the supplier generated considerable ill will inmajor export markets while attempting to export directly.

2. Sometimes, suppliers engage the wrong intermediaries for their prod-ucts, and decide to change once this situation becomes obvious. Thiswould be a favorable answer, provided the previous intermediarycaused no great harm in major overseas markets. On the other hand,intermediaries sometimes successfully establish reasonable overseasmarkets only to be discharged by shortsighted suppliers intent on cap-turing the intermediaries’ profits. Obviously, experienced ETCs are cau-tious about dealing with such suppliers

• Does the supplier’s product compete well regionally? Nationally? Productsthat do can usually compete well overseas, but the converse is also usuallytrue. Although some products that are obsolete in the U.S. may compete insome developing overseas markets, this is the exception rather than the rule.

• What competitive features does the supplier’s product enjoy? Some aredirectly applicable to overseas markets while others, such as good domesticadvertising, are not.

• Is the supplier willing and able to modify the products to meet the require-ments of major overseas markets? See Chapter 3 for typically required

Indirect Exports 83

changes. This can be a major problem when the supplier is a wholesalerrather than a manufacturer.

• For countries requiring preshipment inspection, is the supplier willing toprovide inspection agencies with its domestic price lists?

• What kind of after-sale service and warranty work is required, and how is itnormally provided in the domestic market?

• What payment terms will the supplier grant the ETC? Keep in mind that theETC is usually responsible to pay the supplier on domestic payment terms,while the payments it receives from overseas buyers often take longer. Sup-pliers sometimes grant slightly longer time to ETCs, thereby helping withwhat otherwise could be negative cash-flow situations.

• Is the supplier willing to give exclusive protection for overseas markets tothe ETC? For how long, and under what conditions? If the supplier is notthe manufacturer, can it obtain exclusive protection for some or all overseasmarkets from the manufacturer? For that matter, does it have the manufac-turer’s permission to export the products at all? This can present real prob-lems for all concerned if the manufacturer has its own export program.Every savvy ETC knows that it can’t compete with the factory.

• Is the supplier willing to allow the ETC to establish such overseas tradingpartners as sales representatives (sometimes called “agents”) and importingdistributors, and to provide them with such protection as they may need towork effectively?

• Is the supplier willing to register its trademark in principal overseas marketsor to allow the ETC to do so in its behalf?

• Will the supplier dedicate a contact person with specific responsibility toliaise with the ETC?

• Will the supplier provide the ETC with firm anticipated availability dates sothe ETC can make shipment or delivery commitments?

• Above all, is the supplier really committed to exporting? All too often, com-panies faced with problems in the domestic market turn to exporting as alast resort. It is often too late by then, as overseas markets take time todevelop. Even when this strategy works, such suppliers frequently lose inter-est once the domestic market recovers. ETCs are less vulnerable to this sit-uation than are some other kinds of intermediary. Since they handle most orall of the export-related tasks, they become large domestic buyers as far astheir suppliers are concerned. They normally have equal status with otherlarge domestic buyers except when the domestic market is so good thatproduct availability becomes an issue. At this point, the “good old boy” net-work kicks in. Long-time supplier ties with domestic buyers often takeprecedence, and ETCs (and their overseas buyers) find themselves last inline for product allocation.

84 Export Channels

Here are some questions that the supplier should ask of the prospective ETC:

• What other product lines does the ETC presently handle? May these sup-pliers be contacted for references? Obviously, suppliers prefer that theirETCs refrain from handling directly conflicting product lines, especiallywhen the ETCs require exclusivity from the suppliers. However, ETCs thathandle complementary lines can often launch a new-to-export product linequickly, since they already do business with likely overseas trading partners.

• How many different types of product lines does the ETC handle? Eachindustry has its unique practices that must be followed for successful busi-ness. For instance, most mature industries have several major trade showseach year that are attended by “everybody who is anybody.” ETCs attempt-ing to address too many different industries often find themselves spreadtoo thin.

• To which countries does the ETC presently export? Some ETCs have con-siderable experience with a particular region but little experience else-where. While they may be excellent choices for the markets with whichthey are familiar, granting worldwide exclusivity would probably be inap-propriate.

• How long has the ETC been in business? This is a two-sided issue:

1. A venerable firm may seem a safer bet than a newer one, and often is,but much depends on the age of the people running it. Export experi-ence is a huge asset, but personal relationships are extremely impor-tant in foreign trade. Elderly traders probably have close relationshipswith elderly overseas counterparts, and performance may suffershould either become inactive. Further, many ETCs are managed byone or a very few seasoned exporters whose skills are required daily.Asking for a succession plan may be appropriate under such circum-stances.

2. A start-up ETC may lack the necessary experience to do the job—unless, of course, it is a new company managed by an experiencedexporter. On the other hand, a new ETC is probably hungry for businessand likely has few other lines competing for its time.

• How does the ETC pay its bills? Does it have sufficient capital to build anexport market for your products? Obviously, this should be of greater con-cern for newer ETCs than for well-established firms. Determining this is notas easy as it seems. Normal credit evaluation ratios may not apply, as ETCsdo not require much in the way of fixed assets. Fax, e-mail, and postal con-nectivity are inexpensive. There shouldn’t be much of an inventory require-ment either, as most ETCs purchase only after they have receivedcorresponding orders. Still, travel and overseas promotions cost money.More important, can the ETC finance the growing export receivables that

Indirect Exports 85

everyone hopes will result from its efforts? Chapter 12 of this book showsways that can make exports almost self-financing, but to work well, thesemethods require assistance from people experienced in structuring exportpayment terms. Therefore, it is important to know whether an ETC has agood banking relationship with a competent foreign-trade banker or similarfinancing source.

• Will the ETC dedicate a contact person with specific responsibility to liaisewith the supplier?

In addition to satisfactory answers to the previous lists of questions, ETCsand suppliers should agree on how they will operate and under what circum-stances and how the relationship will end.

The most basic operational question is whether the ETC is to trade in itsown name or under the supplier’s name as its “Export Department.” There arepros and cons to either situation:

1. ETCs trading in their own names proclaim that they do not manufacturethe product. This may turn off some buyers that prefer to buy “factory-direct,” inviting them to attempt going around the ETC. Some suppliers willrefer such inquiries back to the ETC, while others try to oblige the foreignbuyer by dealing directly. Either way, the result is negative. On the otherhand, when an ETC trades under its own name, the supplier would not beheld accountable for any misbehavior on the ETC’s part.

2. ETCs trading under their suppliers’ names do not make their intermediaryrole obvious. This avoids buyers attempting to go around them. There is anadvantage for the supplier too, as its name becomes known overseas ratherthan that of the ETC.This may be handy when the relationship ends. On theother hand, when the ETC trades under the supplier’s name, the supplierwill be implicated in any ETC misbehavior.

No one likes to think of it when forming a new relationship, but sooner orlater all things come to an end. Possible reasons include ownership changes oreither party going out of business, but the most likely cause has to do with ETCperformance. Lack of performance results in a disappointing export market,and such relationships usually either atrophy or are not renewed. However,when the ETC performs very well, the resulting export market exceeds expec-tations. Assuming the supplier honors its initial agreement—which it should asthe ETC is obviously doing its part—the question becomes whether or not torenew. A larger than anticipated overseas market can make the alternative ofdirect exporting seem very attractive to the supplier, especially if the ETC hasbeen trading under the supplier’s name. The idea of capturing the profit theETC had been making may seem irresistible. However, before deciding, the sup-plier should consider two points:

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1. Does the ETC do things that are not obvious and, if so, can they be easilylearned? Exporting may look deceptively easy to suppliers because theirETCs handle so much of the export-related activities. There’s considerablymore involved to exporting than having product ready to ship at the load-ing dock.

2. What is the ETC likely to do if the relationship is not renewed? After all, itis now well-acquainted with the supplier’s industry as well as the pluses andminuses of the supplier’s product line. Although the supplier’s name maybe known to the overseas buyers or trading partners, the supplier may notknow who they are. Some agreements prohibit the ETC from soliciting anyof the accounts it developed for the supplier’s product, but this should bringlittle comfort because a good ETC is perfectly capable of locating new ones.The supplier should realize that by releasing an effectively performingETC, it may be creating an even more effective competitor.

Some equitable end-game provision would be far better for all concerned.How about one precluding the ETC from competing with the supplier for aspecified time after the agreement ends, while putting it on retainer during thattime so the export function may be transferred in an orderly manner? This way,the supplier gets the training it probably needs, the ETC gets some residualincome, and there’s neither immediate competition nor hard feelings for eitherparty.

For a directory of ETCs, visit www.myexports.com.

Export Management Companies (EMCs)

Export management companies (EMCs) resemble ETCs in that they locateoverseas trading partners and/or buyers. Like ETCs, they usually export forproducers, but also can successfully do so for well-positioned wholesalers. SomeEMCs also handle export shipping. Few, however, take on the export credit risk;in fact this is what distinguishes them from ETCs.

Since EMCs do not pay their domestic suppliers, they derive their profitfrom predetermined sales commissions that suppliers build into their exportprices.These commissions are typically payable only when the suppliers receivepayment, thereby keeping the EMC involved in the payment process.

EMCs usually trade as their suppliers’ “export departments” rather than intheir own names. This is true because EMCs do not take title to the exportedgoods. Since payments flow directly from foreign buyers to the domestic suppli-ers, the overseas buyers learn who the suppliers are, and vice versa.The fact thatsuppliers and buyers know each others’ identities makes EMCs more vulnera-ble than ETCs.

Suppliers lacking export experience are often uncomfortable extendingcredit to foreign buyers.This can make working with an ETC more attractive to

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them than the EMC alternative. On the other hand, EMCs can usually work onlower profit margins because they do not bear the export credit risk.

The lists of questions we saw under ETCs generally apply to EMC relation-ships with two important differences:

1. Since EMCs typically do not owe money to their suppliers, there is no needfor them to request extended payment terms. Rather, the question becomeswhat payment terms will suppliers extend to the overseas buyers.

2. EMCs should be even more concerned about supplier stability—particularlythe way they pay their bills—than ETCs would be. When all goes well, andexports happen, suppliers will owe sales commissions to their EMCs.

Suppliers should be concerned with the stability of their EMCs even thoughpayments will come directly from overseas buyers. Many export-intermediarycompanies start up as EMCs rather than ETCs simply because they lack thecapital needed to finance export sales. Suppliers could be left in the lurch if theirEMCs suddenly go out of business.

For a directory of EMCs, visit www.myexports.com.

Export Merchants

Export merchants are companies that buy unpackaged or neutral packagedproducts from suppliers for resale overseas under their own brand names. Theybehave exactly as though they were manufacturers, advertising and buildingmarkets for their own trademarks.

Because export merchants are not manufacturers, their plant and equip-ment investment is limited to packaging or labeling operations.This can free-upfunds for promotion, and result in these intermediaries having surprisingly highlevels of brand-name awareness in markets where they are active.

Export merchants almost always buy from manufacturers, rather than fromwholesalers, for two reasons—the neutral packing they require is usually besthandled at the factory level, and the obvious fact that export merchants arethemselves wholesalers.

Sales to export merchants may have both good and bad consequences formanufacturers. On one hand, they require no promotional assistance from themanufacturers, since promotion is exactly what export merchants do. On theother hand, export merchant activities may interfere with manufacturers’ ownexport efforts, or those of a duly appointed ETC or EMC. This can be particu-larly embarrassing when the products are identical but have different brandnames and pricing. Another downside is that since export merchants sell theirown brand-name products, they can change manufacturers without losing busi-ness. This can put manufacturers that have come to rely heavily on export-merchant sales at a huge negotiating disadvantage.

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Export merchants run risks of their own.They depend on manufacturers forproduct availability, and can be hurt if this is curtailed for any reason. Whileswitching manufacturers may be an option, this cannot always be done quicklyenough to assure product continuity. Further, the integrity of export merchants’brand names depends on consistent product quality—something they do notdirectly control.The fact that some countries require that manufacturers’ namesappear on product labeling for at least certain classes of goods presents anotherproblem for export merchants.

Supplier sales to export merchants resemble sales to ETCs, as both aredomestic sales of products to be exported by others. As with ETCs, suppliersshould be vitally concerned with the way their export merchants pay their bills.

Confirming Houses

Confirming houses are purchasing agents that work for foreign buyers. Theyreceive the product requirements from their principals, source products, negoti-ate purchases, and arrange for shipment, all in behalf of their principals. Typi-cally, confirming houses also pay the suppliers.

Sometimes, satisfactory transactions with confirming houses lead to addi-tional business. One possibility is that the foreign principal may like the productwell enough to want to offer it for sale locally, becoming a sales representativeor importing distributor. A second, less-likely possibility is that the confirminghouse itself may decide to offer the product overseas, taking on the role of anETC or EMC.

Sales to confirming houses produce additional business but may have adownside for suppliers since they have no control over what a confirming houseactually does with the product. For instance, it could be diverted into anothertrading partner’s exclusive territory, putting that relationship at risk. Worse, itcould be diverted to a destination, end use, or end user prohibited under U.S.export controls as described in Chapter 2 of this book. Suppliers can reduce thelikelihood of either of these situations happening by carefully checking the con-firming houses’ reputations, demanding specifics on where and to whom theproducts are going, and making this a condition of sales contracts (by specifyingit in quotations, order acknowledgements and invoices). As mentioned earlier,the fact that confirming houses are normally responsible for payment providesanother good reason to check their bonafides.

Nonconfirming Purchasing Agents

Nonconfirming purchasing agents operate similarly to confirming houses,except they themselves do not pay the suppliers. Payment arrangements mustbe worked out between the suppliers and the foreign buyers.

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Exclusivity The question of whether an export intermediary should begranted exclusive export rights arises most often when a supplier uses either anETC or an EMC. By doing so, a supplier forgoes the possibility of doing busi-ness directly with potential buyers located in the intermediary’s assigned terri-tory. However, failure to grant a degree of exclusivity will surely reduce theintermediary’s incentive to develop export markets.

The degree of exclusivity required for a relationship may vary:

1. ETCs or EMCs that commit to developing export markets worldwide willnormally request worldwide exclusivity.

2. Some ETCs or EMCs specialize in certain parts of the world in which theyhave excellent connections, and would probably agree to exclusivity foronly those markets. Be careful not to create a checkerboard-like situationby providing country-specific exclusive arrangements with different inter-mediaries for integrated regions. For instance, it usually makes sense forETCs and EMCs specializing in Western Europe to handle the entireregion. Once there, traveling from one country to another is easy, productsflow freely from country to country, considerable business is done at hugeregional trade shows, and most countries there now use the same currency.

3. A variation of points 1 and 2 may be starting a relationship with one ormore exclusive regions with the intention of increasing the territory basedon performance.This helps avoid the situation where an ETC or EMC withworldwide exclusivity does very well in some markets but little or nothingin others. Because the good far outweighs the bad, the supplier toleratessub-par performance in some parts of the world for fear of ending an other-wise profitable relationship. For its part, the ETC or EMC feels obligated toattempt to develop business in markets for which it is ill equipped to han-dle, or risk losing an otherwise profitable product line. This standoff can goon for years when neither party wants to be the first to admit the obvious.

4. Suppliers that offer different and unrelated products may provide eithertotal or regional exclusivity on a product-specific basis.The same applies toa single product that is used by two entirely different kinds of buyers, or ismade to different standards for different end uses. For instance, it is per-fectly understandable for an aspirin manufacturer to have an ETC or EMCfor retail-sale products, while reserving the right to quote directly on largeinstitutional inquiries (especially for hospitals, which typically imposetighter specifications than the retail trade requires).

Suppliers should commit exclusive territories to export merchants only inreturn for either a huge volume commitment or the kind of exclusive represen-tation commitment that normally comes from ETCs and EMCs.While it may beprudent for a manufacturer to agree that a particular export merchant will be

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the only one authorized to private-label its product, granting the export mer-chant exclusive overseas territories would probably be inappropriate.

A confirming house, by definition, represents the interests of an overseasbuyer. It should not be granted exclusivity unless it commits to an acceptablevolume of purchases—and even then only for the overseas market in which itsprincipal is active.

DIRECT EXPORTS

We now focus on how products are handled outside the supplier’s country.Theymay be sold either directly to end-user buyers or through intermediaries locatedin overseas markets. Since both exporting producers and export intermediaries(ETCs and EMCs) use the same channels, we will include them all under thegeneral term seller. There are two basic types of overseas intermediary, import-sales representatives (often called agents) and importing distributors. Through-out this chapter we refer to them collectively as trading partners. The type ofproduct usually determines whether overseas intermediaries should be usedand, if so, which kind.

Direct Sales to End-User Buyers

It is possible for sellers and end-user buyers to conduct business directly. Forthis to happen successfully, the following criteria must somehow be fulfilled:

• Seller and end-user buyer must become aware of each other. This may hap-pen if either party is very well known, when there are few enough of eitherto permit targeting, or through advertising, by referral, or as a result of anInternet search.

• The parties must understand what each other offers and requires. This mayhappen with products that are graded to international standards (e.g., petro-leum and metal alloys), when product characteristics are clearly indicated inseller advertising (e.g., a computer’s capabilities as defined in the manufac-turer’s catalogue or on its website), where the buyer provides requirementsin detail (blueprints for a proposed building), for one-of-a-kind products(the English-language edition of Harry Potter and the Sorcerer’s Stone), orwhen precision is not particularly important (e.g., no. 2 pencils).

• The parties must determine how delivery will take place. There are manypossibilities. Seller ships to buyer at seller’s risk? At buyer’s risk? Buyer col-lects product at seller’s facility? Seller sends an engineer to the buyer’s facil-ity to provide technical service?

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• The parties must determine how the seller is to be paid. With order? Letterof credit? On delivery? Open account? (The various possibilities are cov-ered in Chapter 12.)

These issues must somehow be addressed. Successful exports directly to end-user buyers normally happen under one or more of the following circumstances:

• Repeat exports of the same product in quantity. Examples include pur-chases of coal by a steel mill, or purchases of made-to-order pushbuttons byan appliance manufacturer.

• Large purchases, such as an entire assembly line or custom-made machinery.

• Small retail purchases made from mail-order catalogues or websites forwhich payment is enclosed or a credit card number provided with the order.

• Purchases of products such as computer software that are both displayedand delivered over the Internet and are typically paid by credit card.

• Purchases of services, such as engineering, travel reservations, or securitiestrading.

Until the computer revolution, exports to end-user buyers were largelyrestricted to repetitive or large purchases and occasional catalogue orders. Sell-ers had little interest in making many small shipments and managing accountlists of thousands of individual buyers.The Internet, computers capable of man-aging huge databases, and the growth of small package “integrated” carriers likeUPS, DHL, and FedEx providing door-to-door transportation and freight cost-ing have changed this. Still, sellers and buyers that do business infrequently bymail or over the Internet normally do not know each other very well. This mayexpose them to risks that do not apply when the parties are well acquainted,such as:

• Credit card fraud or the possibility of a buyer protesting a credit card chargeeven after the ordered product has been delivered

• Failure of sellers to provide country-specific documentation required forimport

• Greater likelihood of misrouted or incorrectly-delivered shipments

• Handling returns or warranty-service claims

• Possible shipments to prohibited parties or proscribed end uses. (See Chap-ter 2, Export Control.)

The integrated carriers are working to remove some of these problems. Newservices include customs clearance for selected destination countries andenhanced COD-type payment solutions whereby delivery is made in exchange

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for payment. Industry groups, such as the National Council on InternationalTrade Documentation (NCITD), and government export-control authoritiesare working to develop compliance procedures for large numbers of smallretail-sale exports. Further, as we will see in Chapter 12, integrated ordering-payment systems like Tradecard® show the potential of bringing additionalsecurity to trade between unacquainted parties.

The growing trend toward standardization in foreign trade also makes occa-sional international transactions easier. The Harmonized System (HS) providesreasonably uniform product descriptions in many languages to the many coun-tries that subscribe to it.The International Chamber of Commerce (ICC) worksconstantly to make international trade more predictable, providing standard-ized sales and payment terms, and model contracts for international sales. Multi-national organizations like the World Trade Organization (WTO) and theWorld Customs Organization (WCO) work to increase transparency in interna-tional trade. Significant progress on the thorny problem of currency differenceswas demonstrated in a spectacular way on January 1, 2002, when 12 of the 15European Union member countries physically adopted the Euro. Even restric-tive product standards like the European Union’s CE Mark and Mexico’sNOMS may help by increasing buyer comfort by providing assurance that indi-cated products comply with certain published criteria.

Sales Representatives

Sales representatives are persons or companies that represent foreign sellers intheir own local markets in return for a predetermined commission on sales.These trading partners are often referred to as agents, a term strongly implyingbroad authority to commit absent principals to a host of legal requirements.Thisprobably dates back to times when communications took so long that foreignsellers needed to empower their representatives with agency authority to makemajor on-the-spot decisions. Since modern rapid communications make thisunnecessary, most representatives exercise only limited authority and, for thisreason, should not be called agents.

Regardless of what they are called, representatives provide valuable expo-sure for overseas principals by:

• Locally making sales presentations

• Providing a degree of local credibility to an otherwise unknown product

• Arranging for translations into appropriate local dialect

• Selecting effective local advertising media

• Assisting buyers with delivered-cost calculations

• Sending orders to the principal for acceptance

• Assisting buyers with import-clearance formalities

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• Advising the principal of local government requirements

• Providing necessary start-up assistance, operator training, and after-saleservice

• Keeping the principal informed about applicable regulations, consumerpreferences, and competitor activity in the local market

Since representatives work on a commission basis, it is actually their localcustomers that enter into sales contracts with the sellers. Although paymentsflow from the buyers to the sellers, representatives can assist sellers in deter-mining appropriate payment terms by providing credit information on localbuyers. They can also help with local collections when necessary, which they dowillingly as their commissions are normally payable only after the sellers havebeen paid. “Del credere agents” provide additional comfort to sellers by guar-anteeing payments, but this is an exception to the way representatives nor-mally work.

Products that are normally shipped when ordered, as opposed to those thatare locally inventoried, benefit most from sales representation. Highly technicalor complicated products such as production machinery or prefabricated hous-ing kits are obvious choices. The same is true of service products such as spe-cialized contract engineering. Sellers seeking to supply governments or largeparastatal institutions also benefit from local representation. In fact, such insti-tutions often insist on it for two reasons. First, they usually make major pur-chases on sealed-bid basis and require a representative from each bidder to bepresent when the bids are opened. Second, they want a local party to be avail-able for any needed after-sales service and to be accountable for any seller mis-behavior.

Most representatives work on a contractual basis. In addition to specifyingthe products, most agreements specify sales-commission schedules, territory,duration, and the extent of the representatives’ authority to commit the sellers.

Exclusivity becomes a major issue, and most well-established representa-tives will not consider taking on a new-to-market product line without long-term protection. In fact, representatives that do not make such demands shouldbe suspect. Are they desperate? Do they know what they are doing? Worse, arethey secretly representing a conflicting product, and therefore wish to avoid theexclusivity issue? As we saw with ETCs and EMCs, the greatest expenditure oftime, effort, and cost incurred in introducing new products comes at the start.Only by being sure that it will continue to be involved for the long haul can arepresentative justify such commitments.

Far too often, sellers contract with representatives without first carefullychecking their bonafides. They do not even check the prospective representa-tive’s credit. This may be understandable, since in the normal course of eventsthe representative probably would not owe money to the seller—in fact, itshould be the other way around. However, failure to carefully check prospects

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before committing can have disastrous results. Some countries have strict lawsconcerning representation agreements. While intended to protect representa-tives that have diligently developed the local market from arbitrary dismissal byforeign principals, such laws may have the unintended consequence of makingit impossible or very costly to dismiss nonperforming representatives.

The following excerpts come from an article titled “Commercial Agents inEurope, Parts I and II,” which Attorney Charles Widdington of the London Citylaw firm Field, Fisher, and Waterhouse wrote for The Exporter magazine. Notonly does it illustrate EU law, but it shows an important distinction between“commercial agents” and “marketing agents,” which readers should keep inmind when dealing with the European Union. The typical sales representativeas described earlier would probably be considered a “commercial agent.”

Prior to 1994, the relationship between principals and agents was subject to vary-ing degrees of specific legislation. This all changed following the harmonizationof protection in the European Community by way of an EEC Directive(86/653/EEC) of the laws relating to self employed commercial agents. All EUmember states were required to bring their laws into line with the terms of thisDirective by 1 January 1994 at the latest.

Quick OverviewThe Directive is binding on all Member States and, though individual MemberStates will have introduced their own national regulations, where these regulationsare inconsistent with the Directive, the Directive will be binding. Key points toconsider are as follows:

—The Directive applies to a commercial agent (as opposed to a marketing agent)

—Acting in relation to goods (not services)

—Where the Directive applies, each party has the right to a written statement ofterms

—Any post termination restrictive covenant is void unless in writing

—Commission has to be paid to the agent by a specific time

—Compensation or an indemnity is payable to the agent on termination of theagency agreement

—It is generally not possible to contract out of the rights under the Directive

When do the Regulations apply? Commercial Agent v. Marketing AgentA “commercial agent” under the regulations is defined as a “self-employed inter-mediary who has a continuing authority to negotiate the sale or purchase of goodson behalf of another or to negotiate and/or conclude the sale and purchase ofgoods on behalf of and in the name of the principal.” R2(1).

“Marketing agents” are excluded from the definition of a commercial agentunder the Regulation because they do not have power to negotiate and concludetransactions on behalf of the principal.

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A marketing agent is an agent whose actual authority is limited to introducingpotential customers to the principal (i.e., they are really providing service to theprincipal, and as agents for services (as opposed to goods) are not caught by theRegulations).

In order to be a marketing agent, the following three elements need bepresent:

—No right to negotiate

—No right to conclude

—No right to sign contracts

“Negotiate” is not defined in the Regulations, but would include activities ofthe agent such as liaising with both principal and customer, presenting price lists orstandard terms of trading.

The only English case to consider what “negotiate” means in the context of theRegulations is Park v. Esso Petroleum Co. Ltd (1999) 3 CL-75. This case suggeststhat a selling agent who just takes commission on a sale involving no professionalskill may fall outside the Regulations.

Therefore, it can be concluded that, unless an agent appointed by a principalmerely introduces customers to the principal so that the principal takes fullresponsibility for negotiating the terms of the sale, it would be difficult for the prin-cipal to argue successfully that the agent was purely a marketing agent.

This is because negotiation can happen when any of the terms of the contract—such as, for example, the type or quality of the products supplied, payment terms orpayment currency—are discussed. Labels in the contract do not help if they aremerely a sham.

The Regulations cover self-employed agents who meet all of the followingcriteria:

—Have continuing authority

—To negotiate or to negotiate and conclude

—Contracts for the sale or purchase of goods

—On behalf or in the name of the principal

Specific exclusions:It is worth noting that there are specific exclusions which do not afford some

commercial agents the same protection in the EU as their colleagues. The Regula-tions do not apply to the following:

—Commercial agents whose activities are unpaid

—Commercial agents when they operate on commodity exchanges or on the com-modity market

—Persons whose activities as commercial agents are to be considered as “sec-ondary”

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This applies in situations in which

—Promotional material is supplied direct to potential customers

—Persons are granted agencies without reference to existing agents in a particulararea, or in relation to a particular group; and

—customers normally select the goods for themselves and merely place ordersthrough the agent, for example, mail order catalogue agents for consumer goodsor consumer Credit agencies.

Duties of a commercial agent to his principalThe agent is required:

—To look after the interests of his principal and dutifully act in good faith

—To make proper efforts to negotiate and, where appropriate, conclude the trans-actions he is instructed to take care of

—To communicate to his principal all necessary information available to him; and,

—To comply with reasonable instructions given by his principal

Duties of a principal to his commercial agentThe principal is required:

—To act dutifully and in good faith

—To provide the commercial agent with the necessary documentation relating tothe goods concerned

—To obtain necessary information for the agent for the performance of his agencyagreement

—To notify the agent within a reasonable period once the principal anticipates thevolume of transactions will be significantly lower than that which the agentcould normally have expected, and

—To inform the agent within a reasonable period of the principal’s acceptance orrefusal or nonexecution of a commercial transaction procured by the commer-cial agent for the principal.

Conversion of agency contract after expiry of fixed periodRegulation 14 states that, where an agency contract for a fixed period continues tobe performed after that period has expired, it becomes an agency contract for anindefinite period.

Minimum periods of notice for termination of agency contractRegulation 15 provides for minimum notice periods for terminating an agencycontract for an indefinite period. These are:

—Where the duration of the agency is anything up to one year, one month’s noticefor termination is required.

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—Where the duration of the agency is between one and two years, two months’notice for termination is required; and

—When the duration of the agency is anything over two years, three months’notice for termination is required.

Savings with regard to immediate terminationRegulation 16 preserves the right of the principal and agent immediately to termi-nate the agency agreement if one of the parties fails to carry out all, or part, of hisobligations under the contract, or where exceptional circumstances arise.

Regulation 17 requires that, except where the agency contract otherwise pro-vides, the commercial agent shall be entitled to be compensated rather thanindemnified.

The grounds for excluding the agent’s right to indemnity or compensationunder Regulation 17 are very limited. These grounds are stated I Regulation 18.Briefly, Compensation is always payable on termination, unless:

—The principal has terminated a contract as a result of fundamental breach by theagent; or

—The agent has terminated the contract through no fault of the principal otherthan on retirement due to age, infirmity or illness; or

—The agency contract (with the agreement of the principal) is assigned/novated toa third party.1

Even where a representative can be readily dismissed, the seller’s reputationsuffers because in local circles it is closely linked to that of the representative.Engage the village idiot or the town drunk, and you look like a fool. Engage arepresentative that is aggressively offering your competitor’s product, and youlook even worse.

Qualified representatives understand a seller’s need for caution in makingsuch decisions. In fact, they welcome it as an indication of the seller’s interest indeveloping long-term relationships. A suitably modified version of the check-list one would use to evaluate a prospective ETC is a good starting point. Youmay also consider ordering an International Company Profile (ICP), a reportcompiled by the U.S. Foreign Service post in the prospective representative’scountry.

Be sure also to check the prospective representative’s credit as covered inChapter 12. You may also want to get a brief legal opinion on representationagreements in the importing country, but first check with the U.S. Foreign Ser-vice post as it may already have this information.This may also be done throughCommerce Export Assistance Centers. While not intended as a substitute forcompetent legal counsel, the International Chamber of Commerce offers aproduct titled “The ICC Model Commercial Agency Contract” that can be help-ful in drafting agreements with sales representatives. For further information,

98 Export Channels

contact ICC Publishing Inc., phone (212) 206-1150, fax (212) 633-6025, or visittheir website at www.iccbooksusa.com.

Since sales representatives function as obvious intermediaries, buyers intheir territories are often tempted to try to go around them and deal directlywith sellers. The Internet intensifies this problem, as buyers can often obtaindetailed product-specific information from supplier websites. This often in-cludes the published domestic price lists used in the seller’s home market. Sell-ers should resist direct overtures from overseas buyers and support theirrepresentatives by referring such inquiries to them for several reasons. First, it isonly fair in keeping with the seller’s obligation to the representative. Second,overseas buyers that attempt to compare local prices to those charged in theseller’s home market may not realize the additional expenses involved in get-ting the product to them, such as freight, insurance, import duty, and local taxes.Finally, representatives not only process orders but may provide other servicesthat are not at first apparent to buyers in their markets. Murphy’s law dictatesthat buyers that have successfully cut local representatives out of deals willinvariably demand local services or warranty repairs that sellers cannot other-wise provide.

Importing Distributors

Importing distributors buy product in their own right and resell it in their homemarkets at wholesale or retail or both.They work best for products that are nor-mally carried in inventory, such as toys, appliances, prepared food products, andsundry items like stationery and film, etc. Good importing distributors providesellers with many of the same benefits as representatives, plus the following:

• Because they buy in their own name, they are responsible for payment,thereby reducing the seller’s account-management burden.

• Since they buy in rather large quantities, their shipments usually have lowerper-unit freight costs than would be the case with smaller shipments. Prod-ucts having lower landed costs can be sold more competitively in the localmarket.

• Larger shipments often mean fewer shipments, which reduces transactioncosts and risks on both ends.

• Some distributors dominate their local markets, and add favorable localfamiliarity to a product just by handling it, especially when they add theirown trademark or label.

Like sales representatives, most importing distributors require agreementsbefore taking on new-to-market products. The reasons are the same and arepossibly more pronounced, since distributors invest not only in promoting

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products but also in financing inventories. However, distributor exclusivity canbe a touchy issue. Some jurisdictions, such as the European Union, prohibit orseverely restrict this practice.

Obviously, sellers should carefully check the reputations of perspective dis-tributors as well as their credit. It’s is not unusual for distributors to requesttheir sellers to assist in the burden of maintaining sufficient inventories byextending longer-than-normal terms of payment.

While not intended as a substitute for competent legal counsel, the Interna-tional Chamber of Commerce offers a product titled “The ICC Model Distribu-torship Contract” that can be helpful in drafting agreements with importingdistributors. For further information, contact ICC Publishing Inc., phone (212)206-1150, fax (212) 633-6025, or visit their website at www.iccbooksusa.com.

Some distributors prefer to import neutral-packaged products and sell themunder their own brand names. This creates a kind of mirror-image of an exportmerchant situation and can be a mixed blessing for sellers. On the plus side,willingness to expose its own brand name demonstrates a high degree of dis-tributor confidence in the products. A locally recognized brand name is alsolikely to get the product launched faster. On the minus side, the distributor isfree to switch suppliers without having to reintroduce its replacement to thelocal market.

As distributors buy in quantity, they can sometimes order enough product tomake special modifications worthwhile.This can become a source of innovation,and more than one product improvement has come at the suggestion of a largeimporting distributor.

In order to appreciate the value a good distributor brings to suitable prod-ucts, let’s consider a product that can be exported several different ways. We’llcreate an admittedly over-simplified example using a small U.S.–made stuffedbear dressed as Uncle Sam retailing for about $25.00, and examine it in the Ger-man market.

1. The product may be sold one-at-a-time over the Internet. Our manufac-turer would soon learn that this product requires CE Marking as we saw inChapter 3. Without unusually high Internet sales, the manufacturer wouldbe unlikely to bother with this unless it was already experienced with CEMarking requirements. To keep our example moving, we will assume it isexperienced, and begins to offer CE-marked bears. Each order goes to adifferent address and therefore requires a shipping carton costing $.75 andabout $17.50 in door-to-door freight cost. There is also a credit card pro-cessing fee of around 3 percent. If our manufacturer charges these at actualcost, the delivered price to each buyer becomes $44.55 plus duty (if any) fora toy that the buyer has not actually seen and that takes a week or more toarrive. Meanwhile, the manufacturer must spend considerable time andeffort processing one hundred single-unit shipments a day to ship 500 bears

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in a workweek. Think of 100 incoming orders per day, 100 addresses, 100boxes, 100 invoices, 100 air shipment forms, 100 labels = 100 chances of get-ting something wrong!

2. Encouraged by the Internet success, the manufacturer engages a Germansales representative to call on toy and gift shops. The retailers get a 40 per-cent discount, the sales representative works on a 15 percent commission,and obtains orders from 50 shops for 10 bears each, total 500 bears. Theresult is 50 shipments that go in larger shipping cartons costing $4.00 eachand that travel at $80.00 per shipment airfreight cost. The retail priceremains the same as a one-at-a-time buyer would pay if ordering on theInternet, $44.55, so the price to the toyshop is $26.73 and the commission tothe representative is $4.01. Since the per-unit shipping charges work out toabout $8.40, our manufacturer realizes $14.32 ($26.73 − $4.01 − $8.40)instead of $25.00. However, there are only one-fifth as many shipments tomake. Further, the fact that prospective German buyers will be able to seeand purchase the bears for immediate delivery at 50 locations must work toincrease sales.

3. Let’s suppose that the manufacturer took a different route, and instead ofa representative it located an importing distributor with 5,000 retailer-customers throughout Germany. The Internet sales performance demon-strated a likely market.After sampling, the distributor obtained commitmentsfor five bears each from 1,000 of its retailers, and ordered 5,000 bears forshipment by vessel. The distributor insisted on a hefty 55 percent discount(which totals only a little more than the retailer and sales representativewould need). The door-to-door freight cost for a 20-foot container will runabout $2,000.00 and the manufacturer needs about $500.00 in moisture-barrier packing materials and desiccants.Working the numbers, $44.55 less 55percent = @ $20.05 less a per-unit shipping cost of about $.50 = a net return of$19.55 per bear.There would be one single shipment, as opposed to the 5,000or 500 shipments needed to sell as many bears directly or through a repre-sentative. Further, the product will be available for point-of-sale delivery at athousand retail points throughout Germany.

Please realize that it is normally much more difficult to get an effective salesrepresentative than to take orders over the Internet, and harder still to get alarge importing distributor. We aren’t considering effort, skill, or luck here butare merely comparing possible results when applying different channels to aproduct best handled by an importing distributor.

Lately, Internet sales have whittled away at importing distribution.This hap-pens with items like software that can be delivered over the net, or with thoseproducts for which the high cost of door-to-door small package airfreight is rel-atively unimportant. Importing distribution prevails when freight contributes a

Direct Exports 101

high portion of the total cost, with items where immediate point-of-sale avail-ability is important, and for product requiring local after-sale service.

Multiple Channels

It sometimes happens in exporting to a particular market that a seller winds upwith more than one kind of trading partner for the same market. The usual mixwould be a representative and an importing distributor. This usually happenswhen the seller first appoints a representative. The representative actively pro-motes the product, eventually attracting the interest of a large importing dis-tributor. The distributor approaches the seller for exclusive distribution rightsfor part or even all of the market. This request often comes with a large orderand a promise of more to come. The result is that the seller now has a commit-ment to the representative and another to the distributor. This may go on foryears, but in the normal course of events the distributor will attempt to bypassthe representative so as to capture the representative’s commission for itself.Realizing what is happening, the representative will probably recommend tothe seller that no exclusive distributor be appointed. It will then try to find otherregional distributors in different parts of the country, and in this way maintainsupremacy over all the distributors.

This awkward situation results from the seller’s engaging a representativefor a product that would have been better handled by an importing distributor.Because of an initial misdiagnosis, the seller becomes committed to a represen-tative plus one or several distributors. Not only are there more trading partnersthan necessary, reducing the seller’s return, but the trading partners probablywill not get along with each other.

Another multiple trading partner situation may result from dividing a prod-uct line along end-user lines. It is quite possible to have a distributor importingproduct for retail sale, and a well-connected representative quoting only on gov-ernment procurement—each exclusive in its own area. Obviously, both tradingpartners should understand and agree to this situation.

NONEXPORT CHANNELS

There are alternatives to export in foreign trade. Licensing and direct invest-ment provide ways to participate in foreign commerce without moving product.However, even these often have an export component.

Licensing

Licensing is providing technology, processes, or know-how by one party (licen-sor) to another (the licensee) in return for royalty payments. Royalties are usu-

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ally based on the output or profit resulting from application of the licensedinformation. Licensing agreements should be carefully negotiated, and the fol-lowing considerations are usually covered:

• Description of the intellectual property

• How will it be transferred from the licensor to the licensee

• Any restrictions on disclosure to third parties

• Any technology-transfer regulations that the licensor’s or licensee’s coun-tries may have

• Territory in which the licensee may offer products made under the license

• Amount of royalty income and its basis for calculation

• Procedures for record keeping and verification

• Tax considerations of both the licensor’s and the licensee’s countries

• Dispute resolution mechanisms

• Alternatives in case the licensor or licensee is acquired by a third party

• An end-game procedure

Licensors benefit by obtaining a share of profit without the need to investaside from any nonreimbursed costs they incur in conveying the technology.Licensees benefit in two general ways: the immediate gain that accrues fromusing the technology and the potential of obtaining more from the same licen-sor to keep its processes current. Often, licensing agreements provide fertileground for enhanced cooperation including third country marketing, cross dis-tribution, and possibly even investment.

Franchising is a variation of licensing that has rapidly grown over the past 20years. International trade expert Guillermo Jimenez wrote the following defini-tion for the International Chamber of Commerce book, ICC Guide to Export-Import Basics:

Franchising—A system based on the licensing of the right to duplicate a successfulbusiness format or industrial process. The franchisor (licensor) permits the fran-chisee (licensee) to employ its business procedures, trademarks, trade secretsand know-how in a contractually-specified manner for the marketing of goods orservices. The franchisor usually supports the operation of the franchisee’s busi-ness through the provision of advertising, accounting, training, and related ser-vices and in many instances also supplies products required by the franchisee forthe operation of the franchise. The franchisee, in return, pays certain moneys tothe franchisor (in terms of fees and percentage commissions) and agrees torespect contractual provisions dealing, inter alia, with quality of performance.The two principal kinds of franchise contracts are master franchise agreements,under which the franchisor grants another party the right to sub-franchise within

Nonexport Channels 103

a given territory, and direct or unit franchise agreements, which are direct con-tracts between the franchisor or sub-franchisor and the operator of the franchiseunit.2

Direct Investment

Investment is acquiring equity, in this case equity in a foreign company. Thedegree of ownership can be critical. Minority investors lack control, and thelegal rights of minority investors vary from country to country. On the otherhand, the idea of a foreign sole-owner or majority investor could breed consid-erable resentment in some countries. Joint ventures that include prominentlocal parties are often more acceptable

Foreign direct investment entails far too many points to be considered inthis book. However, several are so obvious that they must be mentioned:

• Does the host country permit unencumbered repatriation of profits? Somecountries limit profit remittances to such criteria as the export earningsobtained by the local enterprise, while others heavily tax repatriated profits.

• Is the host country’s currency convertible?

• Does the host country government strongly discriminate against foreigninvestors?

• Is insurance available from the Overseas Private Investment Corporation(OPIC), a U.S. government agency providing insurance against arbitraryforeign government action, including confiscation? For further information,visit OPIC’s website at www.opic.gov. OPIC also provides financial guaran-tees and direct loans for approved overseas investment.

• Does the host government have reciprocal tax treatment and investmenttreaties with the United States?

• Are local accounting standards reasonably transparent and reliable?

• Does widespread resentment of foreign investment in general or Americansin particular exist in the host country?

LINKAGES

Sales, credit, and compliance all have a vested interest in using appropriateexport channels and trading department development:

• Credit. Consult the Overseas Private Investment Corporation (OPIC)before any major overseas direct investments are made, particularly in less-developed countries.

104 Export Channels

• Sales. Ask Credit to obtain information on all prospective trading partners,both here and overseas, before making any commitments. This is particu-larly important for EMCs and sales representatives, as they may otherwisenot show up on Credit’s radar screen.

Ask Compliance to check all new trading partners, both here and over-seas, against the various lists of prohibited names issued by U.S. governmentagencies involved in export-control compliance.

Have an attorney check any agreements with trading partners or thoseinvolving licensing or overseas direct investment prior to execution.

ENDNOTES

1. Widdington, Charles, “Commercial Agents in Europe,” The Exporter, Autumn 2001pages 18–19, Winter/Spring 2002, pages 12–13.

2. ICC Guide to Export-Import Basics, Guillermo Jimenez, ICC Publishing, Paris,France, page 216.

Endnotes 105

Chapter 5

Export Marketing

This chapter addresses the related issues of where markets exist, how to findtrading partners or end-user buyers, and how best to work with them.

WHERE IN THE WORLD

The world is a very large place, so we should start our search by attempting toqualify which markets are most promising. These are merely a few commonsense observations—in order to work well, market research should be product-specific or at least industry-specific. We will confine ourselves to a very rough“hit list” of general considerations.

Chapter 3 provided a pretty good idea of whether a product is ready forexport worldwide or if it requires modifications for some markets (50 hz power,CE Mark, etc.). For the purpose of this exercise, sellers should eliminate mar-kets having product-based restrictions that they are not prepared to tackle inthe immediate future.

To search for likely markets, it is necessary to split our coverage into cate-gories: consumable products, capital goods, and foreign aid.

Consumable Products

Consumer Products Chapter 6 covers pricing. For now, it is enough todetermine how the product is priced here in relation to known competition. Ifhigher, is there demonstrable value for the money? If lower, is it because of alower quality or lack of popular features? Each has its place, but in differentmarkets. For instance, upscale, high-quality, state-of-the-art products usually dowell in countries with strong middle, upper-middle, and affluent market seg-ments such as Japan, Northern Europe, Australia, Singapore, and South Korea.Again, this assumes there is real demonstrable value. On the other hand, a no-

106

frills utilitarian product should do well in markets with strong middle, lower-middle, and less affluent market segments. Having fewer bells and whistles,these products not only cost less, but are also more likely to be owner-serviceable. They probably also consume less of whatever drives them (electric-ity, gasoline) and cost less to operate.

The question of how to determine what market segments a country has log-ically follows. One quick way is a World Almanac that shows gross domesticproducts (GDP) and populations on a country-by-country basis. Divide the for-mer by the latter for the per-capita gross domestic product of all likely coun-tries. This by itself provides a very fuzzy snapshot, and there are manydistortions. For instance, a country with a high GDP but grossly inequitableincome distribution may show a relatively high per-capita GDP while in actual-ity there are a few extremely rich families and a majority of poor people.Also, acountry may show a comparatively low per-capita GDP, but its people have asurprisingly high percentage of discretionary income (spending money) becausethe government provides generous social benefits such as pensions, medicalcare, and education.

The next consideration is known competition. It may be foolish to try toexport to a country that produces the same kind of product. Readers who arejust starting to export may want to put such countries near the bottom of theirlists, but don’t write them off entirely.A well-advertised product that is compet-itive in both quality and price may do well against locally produced competitionin countries that do not have huge protective tariffs or other trade barriers. Itstands to reason that there is a demand for that kind of product, or it wouldn’tbe produced locally.

Now, let’s follow the trail of previous U.S. exports of this type of product.This information is available by ten-digit Schedule B Number and destinationcountry from any U.S. Department of Commerce Export Assistance Center. Itis also available on a subscription basis online from two Commerce Depart-ment agencies: The Census Bureau Foreign Trade Division (www.census.gov/foreign-trade) and STAT USA (www.stat-usa.gov). Also try The U.S. Interna-tional Trade Commission’s website at www.usitc.gov. Be sure to check severalyears to avoid being misled by a short-term phenomenon. The AgricultureDepartment can provide similar information for agricultural products at www.fas.usda.gov.

There are two problems with such information. First, it may be too generalif this kind of product does not have its own Schedule B Number or is includedin a very broad one (which means zeros in the last four or five decimal places).Second, it tracks only U.S. exports and is silent about those of other countries.Still, it provides a snapshot that may be clearer than per-capita GDP.

Materials If the consumable is not a consumer product but a material, thetask is to find countries with manufacturers that use them. This is akin to

Where in the World 107

researching capital equipment markets, which we will cover in the next section.A good place to start would be to identify countries that already import suchmaterials from the United States using Census, STAT USA, or Agriculture asappropriate. Next, locate the countries that export quantities of products thatare made from that kind of material.

All Consumables A university in New Zealand hosts a website offeringofficial government statistics. Of course, the results depend entirely on what sta-tistics each government keeps and how well it keeps them. Still, it’s worth a try,if only to get another blurry snapshot (www2.auckland.ac.nz/lbr//stats).

Most industries have their own member-only associations, and some com-pile export statistics. Granted, these are usually based on member surveys andcan be akin to liar’s poker, but they may provide yet another blurry snapshot.

By now, the result should be several more-or-less blurry snapshots or, moreprecisely, lists of countries. Compare them, and look for those that show up inreasonably high positions on all or most of them. Absent any well-known rea-sons to the contrary, such as Argentina’s 2001 financial crisis, the result shouldprovide as good a place to start as any, and one that is better than most.

Capital Goods

Since capital goods tend to be large, expensive, and not subject to consumerpreferences, the task of identifying markets is easier. It is relatively easy todetermine which countries produce the kind of products for which this equip-ment is commonly used. (The previously mentioned New Zealand statisticswebsite www2.auckland.ac.nz/lbr//stats may be a worthwhile source.) Industryassociations tend to be more reliable in tracking overseas major expansion pro-grams for really big stuff. Both Census (www.census.gov/foreign-trade) andSTAT USA (www.stat-usa.gov) should have some previous export information.U.S. exports may be a better guide than we saw for consumer products, as U.S.capital equipment generally enjoys a favorable reputation in markets where it isalready established. Be careful in interpreting the data, however, as recent sig-nificant U.S. exports of that kind of equipment to a particular country may sig-nify local saturation rather than opportunity.

Capital equipment suppliers wanting to get ahead of the curve may considersearching for countries that are reasonably stable and that presently importlarge quantities of the product their machinery produces. This could signal amarket that is ripe for a new facility that would require that kind of equipment.

Be sure to learn of any World Bank projects that could require the kind ofequipment in question. Visit their website www.worldbank.com. Be sure toorder a copy of their bidding procedures, which are strictly observed. WorldBank–financed projects are cooperative ventures with the client governments,so an in-country sales representative will probably be required.

108 Export Marketing

The Overseas Private Investment Corporation (OPIC) insures U.S. invest-ments overseas, and may be of assistance to prospective U.S. capital goods sup-pliers. Investigate their programs at www.opic.gov.

Readers involved in transportation-related capital equipment may find helpfrom the Transportation Department’s Technical and Trade Assistance pro-gram. The program is subdivided by transportation modes, so it is best accessedthrough the DOT website at www.dot.gov.

If the equipment is used in major transportation, power, industrial, telecom-munications, and other infrastructure projects, the Commerce Department’sMajor Projects Assistance program can help identify upcoming projects. This isparticularly useful for project managers. For information, visit their website atwww.export.gov.infrastructure. Suppliers of large capital goods projects mayalso benefit from Commerce’s advocacy program. Check its website at www.trade.gov/td/advocacy.

Foreign Aid

Sellers of products of a kind that are likely to be used as foreign aid shouldmake sure they are registered with all applicable United Nations disaster reliefagencies. Start this process by visiting their website www.un.org, and be pre-pared to spend some time finding your way around. Also, be sure to register forU.S. foreign assistance projects by logging on to the USAID website atwww.usaid.gov. The Commerce Department’s United Aid Initiative assists U.S.suppliers in accessing foreign donor programs. Information is available atwww.export.gov/untiedaid. Also, if the product is agricultural, visit the Depart-ment of Agriculture’s website at www.fas.usda.gov.

Negative Checking

Some markets are difficult to enter for reasons that may not be apparent in mar-ket analysis. The most common problem is high import duties and other taxes.For a short list of the import duty and tax ranges per country, visit the U.S. Coun-cil for International Business website at www.uscib.org and go to the “Carnet”section. Foreign tariff information may also be obtained at the CommerceDepartment’s Trade Information Center website www.ita.doc.gov/td/tic. TheU.S. Trade Representative’s National Trade Estimate Report on Foreign TradeBarriers is available at www.ustr.gov/reports. Country instability may beanother negative, and country-specific information is available from twosources: The CIA World Fact Book at www.cia.gov/cia/publications/factbook/index.html and the State Department’s Travel Warnings, Consular InformationSheets at http://travel.state.gov/travel_warnings.html. Information on Organi-zation of American States member countries is available on their website, www.sice.oas.org.

Where in the World 109

Alternative Approaches

Another approach may be to have someone else do it. Trade Compass providesan informative website that includes a very good trade news feature. It alsooffers several interesting market research products that may do the job. Detailsare available from the website at www.tradecompass.com.The U.S. Departmentof Commerce offers a program called Flexible Market Research, which pro-vides customized responses to questions and issues related to a client’s productor service. Information is available at www.usatrade.com.

The Commerce Department’s Trade Development Industry Officers pro-gram offers industry and market analysis to the following industries that aredeemed to have good export potential:

• Aerospace

• Automotive

• Consumer goods

• E-commerce

• Energy, infrastructure, and machinery

• Environmental technologies industries

• Financial services

• Information technologies

• Materials, metals, and chemicals

• Microelectronics, medical equipment, and instrumentation

• Telecommunications technologies

• Textiles, apparel, and consumer goods

• Tourism

• Other service industries

For information, log on to the Trade Development selection on the ITA home-page at www.trade.gov.

The Commerce Department’s Office of Trade and Economic Analysis pro-vides a broad range of foreign trade data showing useful trends in U.S. exportperformance by major export categories and foreign markets. Details are avail-able from the website www.trade.gov/tradestats.

If the product happens to be textile or apparel related, the CommerceDepartment’s Office of Textiles and Apparel has 26 comprehensive overseasmarket profiles available at http://otexa.ita.doc.gov.

Commerce also offers a video market briefing service that provides marketresearch on a real-time basis. However, this is done on a country-specific basisand would not be useful at the initial stage of prioritizing potential markets.

110 Export Marketing

Top Targets for Trade Promotion and Top Market Opportunities for SmallBusinesses are Commerce Department programs that highlight outstandingmarkets for U.S. products, over the next two years.About 400 individual marketsectors are rated for 40 key countries, so if the product in question belongs to arated sector there may be a wealth of information available. Contact the TradeInformation Center at www.tradeinfo.doc.gov.

The Newly Independent States (former Soviet Union) receive special atten-tion from the Commerce’s BISNIS program. Their monthly BISNIS Bulletinprovides information about major markets as well as finance, transportation,legal issues, and advice on practical issues in doing business with these emergingmarkets. To subscribe, visit their home page www.bisnis.doc.gov.

If the marketing budget permits a really thorough search, and if the productis normally shipped by vessel, contact Commonwealth Business Media Inc.(www.pierspub.com) for information on their Piers export-tracking product.This data is prepared from the outbound manifests for all vessels leaving U.S.ports and contain more elements than either Census or STAT-USA data.Depending on how narrowly the category in question is grouped, this may bevery informative.

Export service companies such as ETCs and EMCs may provide marketresearch services on a fee basis. There are also research companies specializingin overseas markets. Visit www.myexport.com for a directory.

Some of the larger public accounting firms may also be able to help identifypromising overseas markets for their clients, as they have overseas offices andaffiliates. The same is true of multinational banks, but the chances are that anycompany large enough to command their attention for a non-banking task likemarket research is already well-established in foreign trade.

The following Managing Exports article describes an international market-ing firm with an unusual name.The services it offers and its cost structure are ofparticular interest.

Tam Tam Aids New and Old Exporters in Locating MarketsU.S. companies aiming to grow their sales through exporting often find that pro-fessional help is invaluable—and well worth the cost. One among many providersthat ME is aware of is Tam Tam International Business Assistance Services(www.tamtam.com). A little time spent on the organization’s Web site will giveboth new and experienced export pros a good feel for the range of services TamTam offers—and their costs.

Speeding Up the Market Entry ProcessBy taking advantage of the Internet, Tam Tam advertises that it can directly reducethe typical “three to five years” involved in researching, launching, and realizingbottom-line results from entering a new market.Tam Tam experts located in the tar-get country put together a custom entry strategy for your firm: MarketMAP (Mar-

Where in the World 111

ket Access Planning), a ‘roadmap’ for expanding into a foreign market and devel-oping an international marketing strategy there. Each MarketMAP includes Exec-utive Summary, Market Analysis, Product Analysis, Product Pricing, ProductPlacement, Product Promotion, Barriers to Sale, Export Issues, and Overall Con-clusions and Recommendations.

A complementary product is VentureMAP, a detailed, customized plan forestablishing a local office, distribution center, subsidiary, joint venture, or produc-tion facility in a specific country. Other products include PartnerMAP (designed tolocate trade partners in your target markets), TargetMAP (for finding the bestmarkets for your specific products and services and assessing your readiness toexport), and CountryMAP (an in-depth examination of the current economic cli-mate, market opportunities, trends, regulations, e-commerce issues, and relatedconditions and practices for a specific country).

Costs for these services range from $2,000 and up for a TargetMAP initialexploration to $15,000 and up for a full-fledged MarketMAP customized study.

Export pros wishing to try out Tam Tam before committing any resources cantake advantage of several free resources on the Web site:

• Ask Our International Experts

• Free Export Starter Kit

• Post Trade Leads on 20 Sites with PowerPost

• Find Trade Leads with PowerSearch

• Conversion Tools, Checklists, and International Guides

The Tam Tam site is also a great source for international trade news, and youcan sign up for Tam Tam’s free weekly e-mail newsletter.1

WHO IN THE WORLD

Once a prioritized hit list of likely markets has been established, the next job isto find trading partners or end user buyers. Chapter 4 describes how the targetdepends on the seller’s organization, the kind of product, the type of relation-ship desired, and occasionally on the rules of some individual countries.

Not surprisingly, many of the same places that provide market-targetinginformation also assist exporters in establishing overseas contacts.We will coverthese, and then turn to a few unorthodox methods that may work when othersfail.

U.S. Department of Commerce and the U.S.Trade Development Agency

The U.S. Department of Commerce is the obvious first stop for nonagriculturalexport assistance. They work through commercial offices at U.S. consulates and

112 Export Marketing

embassies, as well as through over 100 Export Assistance Centers throughoutthe United States. A list of offices is available at Commerce’s website www.export.gov. Commerce assistance is also available through Small BusinessDevelopment Centers (SBDCs) that are particularly handy for communitiesnot served by an Export Assistance Center. (For information, visit the SBDCwebsite at www.sba.gov/SBDC.)

Information on all Commerce departments for which specific websites arenot listed may be obtained from the above offices or from www.usatrade.gov.Information on U.S. Trade Development Agency programs is available from itswebsite http://www.tda.gov.

The Commerce Department’s flagship program, called Buy USA, is an e-commerce service where interested exporters post their products described byone of a number of broad categories and more narrow subcategories. The com-pany and its overall product lines may also be described in about 125 words orless. Overseas parties seeking contact with potential U.S. suppliers are invited tolog on at no charge, and their requirements are matched up with the registeredexporters.This product generates a huge number of trade leads, but their qualitydepends on how closely the offered product corresponds to one of the availablecategories and subcategories. For instance, an exporter of log home kits couldcome no closer than prefabricated buildings. It is also somewhat passive (bad)but low maintenance (good), since all the exporter need do is frequently checkand respond to appropriate trade leads. It is also reasonably priced, which makesculling through some inappropriate leads worthwhile. An optional hyperlink tothe exporter’s website is a nice feature, and may reduce the number of inappro-priate leads. For details, visit the www.buyusa.com website.

MyExports.com accepts business profiles from U.S. firms for its websitewhich foreign buyers may access when looking for U.S. sources. It also prints anannual directory that is distributed here by Commerce Export Assistance Cen-ters and overseas by U.S. foreign service posts. The basic listing is free, andoptions are available at additional charge. This may produce some valid leads,but it is not as effective as the Buy USA program. For details, visit the MyExportwebsite www.myexports.com.

Commercial News USA is a magazine attractively featuring U.S. products. Itis distributed throughout all U.S. foreign service posts. This is admittedly a“shotgun” approach.The magazine is widely read, and generates plenty of leadsthat have not been prequalified in any way. However, it is possible to locatesome worthwhile contacts this way, and its price makes it attractive, particularlyif the product fits in with one of its occasional motifs. For details, visit their web-site www.cnewsusa.com.

The International Partner Search (IPS) is a reasonably priced service thatattempts to match up an exporter with a sales representative, distributor, oreven a potential licensee in a preselected country.The applicant informs the U.S.foreign service post of the desired parameters, and back comes anywhere from

Who in the World 113

a few to five or more contacts—all of which have expressed some interest in theproduct. Basic information is provided on each prospect, such as the foreignpost’s commercial specialist’s opinion of its level of interest and suitability, itssize, and number of years in business. Should the foreign service post not be ableto locate any suitable prospects, it will issue a negative report, stating reasons(such as local regulations or product unsuitability) along with the names andaddresses of the parties contacted. This program works quite well, as locatingappropriate trading partners is usually handled by foreign service nationals (i.e.,local citizens who know their markets very well) working for the U.S. foreignservice post. Contact the nearest Export Assistance Center for details on thisand the “key service” programs that follow.

The Gold Key Service product is used when the applicant plans to visit thetarget country. First, an IPS is conducted. On arrival, the applicant is briefed onlocal market conditions, and is escorted to meetings with potential trading part-ners by a foreign service post employee. This not only makes very effective useof the applicant’s time, but also provides him or her with a local market expertto help with translation and negotiations. While priced higher than the IPS, theGold Key provides the kind of structured face-to-face contact that indicates topotential trading partners that the applicant is indeed serious. It also conveysthe implied recommendation of the U.S. government, which often creates afavorable impression.

The Platinum Key Service offers long term customized assistance to U.S.companies seeking to enter a market, win a contract, or lower a trade barrier orresolve complex issues. Methods and prices vary.

Trade Opportunity Program (TOP) provides companies with current salesleads from international firms seeking to buy U.S. products and services. Theseleads are both unsolicited and random. Still, they are worth reviewing as theyare free of charge. The aforementioned Commercial News USA also has tradeleads on its website www.cnewsusa.com.

The International Buyer Program encourages foreign buyers to visit the 28major U.S. trade shows it supports each year. Each participating show has aninternational business center where visiting guests are matched with U.S. ex-hibitors offering products they require. To learn whether a particular industry’strade show qualifies, contact Export Promotion Services at www.usatrade.gov/ibp.Along the same lines, the Trade Show Outreach Program provides on-the-spotexport assistance to attendees and exhibitors at 10 to 20 U.S. trade shows eachyear. For details, visit Trade Events at www.trade.gov/td/tic.

Under its Trade Fairs and Exhibitions program, Commerce provides a U.S.pavilion at a number of overseas trade fairs, enabling U.S. firms to exhibit at areasonable cost. Exhibiting at a major overseas trade show is an excellent wayto establish contacts, as many draw attendees not only from the host country butinternationally. Trade show participation also effectively supports establishedtrading partners. For a list of events, view the Trade Events Calendar homepage

114 Export Marketing

at www.ustrade.gov. Commerce also lists approximately 90 trade fairs a year inwhich it does not participate but certifies as being effective events for U.S. firmsto consider. This list is available at http://infoserv2.ita.doc.gov.

Commerce also organizes overseas trade missions for U.S. business people.There are several basic types and variations such as “Women-in-Trade BusinessDevelopment Missions.” Every Commerce mission has a statement of goals, cri-teria for participation, and a contact person posted at Trade Missions atwww.export.gov. There are also Matchmaker Trade Delegations that are specif-ically aimed at matching small- to medium-sized, new-to-market, or new-to-export firms with qualified business contacts in two or three countries. Forinformation, visit the website www.export.gov.

There are permanent Commerce Department exhibition centers in SaoPaulo, Brazil (www.focusbrazil.org.br), Jakarta, Indonesia (www.jakarta.uscc.org), Shanghai, China (www.usembassy-china.org.cn/english/commercial/index.html), and Johannesburg, South Africa (no website available so contact throughwww.usatrade.gov). These Commercial Centers run one or several organizedevents per month, usually on an industry-specific basis, providing a low costmeans of meeting likely trading partners.

Product Literature Centers (also known as Catalogue Shows) are Com-merce exhibits at international trade shows where visitors who register mayreceive literature from participating U.S. firms. The registrations are sent to theparticipants as trade leads. For more information, contact the Trade InformationCenter at (800) 872-8723, which will refer the caller to the appropriate industryor trade specialist or U.S. Embassy officer.

While not a means of identifying potential trading partners, the U.S. Tradeand Development Agency Reverse Trade Missions program funds visits to theUnited States by high ranking foreign government procurement authority offi-cials. For information, visit the TDA website at www.tda.gov.

U.S. Department of Agriculture

Readers involved with agricultural products will find considerable help at theU.S. Department of Agriculture Department (USDA). The U.S. Trade Assis-tance and Promotional Office (TAPO) is the first point of contact for businessesthat need information on foreign markets for agricultural products. TAPO staffprovides basic export counseling and directs companies to the appropriateUSDA offices to answer specific export-related questions. Extensive informa-tion on export assistance programs and foreign market data is available on itswebsite www.fas.usda.gov.

TheAgExportAction Kit provides information on export programs availablefrom the Agriculture Department’s AgExport Connections program. The infor-mation is designed to put exporters of food, farm, forest, and seafood products

Who in the World 115

in touch with foreign buyers. Order a copy at www.fas.usda.gov/agexport.exporter.html.

AgExport products include:

• Trade leads from the Foreign Agricultural Service offices

• Ad space in the Buyer Alert biweekly newsletter that Agriculture distributesfree of charge to over 20,000 potential buyers in 65 countries

• Foreign buyer lists with detailed information on over 23,000 importers offood, farm, forest and seafood products in 85 countries

• U.S. Supplier Lists, which contain contact information on nearly 4,000 sup-pliers of food, farm, forest, and seafood products. These lists are distributedto overseas buyers

Agriculture provides trade show and trade mission programs for food andbeverage exporters. This includes fully appointed booths for trade shows that itfully sponsors and information on the promoters of other food and beverageshows.

The web-based Export Directory of U.S. Food Distribution Companieswww.fas.usda.gov/agexport/directory/main.html lists entries for over 70 com-panies. To register for this new Agriculture Department product, phone (202)690-3416.

The Rural Business-Cooperative Service provides trade-related technicalassistance to U.S. farmer-owned cooperatives. For information, visit their web-site at www.rurdev.usda.gov/rbs/index.html.

Small Business Administration

The Small Business Administration (SBA) helps small businesses locate tradingpartners overseas through its Office of International Trade (OIT). Their TradeMission OnLine is a searchable data base of U.S. small businesses that wish toexport their products to be used by foreign firms and U.S. businesses seekingpartners or suppliers for export trade-related activity. It is designed to facilitatesmall business international sales, franchising, joint ventures, and licensing. Itwill also be used by SBA to recruit for foreign trade missions and to providetime-sensitive trade leads to registered companies. For details, visit the TradeMission OnLine website at www.sba.gov/tmonline. For details on the other SBAexport assistance programs, visit OIT’s website www.sba.gov.oit.

State Governments

All state governments have some kind of export promotional office or depart-ment. Some maintain offices at commercial centers overseas.

116 Export Marketing

Commerce Department Certified Trade Missions are a favorite state gov-ernment tool, and those led by a governor usually command the attention oflocal dignitaries and business leaders in the foreign cities they visit. State gov-ernments also participate in Commerce Department organized multi-state cat-alogue exhibitions programs, for which details are available at your stategovernment or from Commerce at www.usatrade.gov/catalog.

Some states work together in regional groups for a specific event. For exam-ple, the 13 Appalachian-area states and the Federal Appalachian RegionalCommission pooled resources to place an exhibit at the huge London IdealHome Show. Products from each state were exhibited inside a full-size loghome, which itself attracted considerable attention because of its typicallyAmerican style. The display was staffed by personnel from each participatingstate’s export promotion department, Commerce Department trade specialists,personnel from the U.S. Embassy, and a few of the major exhibitors. Because ofcombined state and federal resources, participation costs were kept low enoughto encourage over 60 exhibitors, of which many were new to export.

Foreign Governments

Alone among foreign governments, Japan maintains an agency to encourageimports. The Japan External Trade Organization (JETRO) assists U.S. sellers inlocating suitable Japanese buyers through eight regional offices and 18 stategovernments. JETRO staff will advise U.S. firms as to the suitability of theirproducts and the kind of Japanese trading partner best positioned to success-fully import their products. Colleagues in Japan then search for interested Japa-nese firms through their huge databases and translated press releases innewsletters aimed at the Japanese business community. (One of their magazinesis about as well done as Commercial News USA.) For further information andlocations of their U.S. offices, visit their website at www.JETRO.org.

While most other governments maintain an embassy and some consulateshere, they are seldom interested in helping U.S. exporters sell to their countriesthe way Japan does. In fact, their mission is to help their suppliers sell here. Thiscan be used to advantage by employing some mild trickery. For example, let’ssuppose the product is used in the production of small electric appliances.Rather than request the foreign consulates for help locating importers in theircountries, ask for a list of their small appliance manufacturers that may be inter-ested in exporting to the United States. They will gladly oblige, and the resultwill be a list of potential customers for the product.

Private Promoters

There are literally hundreds of websites where exporters may post leads seekingbuyers, sales representatives, and distributors for their products. Many resemble

Who in the World 117

auctions, and in the early days of international e-commerce one could find hun-dreds of inquiries for the same item. Obviously, some entrepreneurial folkswould pick what seemed to be a good lead and substitute their own names forthose of the originators. That, or literally thousands of people were indepen-dently in the market for containerloads of Marlboro cigarettes or urea on thevery same day! Things have become more sophisticated, improving the chancesof getting serious responses to legitimate trade lead postings.

The following private sector matchmaking programs have been around fora while and are therefore probably worth considering. (Keep in mind, however,that this is something of a long shot.)

• The World Trade Center Association (WTCA) operates a bulletin boardwhere members can post and respond to trade leads.The organization has ahuge network. Trade lead posting is only one of the networking opportuni-ties available, particularly for companies located near a center. The down-side is that WTC membership includes many traders but not necessarilypersons involved in any given industry. In any event, a visit to its websitehttp://iserve.wtca.org is certainly worthwhile.

• WAND is a permanent Internet directory with many well-defined cate-gories. For instance, as mentioned earlier in this chapter, Buy USA has nospecific category for “log-home kits.” WAND does, because it has over54,000 keywords.The reason it has so many is that it began as a compilationof trade directories. In fact, it is a portal for links to directories in Canada,India, South Africa, China, Taiwan, Hong Kong, Vietnam, and some SouthAmerican countries. It also supports 16 languages, so if there is an expres-sion for “log-home kit” in Chinese or Hindi, it will get there. Prospects find-ing a listing can then hyperlink to the listed party’s full website. Thedownside is that, like Buy USA,WAND is passive. Inquiring parties have toenter the system in order to find a listing, and, unlike Buy USA, there’s nonetwork of Commerce Department trade specialists to guide them to it.Still, it can be a worthwhile promotional tool, especially as more directoriesare being added, bringing in more directory users worldwide. For details,visit their website www.wand.com.

• The United Nations International Trade Centre has a huge trade contactdatabase. It has long maintained a trade-lead posting site, but has becomemore sophisticated than back in the aforementioned “wild and wooly” days.For details, visit their website www.intracen.org.

• Trade Compass is a multi-function international trade website that includesa trade-lead posting service.There are many useful features at their websitewww.tradecompass.com.

• The Association for International Business is a 10,000-member worldwideassociation of foreign traders of all types and experience levels. It runs a

118 Export Marketing

trade lead bulletin board that is worth using, as its fees are quite modest. Fordetails, visit their website www.aibcenter.com.

• Tam Tam, which we saw earlier, offers up to 20 free trade-lead postings.Contact them at www.tamtam.com.

Industry Associations

As mentioned earlier, some of the more internationally minded industry associ-ations assist their member companies with export promotion. Many exchangemembership rosters with counterpart organizations overseas, while some runUSA pavilions at major foreign industry shows, either on their own or withCommerce Department support. Even more provide amenities and limitedmatchmaking for overseas guests at their industry’s major U.S. shows.

Banks

In order to function internationally, banks build a network of foreign counter-parts. Through this network, they transfer payments, open and negotiate lettersof credit, handle each other’s collections, and discreetly pass credit informationon each other’s clients. This network provides an ideal but seldom-used plat-form for banks to introduce their preferred clients to their correspondent banksfor onward introduction to their clients.

A bank may oblige a favored client by sending a few sets of product litera-ture to its correspondents in several countries that are likely potential markets.Naturally, the bank will want to be sure that the company is serious, exportready, and creditworthy before making any introductions in its behalf.The goodnews is that the correspondent bankers probably feel the same way, and anyreferrals are likely to be serious, import ready, and creditworthy.

Large Freight Forwarders

Multinational forwarders have offices overseas. Where they don’t, they havecorrespondent arrangements with locally owned foreign forwarders. Evensmaller forwarders have their own correspondent networks. Large or small,they know people overseas who have client bases and may be willing to sendproduct literature by way of introduction. It wouldn’t have the gilt-edge clout ofa bank introduction, but this probably won’t matter much if the right connectionis made.

The Internet

There are several ways to get names and addresses of prospective overseas cus-tomers. The first is a long shot; just enter a powerful search engine like Google

Who in the World 119

(www.google.com), enter the industry you are trying to reach, and see whathappens.

The next focuses on the desired industry by seeking foreign periodicals.Both Worldbizmedia.com (www.worldbizmedia.com) and Ulrich’s Interna-tional Periodical Directory (www.ulrichsweb.com) list foreign periodicals byindustry. Find all those pertaining to the targeted industry for the most interest-ing countries, keeping in mind that many magazines have international circula-tions within their language group. For example, a computer magazine publishedin Spain may have readership in Latin America. Write each publisher, request-ing a complementary copy and their circulation information to evaluate possi-ble future advertising. Most publishers will comply. When the magazines arrive,look at the advertisements for names and addresses of prospects. As a follow-up, write the publishers again, offering to purchase whatever they have in theway of annual buyers’ guides to get even more leads.

Large Public Libraries and Universities

Readers having a large library nearby may be able to access some of the largeforeign directories that are similar to Thomas Register. Some even have collec-tions of international Yellow Pages directories. They may take some navigating,as many do not have English headings, but getting accurate foreign languagetranslations shouldn’t be a major problem at a library.

Many large universities also have business resource centers similar to largelibraries, in part to support their own foreign trade course offerings. They mayalso have another resource—visiting foreign students. Some of these studentscome from commercially active families. They may provide useful contactseither now or when they return home. This is particularly true of those whoserve in intern programs, where they actually work with U.S. companies.

HOW IN THE WORLD

The recommendations in the previous section should garner a collection oftrade leads. Those obtained through the International Partner Search or any ofthe “Key” programs will be quite detailed, as will any obtained through banksand forwarders. Some may be only names and addresses obtained from tradedirectories, while others may be just email addresses.

Prequalification and Initial Contact

It is necessary to prequalify the leads in order to avoid wasting time attemptingto correspond with parties that aren’t really interested or are simply not thekind of party with whom one wants to do business.

120 Export Marketing

Category One—E-mail Address Only For a start, contact all parties forwhich there are only e-mail addresses and request their postal address. Be sureto offer yours. The Internet is extremely anonymous, and all kinds of peoplemay be found there. Anyone refusing to tell where they are should not be con-sidered a likely prospect.They may be merely curiosity seekers or, worse, a com-petitor. Once you have gained at least a postal address, these leads advance toCategory Three.

Category Two—Names and Addresses Only Let’s now look at the leadsfor which there are only names and addresses, including those that came fromdirectories, trade lists, foreign magazines, etc. They have not yet shown anyinterest in your product. These parties should be sent a carefully worded one-page letter. Yes, a letter! Oddly enough, well-written letters that do not appearto be junk mail now carry more prestige than faxes and e-mail communications.The reason is simple: they are rare. If you doubt this, think back to the last indi-vidually typed, manually signed letter you received. You probably opened andread it, especially if the envelope bore a foreign postage stamp rather thanfranking machine postage.

Since the letter and its presentation are all important, the following sugges-tions border on rules:

• Both the envelope and letter should appear to be individually typed (nomailing labels). If there is a robot typewriter that actually types rather thanprints, use it. Otherwise, laser printing is OK as most individual correspon-dence is laser printed nowadays. The point is that the recipient’s name andaddress must be aligned so it isn’t obvious that the letter was mass-producedfrom a computer program.

• The letter should be directed to someone’s attention. If the lead includes thename of an individual at the targeted company, and if the information isreasonably current, use it. The problem is that when gleaning throughdirectories or trade lists, it is nearly impossible to determine how old theinformation is. A letter sent to the attention of someone no longer with thefirm will likely be pitched unread, or returned with a note that so-and-so isno longer with the company (or died four years ago!).The safest course is toaddress the letter to a department, and this will depend on what is beingsought. If the objective is an end user, address the letter to the attention ofthe purchasing manager. If a sales representative or importing distributor isthe goal, address it to the sales manager.

• The letter must be no more than one page. This is an unsolicited offer. Noone will invest the time reading a multipage letter without first determiningwhether he or she is interested.

• Although it would be great to correspond in the reader’s language, a letterin English will do, provided it is “dictionary” English. This means free from

How in the World 121

slang of any kind, as any non-English speaking readers will need to rely ondictionary definitions.

• Because some readers will not speak English at all, or only as a second lan-guage, a graphic illustration of the kind of product offered may create enoughinterest to get the letter translated. Small heavily illustrated brochures, or apicture, or even a chemical formula will do—whatever it takes to inform thereader of the subject matter. This should be lightweight because the lettershould go by first class airmail, which can become expensive.

• The recipient will be curious to know how his or her company name wasfound, and there’s nothing wrong with mentioning this in the first para-graph. Those working from master lists of names obtained from varioussources may not know the origin of each name. As an opening gambit, con-sider something like “The U.S. Ministry of Commerce suggested that wewrite you” etc. This is stretching a little, but if you are like most U.S.exporters, there’s a good chance that many of the leads actually came fromCommerce.

• In the letter, explain who the company is, what product you are offering, andwhat you are looking for (a direct-sale buyer, sales representative, import-ing distributor, etc.). Try to say something nice about the company. Manypeople overseas equate old with stable, so if it is more than ten years old, besure to discreetly mention this somewhere. If the company has any acco-lades or certifications (ISO series) or if the product complies with anywidely known standard (CE Mark, UL, etc.), by all means say so. Lackinganything better, try mentioning that the company is a “leading U.S. supplierof ———,” which sounds hollow but is better than nothing.

• If the company has an attractive website, be sure to provide the address.

• Individually sign the letter in blue ballpoint so it is obviously a manual sig-nature.

• Use first class airmail postage. Anything less screams “junk mail.” Besides,any undelivered mail will be returned so the names can be culled from thedatabase.

• If possible, use postage stamps rather than a mailing machine. Every officehas a stamp collector, and your stamps are foreign to the recipient. In orderto get the stamp, the collector must open the envelope, increasing thechances that he or she will see that it contains an individually prepared,manually signed letter.This, plus the illustrated enclosure, increases the like-lihood that it will wind up in someone’s in-basket rather than a wastepaperbasket.

As these are unsolicited mailings, they need not be followed up. Perhaps adifferent letter may be sent at least six months later if the objective has not beenachieved in the meantime.

122 Export Marketing

Category Three This includes people that have responded to a CommercialNews ad and those Internet inquirers who provided their postal address andwere therefore upgraded from “e-mail only” status. Foreign inquiries resultingfrom domestic ads or any other unsolicited inquiries of a general nature alsobelong in this category. These leads differ from category two in that the inquir-ing parties presumably understand the product being offered and have alreadyindicated some interest.They should also get a letter that looks individually pre-pared as described in Category 2, but this letter should provide more informa-tion and need not be confined to one page.Any accompanying literature shouldbe lightweight, as there are probably quite a few curiosity seekers in this group.

Category Three letters should be followed up about a month after they aresent. Any follow-up method (mail, fax, or e-mail) is fine.

Category Four This select group contains parties on which some informa-tion or at least a recommendation already exists. These names probably comefrom the Commerce Department “International Partner Search” or “key” pro-grams, or referrals through bankers, forwarders, or other trusted parties. Theseinquiries come from parties that have already expressed an interest, are proba-bly reputable, and probably include the name of the person expecting a letter.These are worth composing individual letters including whatever informationmay be useful. Enclose everything available in the way of product literature.There are fewer of them, and their higher-interest level justifies higher mailingcosts. Courier or at least first class airmail is expected. (For airmail, there is noneed to use stamps as opposed to a postage machine, as the recipient will obvi-ously open the letter.)

Category Four letters should be followed up within two to three weeks.E-mail or fax follow-up is appropriate, as the purpose is to determine whetherthe letter was received. (Such is the impression the seller wishes to convey, butresponses from these category four prospects are always eagerly anticipated.)

Second Go-Round

If the trade leads are any good at all, there should be replies to some initial let-ters. Category Two and Three leads who affirmatively reply should get the cate-gory four treatment, and everyone should get whatever information may beuseful and appropriate.

It is now time to ask questions. Regardless of whether a buyer, a sales rep-resentative, or an importing distributor is sought, you should soon decidewhether this is a party with whom you want to do business. The best way is toask for trade and banking references. Often, an innocuous credit applicationform works better than asking direct questions in what should be a very positivesales letter. It is also polite to offer references when asking for them, so providethe name and address of the company’s bank as well as a contact there who will

How in the World 123

provide a good reference if asked. (Don’t be surprised if the prospect checksyour company’s reliability. It takes as much confidence to import as to export.)

If the requested information is not included with the prospect’s next letter,gently ask again. It is important to know with whom you are dealing to avoidwasting time pursuing impossible situations. Once the information is received,get Credit and Compliance involved. If all goes well, specific quotations maysoon be needed, and appropriate payment terms need to be determined.There’salso a remote chance that the prospect may appear on one of the “bad guy” listsdescribed in Chapter 2. If so, business may prove difficult to impossible(depending on which list).

Cautions

The above procedures should be tailored to your company and the type of prod-uct being offered. There are some general exceptions:

Direct Mail to Individual Consumers Companies that directly mail toindividuals will encounter problems getting databases and face restrictions ontheir use for some markets, particularly the European Union.There are strongright-to-privacy laws, such as the EU directive 95/46/EC. Fortunately, help isavailable from the U.S. Direct Marketing Association (DMA). Besides help-ing to cope with restrictions, this organization can provide information onoverseas counterpart groups. For more information, visit their website www.the-dma.org.

Unsolicited Inquiries Before handling these as a category three reply, makesure they do not come from a market in which the company already has a trad-ing partner (sales representative, importing distributor or licensee). Dependingon the agreement, it may be appropriate to send such inquiries to the tradingpartner for handling.

Price Information Sellers who use confidential pricing information maywant to get to know a prospect before revealing it. This can be particularlyimportant with representatives’ commission schedules and importing distribu-tor discounts. Competition may be trying to snoop, or a big-ticket end userprospect may be trying to learn how much discount your distributor gets inorder to negotiate a lower price. It may be a good idea to work from retail pricesand be a bit vague about the actual commission or discount structure before atleast the credit information is in hand. People attempting to spy are normallyreluctant to provide credit references, as this may disclose their allegiance. Onthe other hand, the simple act of providing references speaks well of theprospect.

124 Export Marketing

SUPPORTING TRADING PARTNERS

Sellers may want to support the local efforts of their sales representatives orimporting distributors. Cooperative local advertising often works well. It providesthe right local touch through the trading partner’s knowledge of local market con-ditions. Equally important, it puts the seller and trading partner in a joint effortsituation, which may strengthen their bond and increase morale on both sides.

Cooperative advertising may take on many forms, including media, bill-board signage, trade shows, and even local direct mail promotion. It all dependson the product and the market. Good trading partners can usually select themost effective means.

Any cooperative project should be preapproved by both the seller and thetrading partner. The distribution of cooperative funding (such as 50:50) shouldbe made clear at the start. Many experienced sellers silently add a reserve of 10or 15 percent to the agreed participation amount for unanticipated expenses.Outlays should also be determined, and it is usually easier if one party handlesthe immediate payments and receives reimbursement from the other, ratherthan attempting to pay each bill on a pro-rata basis.

Sellers that have enough confidence in their trading partner’s ability should,as much as possible, let local details be handled locally. Above all, trading part-ners should produce the necessary translations into their local idioms. Allwidely spoken languages have peculiarities, nuances, and slang that may trapeven professional translators who are not familiar with local dialect.

Sellers, including some very large corporations, sometimes provide cooper-ative advertising as a percentage of sales. While this may be appropriate forinternal budgeting, it seems illogical if applied on a market-by-market basis. Forinstance, a new-to-market product will presumably have low initial sales until itbecomes reasonably well known and well accepted in the market. This seems tobe exactly when maximum advertising support is most needed.

Look for government or trade association co-operative advertising pro-grams. For instance, the Agriculture Department’s “branded” program providesup to 50 percent reimbursement for certain export promotion activities. The listof eligible products includes some that are not directly agricultural, such as for-est products.Trade show organizers often arrange local press coverage for showexhibitors—as much to promote the show itself as the exhibitors’ products.

For overseas trade shows, the mere presence of a “home office” employee torepresent the company at a trading partner’s booth sends a strong signal of sup-port. It can also be an illuminating experience. There’s much to be learned attrade shows, even by people who are not fluent in the local language. Beforesending anything overseas for temporary use at shows, be sure to read aboutcarnets in Chapter 8. This is particularly important when several foreign showsare run consecutively.

Supporting Trading Partners 125

VOLUNTARY STANDARDS CERTIFICATION

Going beyond mandatory compliance as described in Chapter 3, voluntary com-pliance with well-known standards can be a powerful marketing tool. Foreigntrade expert Rosalind McLymont makes a strong argument for this in the fol-lowing Managing Exports article.

Exporters Look to 12 Certifying Bodies to Boost CompetitivenessA major challenge for export pros is keeping up with evolving quality assurancestandards for goods and services in the global market place, especially since effortsto create and harmonize such standards are now proceeding at a frenetic pace.Since getting your firm’s products certified can mean the difference between suc-cess and failure in highly competitive markets—and not only in the EU market—ignoring quality assurance standards is often not an option. Fortunately, theinformation you need to determine when and how to seek quality certification foryour products is generally available online in easy-to-understand format (seebelow).

Exporters, as well as government officials worldwide, are undoubtedly con-cerned that national standards developed in isolation can be used as trade barriers,hence the emphasis on harmonization among the various national and regionalstandards-setting bodies. In addition to diminishing trade barriers, harmonizationpromotes safety; allows interoperability of products, systems, and services; and pro-motes common technical understanding.

Benefits of Global Quality StandardsAlthough not mandatory, certification to global standards can bring major benefitsfor U.S. exporters as demand for higher product quality standards grows. Benefitsinclude:

• Continuous improvement of quality in order to meet the standards

• Enhanced customer/supplier relationships

• Overall cost reduction

• Enhanced competitive position of conforming suppliers

U.S. exporters who have certified to global standards contend that these bene-fits far outweigh the heavy cost and lengthy time invested in the complianceprocess.

It is therefore prudent for export professionals to keep abreast of standardsactivity in their specific industry. The following list includes some of the mostimportant organizations (and their Web sites) involved in drafting, implementing,maintaining, and overseeing standards.

1. International Organization for Standardization (ISO, www.iso.org). A world-wide federation of national standards bodies from some 140 countries thatpromotes the development of standardization and related activities. Its stan-

126 Export Marketing

dards tend to become a market requirement. The ISO 9000 quality manage-ment series, for example, serves as the baseline for various industry-specificstandards. ISO 14000 is the environmental management system (EMS) stan-dard to assist companies in controlling their impact on the environment.

2. American National Standards Institute (ANSI, www.ansi.org). Administersand coordinates the U.S. voluntary standardization and conformity assessmentsystem. The online version of its bi-weekly publication “Standards Action,”provides status reports on domestic, regional, and international standards inthe works. The Web site links to all U.S. standards developing organizations.

3. American Society for Quality (ASQ, www.asq.org). The leading qualityimprovement organization in the United States, ASQ members have initiatedmost of the quality methods used throughout the world, including statisticalprocess control, quality cost measurement and control, total quality manage-ment, failure analysis, and zero defects.

4. The International Electrotechnical Commission (IEC, www.iec.ch). This is theinternational standards and conformity assessment body for all fields of elec-trotechnology. Any component or system manufactured to IEC standards canbe sold in any other member country. See their Web site for member countriesand standards.

5. Quality Excellence for Suppliers of Telecommunications (QuEST, www.questforum.org). Known as the QuEST Forum, this body is dedicated todevelopment and maintenance of TL 9000, the telecommunications qualitysystem requirements for design, development, production, delivery, installa-tion, and maintenance of telecom products and services.

6. International Conference of Building Officials (ICBO, www.icbo.org). Devel-ops building and construction codes. In January 2003, ICBO will merge withcode giants Building Officials and Code Administrators International(BOCA) and the Southern Building Code Congress International (SBCCI) toform the International Code Council (ICC www.intlcode.org).The merger willform the world’s strongest code force dedicated to ensuring the public’s safetyin the built environment.

7. International Automotive Task Force (IATF).An ‘ad hoc’ group of automotivemanufacturers and their respective trade associations formed to provideimproved quality products to automotive customers worldwide. The U.S. asso-ciation is the Automotive Industry Action Group (AIAG, www.aiag.org)ISO/TS 16949 is the global automotive industry’s quality standard. It incorpo-rates the QS 9000 standard developed by the Big Three.

8. American Aerospace Quality Group (AAQG). Responsible for AS 9100, thefirst single standard available for use across the global aerospace community.The standard includes requirements necessary to address both civil and mili-tary aviation aerospace needs.

9. Industry Cooperation on Standards and Conformity Assessment (ICSCA,www.icsca.org). A group of corporate standards professionals and businessexecutives from 14 countries, over 50 globally active companies, and 13 indus-try associations. Focuses on conformity assessment requirements and ways to

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improve the global ‘system’ for standards development, with a view to moreefficient market-access procedures. Promotes the controversial Supplier’sDeclaration of Conformity Assessment (SDOC), a self-certification concept,as an alternative to ISO 9000 and “nonvalue-adding” certification. Cooperateswith Partners in World Safety to promote a common understanding on ways toincrease public health, safety, and protection of the environment and at thesame time eliminate non-value-adding conformity assessment processes.

10. European Committee for Standardization (CEN, www.cenorm.be). Responsi-ble for promoting voluntary testing harmonization in Europe, in conjunctionwith worldwide bodies and its partners in Europe. Members are the nationalstandards bodies of the European Union, European Free Trade Area coun-tries, and the Czech Republic. Formal adoption of European standards isdecided by a weighted majority vote of all CEN national members and is bind-ing on all of them.

11. European Committee for Electrotechnical Standardization (CENELEC,www.cenelec.org). The European Union’s official standards developer in thisfield.

12. European Telecommunications Standards Institute (ETSI, www.etsi.org). Pro-duces the telecommunications standards that will be used for decades to comethroughout Europe and beyond”2

POTPOURRI

Marketing professionals should find the following websites interesting.

• World-newspapers.com lists newspapers worldwide by continent. www.world-newspapers.com.

• The Enterprise Development Website is a Canadian website that evaluatesand rates foreign trade-related websites on a one- to five-star basis. www.enterweb.org/market.htm

• Know This is a marketing virtual library. http://www.knowthis.com

• Marketing and International Business Links is an incredibly complete col-lection of useful websites for foreign traders. Make sure your printer is fullof paper and toner when visiting it. http://wtfaculty.wtamu.edu/∼sanwar.bus/otherlinks.htm

LINKAGES

Obviously, Sales is the discipline most involved in export marketing. However,Compliance and Credit also have an interest:

128 Export Marketing

• Compliance. Advise Sales which countries are embargoed and which of thecompany’s products (if any) may encounter difficulty in obtaining licensesfor which countries.

Promptly notify Sales of any export control problems (“bad guy” lists)with prospective buyers and trading partners.

• Credit. Promptly notify Sales of appropriate payment terms for prospectivenew buyers.

Promptly notify Sales whether the reputation and credit history ofprospective new trading partners is acceptable.

• Sales. Provide Compliance and Credit with as much information as possibleon prospective new buyers and trading partners.

Check the company’s exports against Commerce Department export sta-tistics for existing overseas markets and potential new markets that may beoverlooked.

Check with Manufacturing on the possibility of voluntary certification tostandards that would enhance product appeal.

Check the carnet section of Chapter 8 of this book and with Trafficbefore sending anything abroad for temporary display.

ENDNOTES

1. “Tam Tam Aids New and Old Exporters in Locating Markets,” IOMA’s Report onManaging Exports, Issue 10-01, October, 2001, page 2.

2. McLymont, Rosalind, “Exporters Look to 12 Certifying Bodies to Boost Competi-tiveness,” IOMA’s Report on Managing Exports, Issue 04-02, April, 2002, pages 6–7.

Endnotes 129

Chapter 6

Export Pricing

Pricing is undoubtedly one of the most difficult business processes, and this iseven more true of export. Reasons include distance from markets, lack of timelydata, different market-specific distribution patterns, varying buyer expectationsand preferences, different legal requirements, local or third-country competi-tion, higher freight and handling costs, possible product modifications, greaterrisk, and often longer accounts receivable turnover. Many countries also haveantidumping laws—constraints on how low export prices may be in relation tohome-country pricing. Making sense out of all these variables seems like aninsurmountable task. Still, many U.S. companies that successfully export tacklepricing every day.

Rather than addressing the difficulties headlong, let’s look at pricing inanother way. Determine costs, decide on a reasonable profit, add it to your costs,and there you are. Then, do a reality check to see whether the proposed pricingwill stand up. This easy-sounding approach is the one we’ll follow, since it’s asgood a place to start as any.

For this chapter, we will again assume that the seller is the manufacturer.Nonmanufacturing sellers have an easier time determining their product costs,since these are simply whatever their suppliers charge. Once product costs aredetermined, both manufacturers and resellers have the same options in deter-mining their export pricing.

COSTS

It is necessary to know one’s costs of doing business in order to establish a base-line for pricing. Otherwise, manufacturers could find themselves selling at a lossor restricting their market share through needlessly high pricing.

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Direct Costs

Direct costs relate to items that actually go into making a product; that is, mate-rials from which a product is made and direct-production labor. Every success-ful manufacturer knows what these are and manages them closely. However,there are some peculiarities involved in manufacturing products for export.

At this point, we need to define three terms as used in this chapter:

Material A tangible thing from which something else is made; for example,an ingredient. Keep in mind that a given item may be a material for one partyand a product for another. For instance, a computer manufacturer would con-sider an on-off switch to be a material, while the same item is a product as far asthe switch manufacturer is concerned.

Product The item being exported or imported.

Re-export Exporting from the United States items that have previously beenimported. (Note:This definition is entirely different from the Bureau of Industryand Security (BIS) definition of reexport that we saw in Chapter 2 of this book.)

First, some good news about the costs of imported materials or products. Itis possible to recover most of the duty paid on imported items that are subse-quently exported. Called drawback, this duty-recovery program applies both toitems that are exported in the same condition as they were imported and toitems used as materials to make other products that are subsequently exported.Drawback must always be claimed by the party exporting the product from theUnited States. Drawback claims must include detailed information on when andhow the foreign-origin item was originally imported.When the exporter did notimport the item, this information must be obtained from the importer of record.Drawback regulations are found in Part CR191 of the Customs Regulations ofthe United States, and additional information is available on the U.S. CustomsService website, www.customs.ustreas.gov.

U.S. manufacturers may also eliminate the duty otherwise payable on im-ported materials by manufacturing in a foreign trade zone or subzone.Althoughthese facilities are physically located within the United States, they are not con-sidered to be within U.S. Customs’ territory. Goods imported into zones pay noU.S. duty unless and until they exit the zone into U.S. commerce. Further, if theyundergo a manufacturing process within the zone, and are therefore trans-formed into something else, they pay U.S. duty on what they have become uponleaving the zone, rather than what they had been when entering it. Of course, ifimported goods are directly exported from a foreign trade zone—either as theycame in or manufactured into something else—they never pay U.S. duty at all.

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Nonmanufacturing companies may also import and reexport products with-out paying U.S. duty using either foreign trade zones or bonded warehouses.Bonded warehouses are designated facilities where imported goods may bestored for up to five years without payment of duty unless and until they exit thewarehouse into U.S. commerce. However, manufacturing is prohibited, so itemsexit the bonded warehouse in the same condition as they entered and are dutiedaccordingly.

Along the same lines, the United States charges lower duty on certain prod-ucts of countries that qualify for preferential treatment under the following pro-grams: Generalized System of Preferences (GSP), Automotive Products TradeAct, Caribbean Basin Economic Recovery Act, Andean Trade Preference Act,African Growth and Opportunity Act, and the U.S.–Caribbean Trade Partner-ship Act. Products of U.S. insular possessions, Freely Associated States, and thePalestine Authority also receive preferential duty treatment. Restrictions applyto all of these programs. Consult the Harmonized Tariff Schedule of the UnitedStates (HTSUS) for details.

The U.S.–Israel Free Trade Agreement, U.S.–Jordan Free Trade Agreement,and the North American Free Trade Agreement (NAFTA (Canada, Mexico,and the United States)), provide reduced duty or duty-free treatment for eligi-ble imported items originating in these areas. Other so-called free trade agree-ments are on the horizon, increasing potential overseas sources of materials forU.S. manufacturers.

Now for the not-so-good news.The same free trade agreements that providelower U.S. duty on eligible imports may restrict how U.S. manufacturers sourcetheir materials. As we will see later in this chapter, U.S. exports must meet cer-tain origin tests to receive preferential treatment under these free trade agree-ments. This is particularly true of the NAFTA, which imposes some demandingorigin criteria.

Some products require special modifications for export, increasing theirdirect costs. These are covered in Chapter 3 and include such things as differentelectrical current, special labeling, foreign-language instructions, and so on. Wewill consider instructions as part of the product itself and classify these as directcosts.

Indirect Costs

These are costs of inputs other than direct production labor and materials thatgo into a product. These are commonly called “overhead,” and include the costof the factory and its equipment, salaries other than direct production labor,supplies other than materials, advertising, sales commissions, taxes, etc. Over-head is usually allocated to the number of units produced to arrive at total per-unit costs.

132 Export Pricing

Products that are exported have some peculiarities that should be addressedsomewhere in determining export cost allocations.

Export profits have traditionally received preferential federal tax treatmentdating back to the 1950s under a now obsolete program called Western Hemi-sphere Corporations. This was replaced in the late 1960s by the DomesticInternational Sales Corporation (DISC), a highly effective export tax incen-tive program with worldwide coverage. Objections from the European Unionforced a structural change in the 1980s to a successor export tax incentive pro-gram named Foreign Sales Corporation (FSC). This also faced EU objections,and was replaced by the FSC Repeal and Extraterritorial Income Exclusion Actof 2000. The EU objected to this as well, and in 2001 the World Trade Organiza-tion ruled it a prohibited export subsidy. Since many other countries offer taxincentives to stimulate exports, we will undoubtedly see another U.S. attempt toreduce taxes on export earnings.

Generally, exports are exempt from state and local sales taxes. However, nopricing adjustment is required as these are normally treated as add-ons. (Note:This can become an issue with domestic sales of product known to be export-bound. Such sellers should, at a minimum, request proof of export such as acopy of the outward transport document.)

Since an exported product does not benefit from domestic advertising, itshould not be burdened with an allocation for its cost. It should, however, bearthe cost of any advertising aimed at the export market. The same applies torebates, sales contests, and other promotions that apply only to the domesticmarket.

Obviously, allocated overhead for domestic-only sales personnel should notbe charged to exports, or at least reduced to mirror their actual contribution tothe company’s export activities.

Exports to distributors that undertake local after-sale service often requireless account maintenance on the seller’s part than for domestic sales. On theother hand, a warranty policy should be established to compensate distributorsthat assume this function. Frequently, the number of person-hours is deter-mined for common warranty repair items and this, adjusted by prevailing localwage rates, becomes a basis for warranty coverage on exports. Depending onhow this differs from the allocation method used for domestic pricing and thefrequency of such repairs, warranty work may or may not be worth allocatingdifferently for export.

Certifications may be required to export certain kinds of products to certaincountries. These are covered in Chapter 3, and often add to the cost of suchproducts.

Many export shipments require at least some degree of additional packing.The nature of the product and the mode of transportation normally dictate thedegree of export packing required. Companies that routinely export the same

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kinds of product by the same modes may consider allocating export packing toall exported products rather than handling them on a transaction-specific basis.

Many exporting companies use the services of a freight forwarder for someor all of their exports. Forwarders charge handling fees, a situation that has nocounterpart in domestic shipments. Again, this may be allocated to all exportedproducts or handled on a transaction-specific basis

As seen in Chapter 2, export control compliance requires time and effort,both of which cost money. The nature of the product and the normal destina-tion countries will determine how much is involved, but at a minimum manyexport shipments must be reported. If this cost is serious enough to botheraddressing, it should be included in the overall export prices, rather than han-dled on a transaction-by-transaction basis. No buyer wants to knowingly pay forcompliance costs incurred to meet the obligations of the seller’s government.

As explained in Chapter 3, trademarks and copyrights should be protectedfor overseas markets where they are used. The same is true for patented prod-ucts that are exported. Such intellectual property must be registered in thecountries for which protection is desired, and this entails both one-time andmaintenance costs.

Sellers that frequently offer terms of payment involving banks may want toinclude a provision for banking fees in their export pricing. These are often toohigh to absorb, and handling them on a transaction-specific basis could antago-nize buyers that would prefer to pay on open account terms. This is particularlytrue for letters of credit, which are expensive and which many buyers considerunreasonably restrictive.

Sellers that frequently offer extended payment terms to major overseasbuyers (e.g., importing distributors) may want to consider building a provisionfor the cost of additional days outstanding into their export pricing. There aretwo schools of thought on this. Sellers that want to encourage importing distrib-utors to carry larger inventories and demonstrate their support by providingextended payment terms should definitely build in the added costs. On the otherhand, sellers that are reluctant to provide extended terms except as a last resortshould not provide for them in their prices. When asked for extended terms,such sellers may reply that they can comply, but would have to charge extra forthe cost of money, since they are already offering rock-bottom prices.

Some sellers insure their export accounts receivable. Insurance is generallyavailable to cover nonpayment caused by the buyer (called commercial risk)and/or the buyer’s country (called country or political risk). Both increase costs.

As we will see later in this chapter, exporters may invoice in foreign curren-cies, thereby incurring the risk of adverse currency exchange-rate changes.Theycan protect against this by establishing internal reserves or purchasing futurepositions in currencies. Either method increases costs.

There are other expenses peculiar to export, such as country-specific docu-mentation, that are usually addressed on a transaction-by-transaction basis.

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Transaction-Specific Costs

As the name implies, these are costs that are best charged to individual trans-actions rather than allocated as indirect costs. They include country-specificdocumentation, preshipment inspection, prepaid freight charges and casualtyinsurance charges, as well as any of the export packing, forwarding, or payment-term–related costs described above that had not previously been included in theoverall export pricing.These costs should be applied as needed on a transaction-by-transaction basis. We will see how this is done in the proforma invoice sec-tion of Chapter 9.

The area of transaction-specific costs provides fertile ground for cost reduc-tion. These, and other cost-cutting measures, are described in the followingManaging Exports article:

For our fourth annual survey in a row, the same two strategies have been listed byhundreds of export pros coast to coast as their “most successful” for improvingadministration and holding down costs: “Changed or worked more closely withfreight forwarders” and “Improved accuracy and timeliness of shipping docu-ments.” In our last survey, 75 percent of respondents picked the first and 71.3 per-cent the second strategy as their most effective from a list of 10 (see accompanyingtable). Such consistent results are not hard to account for. Over the last four years,quantum leaps in automation have helped export managers cut down on costlymistakes in document preparation. ME survey results indicate that exporters con-tinue to “go electronic” to take advantage of these benefits as software becomesever more affordable and user-friendly. Export pros are also continuing to take toheart the continued advice of experts in the trade to sift carefully through the for-warders you use, pick the handful that perform best, and then concentrate onbuilding the best possible relationships with them.

While these top two strategies could be framed and hung up in every exportdepartment as the “two commandments of cost-efficient export administration,”significant numbers of respondents got their best results with other strategies. Forexample, “Worked more closely with international sales or credit staff” was thestrategy of choice for 59.3 percent, while “Using the internet to increase depart-ment productivity” was favored by 57.4 percent (compared to 48.6 percent in lastyear’s survey), and 56.5 percent experienced the greatest success by ‘Renegotiatingshipping, freight, or insurance costs.”

While five more strategies were singled out as ‘most successful,’ by smallernumbers of respondents (see table), every export operation is unique, and manyME readers will benefit from carefully considering those as well. For example,almost a third of our respondents met with their greatest success by outsourcinglogistics, while substantial percentages cut costs by improving collections or usingnew BXA [sic] (now BIS) automated systems.

At least as useful as the raw data the survey generated are actual comments byrespondents on how their most successful strategy was implemented and moneywas saved as a result.

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Smart Management of Forwarders“We have stopped relying on one freight forwarder and now use different ones fordifferent regions, weighing which have the best prices and saving from 10 to 20 per-cent in costs,” explains the Export Manager at a 200-employee California firm thatmanufactures landscape and irrigation supplies. Another idea comes from a Ware-house Distribution Manager at a North Carolina photographic paper exporterwith 350 workers: “We switched to a new forwarder and pay them on a monthlyretainer fee basis.This took bill verification from several hours a week to zero, andwe pay ocean carriers directly—resulting in less time addressing late payments.”

“We contracted with one primary freight forwarder for exporting all the com-pany’s products,” reports the International Order Processing Manager at a Penn-sylvania aluminum pigments manufacturer. “They are current with all rules andregulations, which keeps us in compliance. Due to this alliance, our orders arealways expedited.” The Director of International Business at a 9,000-employeeMissouri firm cites a similar experience: “We now partner with a large freight for-warder for all our international shipments.The result is lower costs and better sup-port on customized solutions for project bids.”

Faster, More Accurate Documentation“We increased the accuracy of our shipping documents by automating. This hasreduced the number of times documents are sent back to the International Depart-ment for revision,” explains the Shipping/Traffic Manager at a 1,200-employeeCalifornia electronics firm. “Now, they are correct the first time around, savingboth time and money.” The Corporate Import/Export Manager at a New Yorkmanufacturer of power and industrial equipment, with 140 workers, shares this tip:“We designed a streamlined system for screening transactions and determiningclassifications to ensure compliance on each export. A great time saver.”

“We’ve implemented a quality control program whereby staff reviews and dou-ble checks each others” (and our forwarders’) shipping documents,” reports theExport Manager of a paper products exporter in Florida. “We create the docu-ments the same day the materials ship,” explains the Vice President of Sales at anArizona electronics company. “Then we use the Internet to send the documents toour overseas customers and our international offices.”

“We installed automated export documentation software to accelerate andfacilitate our global trade transactions,” says the responding export pro at a Con-necticut exporter with four employees. “Filing our SEDs via AESDirect forced usto improve the accuracy and speed of our export data,” states the Traffic Managerat an 800-worker valve/couplings manufacturer in Pennsylvania. “ImplementingEMS 2000 export software has saved us $45,000 annually—and one employee’stime,” explains the Manager of Corporate Logistics at an 8,500-employee Colorado-based computer equipment exporter.

Renegotiate Provider Contracts, Agreements“By renegotiating with our shippers, we have saved approximately $25,000 permonth in land freight,” notes the International Credit and Export Manager at a 60-employee oil metering systems exporter in Texas. “The idea originated from a spe-cial department created within our corporate office.”The Director of International

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Sales at another Texas exporter reports: “We called all our international carriersand renegotiated rates on our volume. The result was that we reduced our freightcosts by half from last year.”

“We sent out detailed RFQs to a list of shipping, freight, and insuranceproviders,” says the Transport and Export Manager at a 1,000-employee Oregonmanufacturer of printing equipment. “Picking the ones that offered the best bangfor our buck saved us over $1 million to date.” Reports the Customer Service Man-ager at a 5,000-worker Ohio tool manufacturer, “Thorough negotiations lead byour corporate consultants resulted in us leveraging our freight volume globally.Weexpect savings of $100,000 to $250,000.”The Export/Purchasing Director of a NewJersey exporter of dyes, pigments, and chemicals says,“by renegotiating freight andinsurance rates we lowered costs by 20 percent, saving about $200,000.”

Other Good TipsOutside of these three main areas, our respondents describe a number of otherinnovative ways their export operations have cut costs while improving efficiency.

• Using the new BXA (now BIS) automated systems has been our most effec-tive strategy,’ notes the Export Controls Manager at a 10,000-employee Con-necticut electrical distribution firm. “I can’t speak highly enough of the costchanges we were able to implement.”

• “We worked more closely with the international sales staff in improving com-munication with our international distributors,” reports the Director of Inter-national Operations at an Illinois exporter of educational materials. “Ordersbeing put in more efficiently, quickly, and accurately have saved us big moneyin freight costs.”

• The Export Manager at a costume jewelry manufacturer in Rhode Island, thatemploys 800, cut costs this way: “In conjunction with our cargo partners andvendors, we developed process improvements in offshore packing, saving$70,000 annually.”

• The Corporate Credit Manager at a New York dental supply company reportsthis strategy: “We’ve improved documentation and collection proceduresthrough improved and more frequent communications, resulting in a reduc-tion in past due A/R by 5 percent—or $20,000.”

• “Using the Internet to communicate instead of fax and phone has been atremendous time and money saver, cutting costs $6,000 to $7,000 per year,”explains the International Manager at a North Carolina chemicals exporterwith 225 employees.

• “Outsourcing our international logistics to a forwarder has reduced our staffby two and our costs by 10 percent, adding up to $400,000 in annual savings,’reports the International Transport Manager at an 8,000-employee South Car-olina exporter of petroleum products.

• The Logistics Manager of a burnt clay products manufacturer that employs150 in Utah reports,“We located and now use an excellent import/export agentwho is very familiar with all aspects of international shipping, resulting infewer errors and savings in time and money.”

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• “Filing our SEDs in-house through AESDirect has saved us $100,000 peryear,” reports the Import/Export Manager at a 2,000-worker South Carolinaapparel manufacturer.

• “Recently, we changed our export packaging from wood to cardboard, reduc-ing our costs significantly,” says the International Sales Director at a Californiaexporter of steel cabinets that employs 100.

Most Successful Strategy for Improving Management of Export Administration and/or Reducing Cost

Company Size

Less than 500 500 and Over OverallChanged or worked more

closely with freight forwarders 75.8% 75.0% 75.0%Improved accuracy/timeliness of

shipping documents 77.3% 58.3% 71.3%Worked more closely with

International sales and/or credit staff 63.6% 50.0% 59.3%

Used the Internet to increase department productivity 54.5% 63.9% 57.4%

Renegotiated shipping/freight/ insurance costs 60.6% 52.8% 56.5%

Expanded or established newChannels of international distribution 42.4% 38.9% 41.7%

Outsourced various internationallogistic operations to a 3PL or forwarder 22.7% 33.3% 26.9%

Improved international collectionrate and speed 22.7% 19.4% 20.4%

Used new BXA (now BIS)automated systems 10.6% 33.3% 17.6%

Streamlined international credit application process 12.1% 11.1% 11.1%

Other 15.2% 22.2% 17.6%1

EXPORT COST ANALYSIS

It is often handy to create a worksheet in order to determine the true cost ofexported products, as opposed to those sold domestically.While these will likelybe less precise than those used for domestically sold products, they should pro-vide a good handle on what is really involved in exporting. This could be a one-time exercise if the results are very similar to domestic costings. However, thedifferences may be substantial.

138 Export Pricing

An export cost worksheet should include provisions for the direct and indi-rect costs we have just seen, and should look something like this:

Direct costs:

• Materials (adjusted for any product modifications and import duty recoveryor substitutions required to achieve preferential-duty treatment)

• Direct production labor

Indirect costs:Adjust the normal product-allocated overhead costs as follows:

1. To the allocated product overhead, add any overall provision for the fol-lowing:

• Export-related advertising

• Cost of export personnel

• Warranty work provided overseas

• Costs of export-related product certifications

• Additional export packing

• Forwarding

• Cost of export control compliance

• Cost of foreign registration for intellectual property

• Banking fees

• Cost of extended payment terms

• Cost of export credit insurance

• Provision for internal reserves or cost of future positions for sales inforeign currencies.

Be sure not to include overall provisions for costs that will also be added on atransaction-by-transaction basis.

2. Reduce the allocated product overhead by the following:

• Any export-related federal tax incentives

• Cost of domestic-only sales personnel

• Cost of domestic advertising or other promotional activity

• Allocation for domestic after-sale service

This procedure should provide an approximate total cost for exported prod-ucts. Like all allocated costing, the amounts and amortization times for one-timeexpenses like product certifications and intellectual property registration are

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accounting judgments. Nevertheless, they do represent actual costs, and shouldbe factored into export pricing.

Obviously, new-to-export manufacturers will have a considerable amount ofguesswork.This is acceptable,since they will probably have few exports at the start.It is still worth doing and updating periodically. Increasing export volumes bringmore empirical data and also increase the importance of getting these costs right.

MARKUP

There are several approaches in determining how much profit to include whensetting export prices.They apply both to products sold through overseas tradingpartners, such as importing distributors or representatives, and to end-userdirect sales. The first two have obvious advantages, and it may be that both areappropriate for a given product at different stages:

Entry-Level Pricing

Entry-level advocates reason that the profit margin for new-to-market productsshould be as low as possible to facilitate market entry. Prices can eventually begradually increased to permit higher profits once the product has become wellestablished. Since the greatest cost and effort for overseas trading partners hap-pen at the introductory stage, subsequent sales involve lower transaction costs.This should make distributors willing to pay slightly higher prices and sales rep-resentatives willing to sell at higher prices once the line becomes better known.The logic applies to products sold directly to end-users too, since most buyersare willing to pay more for a product that has a good local reputation.

Obviously, this should provide the fastest and easiest market entry for manytypes of products. It makes particular economic sense for price-sensitive prod-ucts, especially those benefiting from production economies of scale, since it willlikely produce orders faster than would otherwise be the case.

One downside to this logic is that “eventually” never seems to come.There’salways a reason why prices cannot be increased to beef up otherwise meagerprofit margins. There’s also the possibility that overseas trading partners maycapitalize on what they know to be below-market prices by applying higher-than-normal profits or from the ease in selling low priced products. This mayhave been the reason for quickly attracting them in the first place, and gettingthem to work on a more customary profit margin or pricing level later mayprove difficult. Another downside is that historically anemic profits will causesenior management to downgrade the importance of exporting to the company.

Normal Markup

Advocates of a normal markup export pricing policy concede that market pen-etration may take longer. However, they point out that since the greatest seller

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cost and effort normally take place at the start, this is precisely when profitsshould not be sacrificed. They claim that starting a trading partner relationshipbased on artificially lower prices creates an artificial relationship and thatsooner or later problems will develop if and when prices are increased. Theyalso hold that there is always some bargaining involved, and if profits are mini-mized at the outset, little remains to give in case an exceptionally good oppor-tunity comes along. There are buyers—even entire cultures—that never pay theasked price, regardless of how attractive it may be.

This argument has particular merit for products sold mainly on featuresother than price. It is also a more long-term approach. However, proponentsapplying this theory to new-to-export companies must accept the fact thatexport sales will take longer to come, and that the export effort will be chalkingup deficits until they do.

Enhanced Export Markup

This theory holds that as exports entail more hassle and perhaps greater risk,they should therefore command higher markups. Since we have already consid-ered possible product modifications and likely additional export-related tasksin our export cost analysis, this position is inconsistent with the idea of buildingviable export markets. Companies holding this opinion probably have morebusiness than they can handle already. Those having additional capacity shouldconsider converting exports to domestic business by engaging an export inter-mediary as described in Chapter 4.

Caveat

These pricing theories should be considered in relation to each company’s par-ticular circumstances. Besides the obvious desire to increase sales and profit,there are other benefits from exporting that have varying degrees of importancefor different companies. Without stretching the imagination too far, theseinclude:

• Increased customer-base diversification

• Increased market diversification (recession seldom strikes all countries atonce)

• Increased manufacturing economies of scale

• Counter-seasonal markets in the Southern hemisphere

• Potential markets for products with declining acceptance in the domesticmarket

• Domestic-market saturation

• Potential addition of new products through cross-distribution (two or moresellers distribute each others’ products in their home markets)

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• Depriving foreign and domestic competitors of market share in third coun-tries

• Earning foreign exchange to offset the cost of imported materials

• As an exploratory step towards overseas investment or licensing

• If requested by a large domestic customer to support its own export activities

• Enhanced prestige

Although difficult to quantify, at least some of these may have an impact onhow a particular company prices its products for export. The following list ofquestions found in the U.S. Department of Commerce’s A Basic Guide toExporting may also provide food for thought on pricing objectives:

• What type of market positioning (customer perception) does the companywant to convey from its pricing structure?

• Does the export price reflect the product’s quality?

• Is the price competitive?

• Should the company pursue market penetration or market-skimming pric-ing objectives?

• What kind of discount (trade, cash, quantity) and allowances (advertising,trade-off) should the firm offer its foreign customers?

• Should prices differ by market segment?

• What should the firm do about product line pricing?

• What pricing options are available if the firm’s costs increase or decrease?Is the demand in the foreign market elastic or inelastic?

• Are the prices going to be viewed by the foreign government as reasonableor exploitative?

• Do the foreign country’s antidumping laws pose a problem?2

We will cover many of these questions in this chapter.

EXPORT PRICE LISTS

Many companies use several export price lists. Often, these are differentiated bythe importing country or the kind of buyer.

U.S. products enjoy particular advantages in some overseas markets. Sell-ers may use this to increase market share or, where possible, to gain a higherprofit than may be found in less receptive markets. Buyers in Canada, Mexico,Israel, and Jordan pay lower duty on eligible U.S. origin goods because of freetrade agreements. This trend is likely to continue. One major step is a planned

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Free Trade Area of the Americas (FTAA)—a free trade agreement embracingmost Western Hemisphere countries. U.S. foreign aid recipient countries havea different built-in preference, as sourcing is restricted for many foreignaid–supported transactions.

The type of buyer can influence the price. Original equipment manufactur-ers (OEMs) usually enjoy lower pricing for the materials they buy, at least forsubstantial quantities. Products sold through importing distributors that main-tain inventories and supply local dealers might be offered on both dealer anddistributor price lists. Direct end-user sales would obviously require yet anotherprice list.

Beware of the Internet! Many sellers provide their domestic price lists ontheir websites. This has the unintended consequence of also making them avail-able to prospective customers overseas. Since the selling prices in foreign mar-kets include freight, duty, and often an importer profit, they are often higherthan corresponding domestic prices in the originating country, a situation thatmany overseas buyers find difficult to understand.

CURRENCY

Sellers may wish to enhance their competitive positions by invoicing in for-eign currencies. Obviously, U.S. sellers doing this run the risk of receivingfewer dollars than anticipated should the value of the dollar increase in terms ofthe invoiced currency. The converse is also true; an increase in the value of theinvoiced currency would result in more dollars.

Foreign currency invoicing should be limited to stable currencies that arereadily convertible. Payment terms are also a factor. Fewer days outstandingmeans lower risk of major adverse currency shifts.

There are two ways that sellers invoicing in foreign currency may reduce oreliminate their foreign exchange exposure. Both work best for reasonably largetransactions, we’ll say $50,000 or more, and both involve an additional fee. Bothare available from banks or currency exchanges.

Foreign Exchange Option

The foreign exchange option is akin to an insurance policy, providing the rightto exchange a predetermined amount of one currency for a predeterminedamount of another at a specified future date.The option holder decides whetheror not to exercise the option, depending on how the exchange rate of the day(called the “spot” rate) compares to the option rate on the option date. This isthe safest way to protect foreign currency accounts receivable, but entails pay-ment of the option fee regardless of whether the option is used.

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Forward Contracts

The forward exchange contract is an agreement to exchange a predeterminedamount of one currency for a predetermined amount of another on a specifiedfuture date. Unlike the forward exchange option, both parties are obligated todo so, regardless of what the spot rate may be. This removes the possibility ofexchange profit, but pegs the foreign currency receivable to an agreed amountof dollars.

Caveat

A word of warning is appropriate here about foreign exchange options and for-eign exchange contracts. Both rely on the exporter having the foreign currencyat its disposal at the maturity date. Sellers invoicing in foreign currency shouldbe sure their customers clearly understand exactly when and how paymentsshould be made. Needless to say, foreign currency invoicing should be providedonly to buyers whose credit is unquestioned. Better yet, try to couple foreigncurrency billing with secure terms of payment. A likely result would be a letterof credit, which we will cover in Chapter 12.

Naturally, the cost of an option or the exchange rate of a contract will reflectthe contracting parties’ comfort level in both currencies. Savvy exporters makesure they can obtain coverage and get an idea of the approximate cost beforeoffering foreign currency billings.

FINE-TUNING

Inevitably, there will be some fine-tuning of price lists to accommodate individ-ual situations. It is best to anticipate this by building in some flexibility whilecreating these lists.

Discounts

It is a fact of life that most buyers will resist paying the full list price.While hon-oring all requests for lower prices makes the price lists meaningless, there aresome circumstances where discounts are appropriate. The most obvious is aquantity discount in return for a large order, and this applies to most industries.Cash discounts are also widely used, particularly for large orders or for productsnormally purchased on extended terms of payment. Discounts are often used inindustries that work on a seasonal basis. Orders placed at certain times of theyear are far more important than those placed in season, and “early buy” dis-counts or floor-plan financing are a common industry practice.

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When extending discounts, be sure to ask the buyer how this should beshown on the commercial invoice. Possibilities include showing the discount asa line item or rolling it into the basic price.

NAFTA eligibility is another consideration for products having foreignmaterial content and qualifying under the transaction value basis regional valuecontent formula. Reducing the price could put it out of compliance, so that adiscount of, say 5 percent, could result in the buyer’s needlessly paying 10 per-cent or more in import duty. We will cover NAFTA eligibility later in this chap-ter, but keep this in mind when offering discounts to buyers in countries withwhich we have free trade agreements.

Minimum-Order Charges

Export shipments often require detailed documentation.While most sellers willgladly handle this for large orders, the time and expense can easily eat up theentire profit for small ones. For this reason, many sellers impose a handlingcharge for export orders below a certain size or value.This is not to be confusedwith the shipping and handling charges levied by mail-order houses, sinceexport-handling charges are in addition to the cost of freight. One nice thingabout including such charges on export price lists is that they can be selectivelywaived, such as for occasional small orders placed by large customers or over-seas trading partners.

Another approach is to invoke a minimum quantity or value, below whichorders will not be accepted. This eliminates unprofitable small orders, butmisses the possibility of making small orders profitable by using a handlingcharge.

THINGS TO AVOID

There are some trade practices that do not make economic sense or involvedeception. As such, reputable U.S. sellers should avoid them.

Rebating

A rebate is the refund of a portion of the purchase price after a transaction hasbeen completed. Rebates are usually extended to encourage buyers to achievecertain volumes of purchases, and work well in domestic business. However,they should not be used for export because foreign buyers normally pay importduty and local taxes on the invoiced value. Whenever possible, rebates to whicha foreign buyer is likely to be entitled should be used to reduce the selling priceas invoiced, thereby avoiding the overpayment of duty because of higher-than-necessary invoiced prices.

Things to Avoid 145

Under-Invoicing

Under-invoicing is the act of deliberately providing a commercial invoice show-ing a lower-than-actual value. Sellers should not engage in this practice as it maybe punishable as fraud by the U.S. government.The U.S. has treaties with a num-ber of other governments to cooperate with each other to uncover such activitythrough interchanging customs information and reciprocally prosecuting suchactivities.

Sellers should also consider what kind of buyer would propose such ascheme. A person willing to defraud his or her own government would thinknothing of doing the same to someone in another country.

Incidentally, it is widespread under-invoicing that forces governments toimpose preshipment inspection regulations that we saw in Chapter 3 (and willsee again in Chapter 11). These add to transaction cost and risk for seller andbuyer alike.

Over-Invoicing

Strange as it seems, there are circumstances where buyers ask their suppliers toinvoice them at higher-than-agreed prices. Typically, these requests arise fromregulations in the buyer’s country that prohibit or limit access to foreign cur-rency.

Government foreign exchange control regulations normally requireimporters to obtain prior approval by applying for import licenses. Access toforeign exchange to pay for authorized imports is normally tied to importlicenses. Therefore, an import license becomes the key to foreign exchangeavailability. For this reason, buyers would ask their suppliers to quote andinvoice at higher-than-agreed pricing, and to open or credit a U.S. bank account(which they are not supposed to have) with the resulting surplus.

Another possible reason may be a buyer’s attempt to show artificially lowerprofit on import transactions by exaggerating costs to avoid local income taxes.A third reason could be an attempt to launder money. Over-invoicing andunder-invoicing involve a seller cooperating with a buyer’s attempt to circum-vent his or her national law. Both involve misrepresentation, and presumablyboth may be prosecuted here. The possibility of money laundering terroristactivity makes the stakes even higher.

It should be noted that buyers requesting over-invoicing are willing to payhigher-than-necessary import duty. This could indicate real desperation toobtain hard currency, to avoid income tax, or to secretly move money fromcountry to country. Any of these should be of interest to the exporter’s Creditdepartment. The Compliance department should also be interested, especiallywhen the reason isn’t obvious economic instability in the buyer’s country.

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Dumping

Dumping is defined as the selling of a commodity in a foreign market at lessthan fair value. Most governments, including the United States, have legislationin place to protect their home markets from dumped foreign-origin products.Normally, countries will impose punitive antidumping duties on imports foundto have been dumped.

In considering whether a product is being dumped, governments typicallycompare the price charged importers in its country to the local price in thecountry of origin as well as to the price importers in other countries pay.

The World Trade Organization (WTO) rules recognize dumping as a poten-tially unfair trade practice that can disrupt markets and injure producers ofcompetitive products in the importing country. In the WTO Agreement onImplementation of Article VI of GATT 1994, WTO member countries createdmore detailed rules governing their ability to take action against imports sold atan unfairly discounted export price. One of the changes was a new Committeeon Anti-Dumping Practices, which countries must promptly notify concerningany antidumping actions that they take.

Since procedures and reference prices differ from country to country, thequestion of whether a product is being dumped is an issue between the buyerand his or her government. However, sellers may be required to submit pricinginformation for such inquiries in order to prove that the product is not beingdumped.

PREFERRED DUTY TREATMENT

The United States participates in three free trade agreements under whichU.S.–origin goods receive preferential duty treatment from participating coun-tries. This makes U.S. products more competitive in these markets than theywould otherwise be and therefore has a bearing on export pricing. It may alsoinfluence materials sourcing for manufacturers, as each agreement has its ownorigin rules for determining product eligibility.

We will cover the cost and price effects here.The enabling documentation isfound in Chapter 11.

Israel

The United States–Israel Free Trade Agreement came into force in 1985. As itspecified a ten-year phase-out of duty, all qualified goods originating in bothcountries became duty free on January 1, 1995. All products meeting the originrequirement are covered by this agreement.

Preferred Duty Treatment 147

The main conditions for admission under the Free Trade Area (FTA) Agree-ment between the United States and Israel (the Agreement) are found in Chap-ter 11 along with an illustration of the required original certificate. For now, it issufficient to note that the minimum amount of U.S. origin content is 35%.

Jordan

The United States–Jordan Free Trade Agreement came into force on December17, 2001, and will eliminate tariffs on virtually all trade between the two coun-tries within 10 years. The tariff reductions are in four stages. Current tariffs ofless than 5 percent will be phased out in two years. Those that are now between5 and 10 percent will be eliminated in four years. Those between 10 and 20 per-cent will be gone in five years. Those that are now more than 20 percent will beeliminated in 10 years.

This agreement is noteworthy as it also covers services, intellectual propertyrights, and electric commerce. Labor and environmental concerns are also cov-ered.

Eligibility criteria can be found through the U.S.Trade Representative web-site at www.ustr.gov/regions/eu-med/middleeast/US-JordanFTA.shtml. Gener-ally, the sum of the cost or value of materials produced in the exporting country,plus the direct costs of processing operations performed in the exporting coun-try, must be not less than 35 percent of the appraised value of the article at thetime it is entered into the importing country. For the purpose of determining the35 percent U.S.–content requirement under the agreement, the cost or value ofmaterials that are used in the production of an article in the United States thatare products of Jordan, may be counted in an amount up to 15 percent of theappraised value of the article.

Unlike Israel and NAFTA, it is the Jordanian importer that prepares the eli-gibility certification. However, as this agreement is very new, U.S. exporters areurged to visit the above website for details and contact their Jordanianimporters to learn of any documentary requirements they may have. U.S.importers should visit the Customs website at www.customs.gov/impoexpo/usjfta.htm for compliance information.

NAFTA

The North American Free Trade Agreement among Canada, Mexico, and theUnited States came into force in 1994. This treaty calls for progressive reduc-tions in the amount of import duty that a participating country (called a“party”) may charge on NAFTA-eligible goods produced in another NAFTAparty.

148 Export Pricing

The preexisting free trade agreement between Canada and the UnitedStates was largely grandfathered into the NAFTA and remains the primary dutyreduction mechanism for trade between the two countries. Since these phase-outs began on January 1, 1989, virtually all products made in the United Statesand Canada became duty free as of 1998.

NAFTA Duty Phaseout When the NAFTA was created to include Mexico,the three parties agreed that applying the tariff reductions already achievedbetween Canada and the United States would cause intolerable strain on theeconomies of all three countries. Instead, new tariff reductions apply toNAFTA-eligible goods traded between Mexico and the United States, andbetween Mexico and Canada. The goal is totally free trade in NAFTA-eligiblegoods among all three parties by the year 2008.

The NAFTA treaty created the following category code to standardize thephaseouts. These code letters will always signify the same percentages, regard-less of the direction a product takes. However, depending on how the negotia-tions for a particular NAFTA-eligible good worked out, a NAFTA membercountry may assign one letter if the good originates in one of the other NAFTAcountries, and a different letter for the same good originating in the otherNAFTA country (see Exhibit 6.1).

The individual tariff-reduction schedules of the three parties are shown inNAFTA Annex 302.2. Each uses the category codes (A through D) shown inExhibit 6.1.The Mexican version considers NAFTA-eligible products originatingin either the U.S. or Canada. The Canadian version considers NAFTA-eligibleproducts originating in Mexico, or in the United States, or of joint Mexican–U.S.origin. The U.S. version considers NAFTA-eligible products originating inCanada and Mexico. Do not confuse these tariff-reduction schedule letters withthe origin criteria letters A through F that we will see later in this chapter.

NAFTA 149

Exhibit 6.1 Category Code Phaseout Time (Years from January 1, 1994)

A became duty free immediatelyB 5 equal yearly stagesB1 6 equal yearly stagesB+ year 1–20%

year 2–0%years 3 through 7–10% per yearyear 8–30%

C 10 equal yearly stagesC+ 15 equal yearly stagesD formerly duty free, remains duty free

The NAFTA does not apply to countervailing duty actions where one of themember countries suspects unfair government subsidy on the part of one orboth of the others.As this book is being written (mid-2002) there is a raging dis-pute between the U.S. and Canada over wood, resulting in high U.S. counter-vailing duty on affected Canadian products. NAFTA countries are alsopermitted to impose antidumping duties on products that are offered for sale bysuppliers in another member country at prices so low as to be considered unfair.There are also several dumping disputes between the U.S. and Mexico.

Need for Correct Classification Since all three NAFTA parties belong tothe Harmonized System of Classification, the agreement was constructedaround the six-digit HS classification numbers. As a few items cannot be ade-quately described with only six digits for NAFTA purposes, additional numberor letter suffixes have been added to them.These are found in Section 401.Withthese few exceptions, the NAFTA relies almost entirely on the six-digit HSnumbers. For U.S. exporters, this is the first six digits of the Schedule B number.For U.S. importers, this is the first six digits of the Harmonized Tariff Scheduleof the U.S. Annotated (the HTSUSA). Either way, the six-digit number will bethe same.

As both NAFTA eligibility and duty phaseout are driven by the HS classifi-cation numbers, it is vital that exporters classify their products correctly. Fur-ther, manufacturers using non-NAFTA-eligible materials must have the correctclassification numbers for them, as well as for the goods that they export, inorder to determine eligibility.

NAFTA Treaty The NAFTA treaty consists of five volumes (actually six forU.S. and Canada, since our previous free trade agreement was largely grandfa-thered into the NAFTA). Volume One is the treaty itself. Volume Two is Annex401, which, as we will see, is extremely important in determining NAFTA eligi-bility. Volumes Three, Four, and Five comprise tariff reduction schedules(Annex 302.2).

NAFTA Eligibility There are six criteria for determining NAFTA eligibility,and for most products complying with any one will suffice. The following ismerely a brief overview. Readers are urged to visit the U.S. Department ofCommerce Office of NAFTA and Inter-American Affairs website at www.mac.doc.gov/nafta/ before attempting to determine eligibility.

1. Criterion A applies to goods wholly obtained or produced entirely withinthe territory of one or more of the NAFTA countries.This applies largely tobasic items such as raw materials, agriculture, animals, etc.

2. Criterion B applies to goods produced entirely within the territory of oneor more of the NAFTA countries and containing some non-NAFTA-

150 Export Pricing

eligible materials. Eligibility is conferred either when the total value of non-NAFTA-eligible materials falls below 7 percent of the producer price of thegood, or when the good satisfies the tariff shift or regional value contentrequirements specified in Annex 401. “Tariff shift” is the difference in HSclassifications between a good and its non-NAFTA materials. “Regionalvalue content formulas” compare the values of the good and its non-NAFTA-eligible materials as a percentage. There are two formulas. The“transaction value” formula compares the selling price of the good withthe value of its non-NAFTA content. The “net cost” formula compares thegood’s cost of production to the value of its non-NAFTA content.

3. Criterion C applies to goods produced entirely within the territory of oneor more of the NAFTA countries exclusively from originating materials.The originating materials may themselves contain some non-NAFTA-eligible materials in prior manufacturing, provided they have achievedNAFTA eligibility.

4. Criterion D applies to goods produced entirely within the territory of oneor more of the NAFTA countries and contain more than 7 percent of non-NAFTA-eligible materials, and cannot qualify for Criterion B because thematerials, although differing in nature from the finished product, are classi-fied the same as the finished product under the Harmonized System. Suchgoods must satisfy one of the regional value content formulas. Criterion Ddoes not apply to goods classified in Chapters 61 through 63 of the Harmo-nized System.

5. Criterion E confers NAFTA eligibility on certain nonoriginating electronicgoods once they have been imported into one of the NAFTA countries.

6. Criterion F applies to certain agricultural goods.

NAFTA eligibility is evidenced by a certificate of origin as illustrated inChapter 11. This is prepared by the seller and given to the buyer to provide hisor her customs officials on request. Unlike the U.S.-Israel Free Trade Agree-ment, NAFTA permits blanket certification, that is, one certificate per buyer peryear itemizing the items for which eligibility is claimed.

COUNTERTRADE

The term countertrade means that the seller agrees to take some or all of thepayment due in the form of products rather than money.This means of paymentis most often used in dealing with markets that have shortages of convertiblecurrency, such as developing countries or those just emerging from command-economy trade policies. However, as we will see with offset requirements, it canalso be used to sweeten deals for large project contracts.

Countertrade 151

Barter

Barter is exchanging goods for goods, services for services, or any portionthereof. It is used primarily when one of both countries have a shortage of hardcurrency and nevertheless desire to trade. This is basic countertrade—tencanned hams for a pair of shoes.

Buy-Back

Buy-back (also called “compensation”) is a means of payment used principallyto finance manufacturing facilities where the seller agrees to take part of theproduction of the facility as payment. For example, the sale of a turnkey bicyclefactory where 60 percent of the price is paid in money and 40 percent in bicyclesproduced by the new factory. Besides reducing the required amount of start-upcapital, this arrangement provides the buyer with assurance of the seller’s ongo-ing interest in the quality of production.

Counterpurchase

In this case, the exporter agrees to buy goods that are unrelated to the salebecause the buyer does not have access to hard currency. The way this oftenworks is that the seller invoices in the buyer’s inconvertible national currency, ispaid, and uses it to locally purchase goods in the buyer’s country.

Offset Requirement

Offset contracts require the seller to purchase goods and services from thebuyer’s country in return for a large supply contract. This is normally a require-ment of the buyer’s government, and is often related to government or para-statal procurement.

A direct offset might involve the sale of 200 commercial aircraft to countryK, and require that the seller license technology and train factory personnel incountry K to build and supply the wings.This not only reduces the hard currencycost of the airplanes, but also provides new technology to the importing country.On the other hand, there is little difference between indirect offsets and coun-terpurchase agreements.

Swaps

Swaps involve trading of fungible (commercially identical) or nearly identicalproducts to save transportation charges. Thus is often done between Canadaand the United States, for instance with oil, because of our close north-southproximity and great east-west distances.

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Ramifications

With the exception of goods provided under direct offset or swaps, anythingother than money received in payment will probably entail additional costs forthe seller. Unless the goods obtained in barter, buy-back, or counterpurchaseare of direct use to the seller, they must be resold in order to yield the money forwhich they are substituted. Also, transportation and import clearance costs willbe incurred in moving goods to the seller in lieu of money. Not only will this takelonger than if payments were made with money, but it may involve the risk ofthe goods not fetching the anticipated price. A second risk is whether the qual-ity of the goods turns out to be as good as anticipated. Of course, the reverse isalso true. There is a possibility that the goods may appreciate in value, so theseller earns more than if payment were made in money. Still, most sellers wouldprefer to avoid the additional burden involved in disposing of goods that weretaken in lieu of money for the sole purpose of making a deal happen.

Fortunately, there are specialized companies that broker countertrade dealsto relieve sellers of unwanted merchandise. They charge a fee or agree to buycountertraded goods at discounted prices, and sellers should keep this in mindwhen estimating their real cost in a countertrade deal.

Since goods provided as part of payment in a deal with direct offset require-ments are often used by the seller in the production of the product, the questionof what to do with countertraded goods does not apply. However, the seller willhave expenses in licensing a company in the buyer’s country to produce the off-set goods, and also runs the long-term risk of creating a future competitor.

Swapped goods are normally so similar as to preclude any disposal problems.

Outside Help

Help is available online from the American Countertrade Association at www.countertrade.org.The website includes a roster of nearly 50 member companieswith countertrade facilities, including such household names as 3M, AT&T,Boeing, General Electric, Lucent, and Motorola.

LINKAGES

Obviously export pricing must be related to both costs and proper trade conduct.

• Purchasing. Consult with Manufacturing and Compliance when consideringa vendor change that may affect a material’s country of origin to make surefree trade eligibility for the product is not compromised.

• Compliance. Keep Purchasing informed of all U.S. duty preferences for im-ported items to guide overseas materials sourcing.

Linkages 153

Keep Sales, Traffic, and the outside forwarder informed of whateverrequirements must be addressed to obtain drawback.

• Sales. (Or whichever department handles export pricing) should ensure thatit has accurate information on product costs and on which markets providepreferential duty treatment for U.S. products.

Inform both Compliance and Credit of any requests for under-invoicingor over-invoicing. Of course, these requests should be refused.

ENDNOTES

1. “Export Pros Reveal Top Strategies for Cutting Costs,” IOMA’s Report on ManagingExports, Issue 02-02, February 2002, pages 1, 10, 11, 12.

2. A Basic Guide to Exporting—1998 Edition, U.S. Department of Commerce, page 81.

154 Export Pricing

Chapter 7

Terms of Sale

Terms of sale identify and assign costs, risks, and responsibilities between sellersand buyers in contracts of sale. As a basic ingredient of sales contracts, they areobviously subject to agreement by both parties.

As we will see in Chapter 9, most countries permit considerable freedomwith contract terms. Although sellers and buyers may be free to agree to anyconditions they wish, both parties are usually better off using well-establishedsales terms rather than inventing their own. The advantages are obvious. It isusually much easier to adopt existing practices than to go to the bother of cre-ating one’s own. The parties can refer to benchmark terms to ensure that theyfully understand their respective obligations. These same terms also would beavailable for reference to others outside the sales contract but indirectlyinvolved in fulfilling it, such as forwarders, carriers, and insurers. Finally, in caseof a dispute, judges and arbitrators could refer to well-established terms, ratherthan having to determine what the parties actually intended.

The advantages of using well-established sales terms are even greater in for-eign trade where, by definition, seller and buyer are located in different coun-tries. This implies different trade practices and legal systems, customs, and oftenlanguages. Obviously, anything that can provide consistency makes life easierfor all concerned.

Fortunately, the International Chamber of Commerce (ICC) provides termsof sale called Incoterms that are widely used in international trade throughoutthe world. As Incoterms have been around since 1936, they enjoy a degree offamiliarity that only well-established rules can have. Periodic revisions ensurethat they reflect current trade practice, and the latest version, Incoterms 2000®,has been translated into more than 30 languages. However, the ICC is a privateorganization rather than a government and therefore cannot write law.Although sellers and buyers are free to use Incoterms and benefit from theirmany advantages, they are under no obligation to do so.

155

While Incoterms are the only logical choice for most sellers and buyers,U.S. parties have what may at first seem to be an attractive alternative. As itsname implies, the American Foreign Trade Definitions of 1941 was an attemptto create sales terms for Americans to use in international trade. While thename may sound great to American traders, these terms suffer from some obvi-ous flaws. They have not been revised since 1941 and do not reflect such com-mon trade practices as air freight, containerization, multimodal transport, orany communications faster than airmail or cablegram. Since they have notbeen widely translated, they are known only to Americans and overseas partiesthat have a long history of dealing with Americans. Finally, their very nameimplies a bias toward U.S. traders, making them less than attractive to people inother countries.

Although few people would knowingly specify these obsolete America-centric sales terms, they enjoy a surprising level of use for three reasons:

1. Many companies copy the last file without fully understanding what they aredoing or why they do it. Some trading relationships go back many years—solong that antiquated terms and conditions have become embedded even incurrent transactions.

2. For many years, the United States has been a net importer of goods. Thismeans that we are more often buyers than sellers. Our overseas supplierstend to accommodate us by doing business our way either because “the cus-tomer is always right” or they mistakenly believe that a set of rules likeIncoterms is too sophisticated for us to handle. While the first reasonapplies only to imports, many overseas buyers of U.S. goods believe the sec-ond, whether consciously or otherwise.

3. To some extent, the logic behind the American Foreign Trade Definitions of1941 continues to exist in the terms of sale that we use with each other indomestic commerce—the Uniform Commercial Code (UCC).

Whatever the reason, continued reliance on obsolete sales terms puts U.S.exporters at a marked disadvantage. Both our overseas customers and competi-tors understand and use Incoterms as part of their everyday commercial activities.

This chapter will assist U.S. exporters in the correct use of Incoterms byexplaining in detail how each term works. We will then compare them to theUniform Commercial Code, which should already be somewhat familiar tomany readers.

For maximum benefit and ease in understanding, readers should have a copyof Incoterms 2000® available for quick reference while reading this chapter.1

Before we can proceed, we will need to understand four basic definitions:

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1. Precarriage. Transportation from the place where a shipment originates tothe departure point on the seller’s side (e.g., a movement by truck or railfrom a seller’s factory to the port or airport on the seller’s side). ManyAmericans call this “inland freight,” but precarriage is more precise, asthere is often another inland freight movement on the buyer’s side.

2. Main carriage.Transportation from the seller’s side to the buyer’s side.Thisis usually an ocean or airfreight movement for U.S. exports.

3. On-carriage. Transportation from the point of arrival on the buyer’s side tothe place where the shipment ends.This is inland freight on the buyer’s side.

We will see how these definitions play out as freight terms in Chapter 10. Fornow, it’s enough to keep in mind that these three transportation segments musttake place in virtually all international sales of goods.They may involve one car-rier or several, or even the seller or buyer acting as a carrier with his or her owntruck. It doesn’t matter as far as Incoterms are concerned.

The fourth term is a “clean” transport document—quickly defined as onewithout any notation of damage or shortage.When carriers accept cargoes, theycheck for obvious signs of damage or shortage, to protect themselves fromincurring liability for any preexisting conditions. Any such problems arerecorded by each carrier on the transport document it issues or signs, and suchdocuments are termed “foul” or “claused.”This becomes all the more significantin foreign trade where handing off cargo from carrier to carrier is common prac-tice. Sellers evidence compliance with any transportation obligations they incurunder Incoterms by obtaining clean documentation.

WHAT INCOTERMS ARE

Incoterms are scenarios of seller-buyer responsibilities, costs, and risks used ininternational sales of goods. The current version, Incoterms 2000, consists of 13such scenarios, each listing commonly required tasks that it assigns to either theseller or buyer, as the case may be. This is done in matching-column form. EachIncoterm has one column for seller, numbered A 1 through A 10, and anotherfor buyer, numbered B 1 through B 10. Depending on the task-distribution ofeach Incoterm, each applicable task is placed in either the seller or buyer col-umn. For instance, two Incoterms—CIP and CIF—specify that the seller isobligated to provide insurance. These two terms place insurance as an obliga-tion on the seller column (A), and the phrase “no obligation” in the buyer col-umn. (B). The other eleven Incoterms put the phrase “no obligation” in theseller’s column. This is not to say that insurance isn’t necessary, only that theseller has no Incoterm obligation to the buyer to provide it.

What Incoterms Are 157

There are two tasks that are constant throughout all 13 Incoterms. Provisionof goods in conformity with the contract is always a seller obligation, so itappears in the seller column for all 13 Incoterms. Payment of the price is alwaysa buyer obligation, and appears in the buyer column for all 13 Incoterms. (Thisisn’t a term of payment as it does not say how or when payment is due—onlythat the buyer is obligated to pay the price.)

Abbreviations and Groupings

Each Incoterm has a three-letter abbreviation as follows:

• Ex Works (EXW)

• Free Carrier (FCA)

• Free Alongside Ship (FAS)

• Free On Board (FOB)

• Cost and Freight (CFR)

• Cost, Insurance, and Freight (CIF)

• Carriage Paid To (CPT)

• Carriage and Insurance Paid (CIP)

• Delivered At Frontier (DAF)

• Delivered Ex Ship (DES)

• Delivered Ex Quay (DEQ)

• Delivered Duty Unpaid (DDU)

• Delivered Duty Paid (DDP)

For convenience, the 13 terms are divided into 4 basic groupings:

1. Departure—group E

2. Main Carriage Unpaid—group F

3. Main Carriage Paid—group C

4. Arrival—group D

As you can see, the first letter of the Incoterm corresponds to the letter of thegroup in which it is located.

There is only one Incoterm in the E group—EXW. The F group containsthree: FCA, FAS, and FOB. There are four C group terms: CFR, CIF, CPT, andCIP. The remaining five Incoterms are found in the D group: DAF, DES, DEQ,DDU, and DDP.

158 Terms of Sale

Transportation Modes and Places

Some Incoterms are restricted to certain means of transportation. FAS, FOB,CFR, CIF, DES, and DEQ may be correctly used only when main carriage trans-portation takes place by vessel. FCA, CPT, CIP, DDU, and DDP are called“omnimodal,” as they may be used for all modes of transportation includingvessel. DAF is also omnimodal, but is normally used only for ground trans-portation, as it requires that the delivery point be at a land border. EXW is notaffected by the mode of transportation, as it involves making the goods avail-able before shipment takes place, and is therefore “nonmodal.”

Each Incoterm must be accompanied by a geographic place. For EXW, it isthe place where the shipment begins, usually the seller’s premises. The placeaccompanying each F group term must be a place on the seller’s side. Since FCAis omnimodal, it may be any agreed place on the seller’s side. Conversely, as FASand FOB are marine-restricted, it must be an agreed port on the seller’s side.The place for each C group term must be on the buyer’s side. Since CPT andCIP are omnimodal, it may be any agreed place on the buyer’s side. However, asCFR and CIF are marine-restricted, the place must be an agreed port on thebuyer’s side. Four of the five D group terms require the place to be on thebuyer’s side. DDU and DDP are omnimodal, so it may be any agreed place onthe buyer’s side. Both DES and DEQ are marine restricted, so it must be anagreed port on the buyer’s side.The place for DAF must be at a frontier prior toimport clearance, so any agreed place on any agreed land border will do.

These rules for determining place must be strictly observed. E and FIncoterms must be accompanied by places on the seller’s side, while all C and Dterms (except DAF) must be accompanied by places on the buyer’s side. Thiscan be a difficult concept to grasp for Americans accustomed to domestic busi-ness, because under the Uniform Commercial Code it is possible to have such athing as “FOB destination.”

Assigning a definite place may prove difficult at the start of a transaction.Often, sellers will make a preliminary quotation before any transportation deci-sions are made. In these situations, they may use a range of places, such as “U.S.East Coast port” or “Bordeaux-Hamburg range.” Specificity can be added lateras the transaction matures. The important thing to remember is that no Inco-term is complete without a place, or at least a range of places.

Finally, each Incoterm defines the place where the seller’s responsibility for thecondition of the shipped goods ends.Depending on the Incoterm chosen, this couldbe the seller’s loading dock, the buyer’s loading dock, or anywhere in between.

Nonadversarial

Incoterms are not intended to turn sellers and buyers into adversaries. On thecontrary, they are designed to promote harmony by helping to avoid any poten-

What Incoterms Are 159

tial confusion resulting from one party or another misunderstanding his or herobligations. Indeed, there are situations where common sense dictates that oneparty is better equipped than the other to handle an emergency—perhapsbecause it takes place in his or her country. In such cases, that party is encouragedto exceed its Incoterm obligation and help if requested, but if this happens it isdone at the cost and risk of the party to whom assistance is rendered.

This statement deserves an example. As we will see shortly, under the FCAterm, the seller’s responsibility for the condition of shipped goods ends oncethey have been handed over to a buyer-appointed carrier. Let’s assume thatsevere damage takes place after the goods have been handed over to a buyer-appointed ship line at a port on the seller’s side, and a survey report is required.Although the seller has completed the FCA Incoterm obligations and is notrequired to do anything further, he or she would be extremely petty by refusinga request for help from the buyer. After all, the event happened in the seller’scountry and the goods are still there. However, if doing so were to become time-consuming, risky, or expensive, any risk and costs would be for the buyer’saccount.

LIMITATIONS OF INCOTERMS

Incoterms have some built-in limitations. Some are deliberate while others aremerely a fact of life.

Tangible Goods and Sales Contracts

Incoterms apply only to contracts for the sale of tangible goods. Further,although the International Chamber of Commerce has determined thatIncoterms may be used for domestic sales contracts, Americans should refrainfrom doing so. Our Uniform Commercial Code works quite well for domestictransactions and enjoys the dual advantages of being both law and widelyunderstood by Americans. So, use Incoterms only for international sales con-tracts for tangible goods, and use the Uniform Commercial Code for domestictransactions.

While Incoterms are not intended to be used anywhere except in the salescontract, they task either the seller or the buyer to enter into such additionalcontracts as may be necessary to fulfill their sales-contract obligations. Forinstance, although Incoterms are not used in contracts of carriage, the C and allD terms (except DAF) task the seller with arranging and paying for main car-riage. Incoterms are not used in insurance contracts either, but CIF and CIP taskthe seller with providing insurance cover. These non-sales contracts thatIncoterms influence are called “subsidiary contracts.”

Incoterms speak only to the obligations that sellers and buyers have to each

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other. This may produce some results that at first appear strange in some of thematching columns. For instance, both the Seller and Buyer columns under theEXW term say “no obligation” for the task of contracting carriage. How can thisbe? The answer is that under this Incoterm, the seller’s responsibility and costend with placing the export-packed shipment on his or her loading dock, avail-able for pickup by the buyer.The buyer has no obligation to the seller to arrangefor pickup and carriage. However, the buyer will do so in his or her own self-interest, since the goods would otherwise sit on the loading dock at his or herrisk, while the seller would be entitled to payment, having completed all itsIncoterm tasks. The easiest way to keep track of this is to ask yourself the fol-lowing two questions each time you use an Incoterm:

1. What obligations has the seller to the buyer?

2. What obligations has the buyer to the seller?

Not Law

Incoterms are not law. We mentioned this earlier, but it needs to be reinforcedfor U.S. readers who compare Incoterms to the Uniform Commercial Code.Rather than law, Incoterms are “creatures of contract.” In order to apply to asales contract they must be specified, but once they are, they become part of thedeal. Sellers normally specify them in their proforma invoice quotations, whilebuyers do so in their purchase orders. (As we will see in Chapter 9, a contractcan be as simple as an offer and a corresponding acceptance.)

Strange as it seems, there is a big advantage in Incoterms not being law.Laws are written by governments, usually by people not directly involved in thetopics they legislate. Once written, they are extremely difficult to change (e.g.,the U.S. Carriage of Goods by Sea Act dates back to 1936 and defies revision forpolitical reasons, although everyone knows its $500-per-package liability limit ishopelessly obsolete). By contrast, Incoterms are written by trade professionals:exporters, importers, carriers, forwarders, customs brokers, and insurers. Fur-ther, Incoterms can be changed whenever the International Chamber of Com-merce determines that they no longer adequately reflect current trade practice.

While not themselves law, Incoterms dovetail nicely with the body of lawthat covers most international sales of goods, the United Nations Conventionon Contracts for the International Sale of Goods (variously called the CISG orVienna Convention).

Ownership Transfer

Incoterms do not speak to transfer of ownership.This is another difficult conceptfor American readers to grasp because Uniform Commercial Code sales termsoften convey title. In foreign trade, ownership is conveyed either elsewhere in

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the contract of sale or perhaps through possession of a negotiable ocean bill oflading issued to cover a vessel shipment.

Possession Rights

Incoterms do not directly speak to possession rights to the shipped goods. Inforeign trade, this is determined by the manner in which the main-carriagetransport document is consigned for a very practical reason; the main carrierlooks to it for the terms and conditions of delivery. However, Incoterms indi-rectly influence possession rights by tasking one party or the other with maincarriage. The party contracting for main carriage is in a position to give instruc-tions to the carrier—including the disposition of the shipped goods.

Customs of the Port and Customs of the Trade

Incoterms cannot accommodate port or trade customs. Given the number anddifferent features of all ports in the world, Incoterms could not possibly addresssuch variables as fee schedules and port practices. Instead, sellers and buyers areurged to determine them for the ports they plan to use. Further, some matureindustries have trade customs that everyone in the business knows and fol-lows, and that apply only to that particular industry. This practice gives rise toindustry-specific contracts, a situation that exists in such basic industries as tim-ber, oil, grain, etc. Incoterms cannot accommodate such “customs of the trade.”Sellers and buyers in such industries are encouraged to look first to any estab-lished trade contracts, and use Incoterms to fill in for areas they do not cover.

Insurance

Only two Incoterms, CIF and CIP, task either party with the responsibility ofproviding cargo insurance cover, and both make it a seller obligation.The othereleven Incoterms show “no obligation” next to insurance in both the seller andbuyer columns. Does this mean that no one should insure? Absolutely not! Itmeans only that under these 11 Incoterms, the seller has no insurance obligationto the buyer, and the buyer has no insurance obligation to the seller.The partieshave an obligation to common sense to arrange for adequate coverage, andshould do so outside of these eleven Incoterms.

Even CIF and CIP do not do an adequate job of covering insurance. Whileboth task the seller with insurance, they accept minimum cover (LondonUnderwriter Institute Clauses C or American “Free of Particular Average—FPA”) as seller compliance. As we will see in Chapter 8, this coverage is inade-quate for most shipments. Sellers and buyers should enhance these twoIncoterms by agreeing on a more acceptable level of coverage.

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There are two reasons for the minimum-cover default position on insurance,and both have to do with the fact that this is the lowest-cost cargo insuranceavailable:

1. Some countries require that local businesses purchase their insurance fromlocal insurance companies. Often, such insurers have less-than-enviabletrack records, or pay claims only in local inconvertible currency (which areprobably the reasons their governments have this sort of requirement).Since the coverage these companies provide is questionable at best, the CIFand CIP Incoterms specify minimum coverage in order to minimize theamount of money spent for it. Presumably, the other party will not be undersuch restrictions and can provide more reliable coverage on his or her side.

2. Goods are sometimes sold while in transit, particularly those shipped byvessel. Each successive buyer may want to arrange for his or her own insur-ance, particularly as the price of the shipped goods is likely to increase fromsale to sale. Minimum cover may suffice until each subsequent buyerarranges better coverage in situations where the goods have already beenvessel-loaded and are covered by a clean ocean bill of lading.

Other than the above two situations, minimum cover cargo insurance maybe adequate only for very low-value cargo like scrap.

SIMPLIFIED VIEW OF TASKS

Before we can consider the 13 Incoterms individually, we need some idea ofwhat is involved in an export shipment. While the following is not intended toreplace the detailed descriptions found in the ICC’s official Incoterms 2000, itwill provide the minimum needed to explain how Incoterms work:

• Someone must have the correct goods available for shipment whenpromised. This is a seller obligation in all 13 Incoterms.

• Someone must mark and pack the goods for export. This is a seller obliga-tion throughout the 13 Incoterms. However, in situations where the sellerdoes not arrange for main-carriage transport, the export-packing obligationexists only to the extent that he or she is made aware of the means of trans-portation. For instance, shipments made by vessel normally require more“heroic” packing than those made by air or ground.

• Someone must arrange and pay for pre-carriage. This may be either a selleror buyer responsibility, depending on the Incoterm selected.

• Someone must arrange for export clearance and pay any applicable exportduty.All Incoterms except Ex Works make this a seller obligation. Note:The

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United States does not charge duty on exports, but has an extremely com-prehensive array of export controls as we saw in Chapter 2.

• Someone must arrange and pay for main carriage (except for ground trans-port where the seller and buyer share a common border.). This may beeither a seller or buyer responsibility, depending on the Incoterm selected.

• Someone must arrange for import clearance and the payment of any appli-cable import duty. All Incoterms except Delivered Duty Paid make this abuyer obligation.

• Someone must arrange and pay for on-carriage. This may be either a selleror buyer responsibility, depending on the Incoterm selected.

• Someone should insure the shipment. As mentioned earlier, only CIF andCIP speak to insurance at all, and these make it a seller responsibility. Obvi-ously, someone—either seller or buyer—should arrange insurance underthe other eleven Incoterms.

THE 13 INCOTERMS 2000

We will now cover the 13 Incoterms 2000, starting from the least amount ofseller participation (EXW) to the greatest (DDP).As this book is about export-ing, we will focus on the seller’s responsibilities. For complete definitions, con-sult the official ICC publication, Incoterms 2000.

Ex Works (EXW)

Place. The point where the shipment begins (often the seller’s premises)

Transport Mode. Does not apply

Under the Ex Works term, the seller is required to make the correct goodsavailable to the buyer when promised, marked and export packed to the extentthat the seller is aware of how transportation will take place. The seller’s cost,responsibility, and risk end at this point. EXW is the only Incoterm that does nottask the seller with loading the collecting vehicle or arranging for export clear-ance.

This term was a favorite of U.S. exporters, as it seemed to be the closestIncoterm equivalent of the Uniform Commercial Code term “FOB Factory.”However, it actually does not work very well for several reasons.

1. It imposes the task of loading the collecting vehicle on the buyer, which iseither difficult or impossible. When sellers alleviate this by loading the col-lecting vehicle themselves, they leave the question “Whose responsibility isit if the goods are damaged during loading?” unanswered.

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2. It is difficult for foreign buyers to comply with U.S. export-control regula-tions. At one time, EXW provided a dodge for sellers wishing to avoid anyconnection with export clearance, but recent changes introducing the roleof the U.S. Principal Party in Interest have changed that for export report-ing. For more information on export clearance refer to Chapter 2. For thedefinition of U.S. Principal Party in Interest, refer to page 268.

3. The exporter loses all control of the shipment. Theoretically, the buyercould arrive at the seller’s premises in a rented truck or a taxi, pick up thegoods, and drive off into the sunset. Buyers wishing to divert shipments toundisclosed or prohibited countries, or even to the domestic market, preferto use EXW for this very reason.

4. EXW works well only with payment in advance or open account paymentterms, since the goods are released to the buyer before transportation takesplace.

Free Carrier (FCA)

Place. There are two possibilities:

1. The point where the shipment begins (often the seller’s premises) as we sawin EXW

2. Anywhere else on the seller’s side (often a buyer-appointed carrier’s termi-nal or forwarder’s warehouse)

Transport mode. Omnimodal

This versatile Incoterm may be used for just about any situation where sellerand buyer wish the seller’s costs, responsibility, and risk to end somewhere onthe seller’s side.

1. If the agreed place is where the shipment begins (frequently the seller’spremises), the seller’s cost and risk for the condition of the shipped mer-chandise end once the collecting vehicle has been loaded. The only otherthing the seller need do is arrange for export clearance. FCA accompaniedby the seller’s premises is clearly the preferred Incoterm equivalent of theAmerican “FOB Factory.”

2. If the agreed place is elsewhere on the seller’s side, the seller is responsiblefor the cost and risk for the condition of the shipped merchandise while inprecarriage to that place, but not for unloading the delivering vehicle.

Either way, the seller is obligated to arrange export clearance, which, in viewof the U.S. Principal Party in Interest regulations, is a safer alternative to thebuyer’s attempting to do so as in EXW.This is because the seller may be able touse his or her Incoterm obligation of arranging export clearance to elicit the

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required information from the buyer-appointed carrier or forwarder. It shouldbe noted, however, that the U.S. government considers all “F” group Incoterms(as well as EXW) to be “routed transactions,” in which the party normally filingthe export declaration would be a buyer-designated forwarder or other agent.See Chapter 11 for details on reporting exports and Chapter 2 for export control.

The document that the seller can use to prove that he or she has handed theshipped goods over to the buyer-appointed party (usually a carrier or for-warder) would be a freight-collect “received-for-shipment” transport documentof any kind. The place would either be the place where the shipment originatesor any other agreed place on the seller’s side (usually a carrier terminal or a for-warder warehouse).

However, as with all “F” group Incoterms, the seller is not really part of thecontract of main carriage, despite the fact that he or she has handed over theshipped goods to the buyer-appointed carrier.The seller is termed a “consignor”while the buyer, who has selected the carrier and contracted for carriage, isreally the “shipper.” It is also conceivable though unlikely that the buyer couldinstruct the carrier to withhold the original transport document, which couldpresent problems for the seller with documentary letter of credit or documen-tary collection payment terms.

Free Alongside Ship (FAS)

Place. A port on the seller’s side

Transport mode. Vessel only

This marine-restricted Incoterm requires the seller to remain responsiblefor all costs and risks to the shipped merchandise until it is placed alongside thebuyer-designated vessel. The seller is also responsible for export clearance.

Because of the way modern seaports are structured, FAS makes little sensefor shipments made on “liner terms,”—contracts of carriage whereby ship own-ers arrange for vessel loading. While many years ago consignors physicallybrought their cargoes to the pier, the goods are now almost always surrenderedto the carrier at the port’s land gateway and placed in the carrier’s terminalsome days before they are vessel-loaded. The result is that except for certaincharter-vessel shipments, sellers do not have access to the pier and thereforecannot place their cargoes alongside the vessel.

There are several other problems with the FAS term when used with linerterms:

1. Ship lines normally bill nonfreight items like terminal handling charges assurcharges to the party paying for main-carriage transportation, which in allF group terms is the buyer. However, under the FAS Incoterm, terminalhandling charges are for the seller’s account.

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2. There is no definitive document to show that the seller has fulfilled his orher Incoterm obligation by getting the cargo alongside the vessel, becauseit never stays there very long.

FAS works well for charter-vessel shipments made on other than linerterms, where sellers can bring their goods to ship-side either on land or by smallvessels called “lighters” which are used to load vessels at offshore moorings.Thedefinitive document would be a mate’s receipt issued by an officer or agent ofthe chartered vessel. However, as with all F group Incoterms, the seller is notreally part of the contract of main carriage, despite the fact that he or she hashanded over the shipped goods to the buyer-appointed carrier. It is conceivablethat the buyer could instruct the carrier to withhold the original document,which in turn could present problems for the seller with documentary letter ofcredit or documentary collection payment terms.

It should also be noted that the U.S. government considers all three F groupIncoterms (as well as EXW) to be “routed transactions,” in which the party nor-mally filing the export declaration would be a buyer-designated forwarder orother agent. See Chapter 11 for details on reporting exports and Chapter 2 forexport control.

Free On Board (FOB)

Place. A port on the seller’s side

Transport mode. Vessel only

This marine-restricted Incoterm requires the seller to remain responsiblefor all costs and risks to the shipped merchandise until it is placed on board thebuyer-designated vessel. “On board” is defined as crossing the ship’s rail. Theseller is also responsible for export clearance.

As with FAS, FOB does not work well for shipments made on liner termsbecause of the way modern seaports are structured. Nowadays, outbound cargois almost always surrendered to the carrier at the port’s land gateway and placedin the carrier’s terminal for some days before it is vessel-loaded. Further, underliner terms, the shipowner undertakes vessel loading, and functions under a con-tract of carriage with the buyer. Sellers should be reluctant to remain responsi-ble for the condition of shipped goods and the cost of services provided bybuyer-appointed carriers—and this is exactly what happens until vessel loadingtakes place. Although thankfully infrequent, dock strikes can magnify thispotential liability.

Vessel-loading is determined by the time-honored formula of passing overthe ship’s rail. While the ship’s rail was once a place where cargoes physicallyrested while being passed from stevedores on shore to ship personnel on board,this practice became obsolete thousands of years ago with the invention of the

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crane. Today, all that can be said for the ship’s rail is that it does provide a theo-retical measuring point (as well as its practical role in keeping people fromfalling overboard).

Again, as we saw in FAS, there is also the problem of terminal handlingcharges which ship lines normally bill to the party paying for main-carriagetransportation (the buyer) while they are actually for the seller’s account.

It should also be noted that the U.S. government considers all three F groupIncoterms (as well as EXW) to be routed transactions, in which the party nor-mally filing the export declaration would be a buyer-designated forwarder orother agent. See Chapter 11 for details on reporting exports and Chapter 2 forexport control.

On the plus side, there is a definitive document—a freight-collect clean on-board marine transportation document. However, as with all F group Inco-terms, the seller is not really part of the contract of main carriage, despite thefact that he or she has handed over the shipped goods to the buyer-appointedcarrier. As mentioned under FCA and FAS, it is conceivable that the buyercould instruct the carrier to withhold the original marine transport document,which in turn could present problems for the seller with documentary letter ofcredit or documentary collection payment terms.

Cost and Freight (CFR)

Place. A port on the buyer’s side

Transport mode. Vessel only

Under the CFR Incoterm, the seller is required to pay all transportationcosts to the named port on the buyer’s side, and to arrange for export clearance.However, the seller’s responsibility for the condition of the shipped goods endsonce they have been vessel-loaded at the port on the seller’s side (to be precise,when they have passed the ship’s rail).This is the same risk transfer point foundin the FOB Incoterm.

It is true of all C group terms that the seller’s costs will end somewhere onthe buyer’s side, while the point where the seller’s responsibility for the shippedgoods ends is somewhere on the seller’s side.

The seller pays the ocean freight bill including the loading port terminal-handling surcharge, which is consistent with the Incoterm cost division. How-ever, some carriers also bill the consignee for terminal handling at the arrivalport.This should not be a seller expense unless it was included in the contract ofcarriage. Since this practice differs from carrier to carrier, sellers and buyersshould compare notes to make sure that they are not both being billed for thesame charges.

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The definitive document is a freight-prepaid clean on-board marine trans-port document, which the seller should have no problem obtaining from the car-rier as he or she is a party to the main-carriage contract.

Cost, Insurance, and Freight (CIF)

Place. A port on the buyer’s side

Transport mode. Vessel only

CIF works exactly the same as CFR, except that the seller is also obligatedto provide insurance. As we saw earlier in this chapter, the insurance obligationextends only to minimum cover, which is inadequate for most shipments. Sellersand buyers are urged to agree on additional coverage beyond of the Incotermobligation. (See Chapter 8 for detailed coverage of insurance.)

Carriage Paid To (CPT)

Place. Any agreed place on the buyer’s side

Transport mode. Omnimodal

Under the CPT Incoterm, the seller is required to arrange for export clear-ance and pay all transportation costs to the named place on the buyer’s side.However, the seller’s responsibility for the condition of the shipped goods endsonce they have been handed over to the first carrier on the seller’s side.As therecan be no carrier before the first carrier, this means at the place where the ship-ment originates. This works well in door-to-door, door-to-port, or door-to-airport transportation, where a single carrier takes responsibility for precarriageand main carriage.

This could present problems for loss or damage taking place during precar-riage when this is handled independently of main carriage. For instance, the con-tract of main carriage is port-to-port, and the goods are damaged while travelingto the loading port in a truck. How is the overseas buyer supposed to file a claimon a seller-appointed small cartage company in the seller’s country? While thispresents no particular problem for the seller, fairness and customer relationsdictate that the parties agree that when the contract isn’t door-to-somewhere,the seller assumes responsibility for the condition of the goods until they reachthe main carrier’s facility on the seller’s side.To avoid confusion, any such agree-ment should be expressed somewhere in the sales contract other than next tothe Incoterm itself.

The definitive document is a clean transport document of whatever kindshowing freight prepaid to the agreed place on the buyer’s side.

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Carriage and Insurance Paid (CIP)

Place. Any agreed place on the buyer’s side

Transport mode. Omnimodal

CIP works exactly the same as CPT, except that the seller is also obligated toprovide insurance. As we saw earlier in this chapter, the insurance obligationextends only to minimum cover, which is inadequate for most shipments. Sellersand buyers are urged to agree on additional coverage beyond the Incotermobligation. (See Chapter 8 for detailed coverage of insurance.)

If insurance is placed on a warehouse-to-warehouse all-risk (London A)basis, the problem of independent precarriage found in CPT is reduced, as thereshould be recourse to the insurance company.

Delivered At Frontier (DAF)

Place. Any agreed place on a land border

Transport mode. Omnimodal, provided the final leg is by ground

This Incoterm uses an agreed border location to divide costs, risks, andresponsibilities between seller and buyer. The seller pays all costs and bears therisk for the condition of the shipped goods up to the agreed border location, andarranges for export clearance, at which point the buyer takes over.

The definitive document would be any clean freight-prepaid transport doc-ument up to the agreed border place, as DAF can theoretically be used for allmodes of transport. However, as a frontier is, by definition, a place on land, thisterm works best for ground transportation. (Parties wishing to use a borderlocation with multimodal transport would probably be better served with DDUrather than DAF.)

While the logic of dividing everything right at a land border is attractive,geography limits this term’s usefulness to U.S. exporters as our country bordersonly Canada and Mexico.

1. Canada. Since trucks freely come and go between the U.S. and Canada, itwould be foolish to attempt to split the freight cost at the border. Further,since there are few physical inspections in either direction, goods normallypass right over the border rather than remain there for any length of time.

2. Mexico. On the surface, DAF seems to make more sense for exports toMexico.Although trucks will soon freely come and go, exported goods stopat the border (usually a forwarder’s warehouse) while the import paper-work is processed.The DAF cost, risk, and responsibility descriptions nicelydovetail. However, the same is true with Free Carrier (FCA), accompanied

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by the forwarder’s warehouse at the border as the place. Either way, theseller is responsible for pre-carriage and export clearance while the buyeris responsible for import clearance and on-carriage. The advantage of FCAis that U.S. exporters may use it for many other situations, while DAF ispresently useful only for Mexico.

DAF may have greater appeal in the future, because nowhere does it restrictthe location to a border of the seller’s or the buyer’ country. Once the infra-structure in Mexico improves, one could project the location southward, such asDAF Mexican–Guatemalan border. Goods would travel through Mexico inbond, and precarriage would extend all the way to the Guatemalan border. Infact, DAF is often used this way throughout Europe.We aren’t there yet, but theDAF Incoterm is ready whenever the time arrives.

Delivered Ex Ship (DES)

Place. A port on the buyer’s side

Transport Mode. Vessel only (usually charter vessel)

Under this marine-restricted Incoterm, the seller arranges for export clear-ance, pays pre-carriage and main carriage transportation costs, and remainsresponsible for the condition of the shipped goods until the carrying vesselarrives at the agreed port on the buyer’s side. Once this happens, the buyerarranges for unloading and all subsequent steps at his or her cost and risk.

DES does not work well with liner terms, as these provide for the ship ownerto handle vessel loading and unloading. For this reason, the definitive documentwill usually be a clean, freight-prepaid marine transport document issuedagainst a charterparty (a “rental agreement” used in vessel chartering).

This term could be risky for sellers who are chartering for a single voyage.Many voyage-charterparties provide timelines for the return of the vessel emptyand seaworthy. This could leave the seller subject to demurrage charges shouldthe buyer fail to promptly unload.

Delivered Ex Quay (DEQ)

Place. A port on the buyer’s side

Transport mode. Vessel only (usually charter vessel)

Under this marine-restricted Incoterm, the seller arranges for export clear-ance, pays pre-carriage and main carriage transportation costs, and remainsresponsible for the condition of the shipped goods until they are placed on thequay (wharf) next to the carrying vessel at the agreed port on the buyer’s side.

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Once this happens, the buyer arranges for all subsequent steps at his or her costand risk.

DEQ can work well with chartering done on liner terms, since both vesselloading and unloading are paid by the same party that pays for main carriage,the seller. However, it does not work well with ship lines, since they normally donot leave arriving cargoes on the quay but remove them to their terminals. Forthis reason, the definitive document will usually be a clean, freight-prepaidmarine transport document issued against a charter party (a “rental agreement”used in vessel chartering), perhaps accompanied by a receipt for vessel unload-ing charges if the charter was not done on liner terms.

The risk of demurrage caused by a buyer’s failure to unload in a timely man-ner that we saw in DES is not present with DEQ, since the seller controls bothvessel loading and unloading.

Incidentally, DEQ is a mirror image of FAS, as both terms have the sellerplacing the cargo alongside the vessel. The difference is that in FAS the pier ison the seller’s side, while with DEQ it is on the buyer’s.

Delivered Duty Unpaid (DDU)

Place. Any agreed place on the buyer’s side

Transport mode. Omnimodal

Under this omnimodal Incoterm, the seller is required to arrange for exportclearance, pay all transportation costs to the named place on the buyer’s side,and bear the risk for the condition of the shipped goods until they arrive there.The definitive document is a clean transport document of whatever kind show-ing freight prepaid to the agreed place on the buyer’s side.

Delivered Duty Paid (DDP)

Place. Any agreed place on the buyer’s side

Transport mode. Omnimodal

DDP is the Incoterm imposing maximum obligations on the seller. In fact,all the buyer need do is exist and take delivery. The seller is required to arrangefor export clearance, pay all transportation costs to the named place on thebuyer’s side, bear the risk for the condition of the shipped goods until theyarrive there, and arrange and pay for import clearance.

The definitive document is a clean transport document of whatever kindshowing freight prepaid to the agreed place on the buyer’s side, plus whateverevidence of import clearance the buyer’s customs authorities may issue, marked“duty paid.”

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DDP presents considerable risk for U.S. exporters. Foreign customs regula-tions and duty rates can change with little prior notice. Many governmentsrefuse to deal with nonresident importers and insist that they engage local cus-toms brokers. When you consider the following questions, DDP doesn’t seemparticularly logical.

• Who, between the seller and buyer, is better positioned to comply with thebuyer’s government’s import regulations?

• Who, between the seller and buyer, is better positioned to select a qualifiedcustoms broker in the buyer’s country?

• Again between the seller and buyer, with whom would the buyer’s customsservice prefer to deal?

Sellers who are brave or desperate enough to use this term are well advisedto increase their prices, not only for their additional costs but also by a healthyprovision for the additional risk that they take on.

DDP may seem to be ideal for buyers. It is true that there isn’t much forthem to do except take delivery. However, to the extent that the customs ser-vices of other governments resemble ours, the seller’s arranging for importclearance represents a downside to the buyer as well.

• Failure to comply with even a minor procedure or the inability to promptlyanswer a nonroutine but otherwise simple question could hold up delivery,which puts “just-in-time” supply in peril. If instead the buyer were theimporter of record, many such situations could be handled promptly on thespot.

• Most customs services are empowered to demand redelivery of goods thatthey had previously released. (Questions about origin marking provide agood example of how this may happen in the United States.) If the buyer isnot a party to the importation, he or she must depend upon compliancefrom a far-away seller who may have already received payment and there-fore have a less-than-burning desire to provide immediate cooperation.

• Many countries including the United States have provisions for drawback—the recapture of some of the duty paid on an imported item if it is subse-quently reexported. This may apply where the good is reexported in thesame condition as it was imported, or where it was used as a component ormaterial in the manufacture of something else. In order to claim drawback,it is usually necessary for the exporter to be able to reference the importtransaction (when, where, how much duty was paid, etc.). This may be diffi-cult if the importer of record was a foreign seller.

• As we suggested earlier to sellers, overseas suppliers selling on DDP termswill almost certainly increase their prices to provide for the additional risk

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that they bear. This can be easily proved by getting a DDP quotation andthen requesting the same seller to provide a DDU quotation for the sameinquiry. Subtract the duty, tax, and customs broker fees and you will likelyfind a significant difference between the result and the DDU price.

• Are DDP buyers really involved in an international sale of goods, or arethey making domestic purchases of preimported goods? When you come tothink of it, what real difference is there between buying nails that havealready been import-cleared from a supplier in Taiwan, and buying Tai-wanese nails (which have also been import-cleared) from a local buildingsupply store?

INCOTERMS AND PAYMENT TERMS

Some Incoterms work particularly well with certain payment terms. This isbecause of the definitive documents that sellers obtain as they complete theirtasks. Letter of credit and documentary collection payment terms work wellonly if the seller has clear access to these documents for presentation throughthe banking system.

• EXW works well only for payment with order or open account terms as itresults in no document other than a commercial invoice and perhaps a pack-ing list.

• Group F Incoterms involve transportation documents. However, they maynot always be available to sellers as the main carriage contract is alwaysbetween carriers and buyers, and forwarders are also usually buyer-appointed.

• Groups C and D Incoterms (with the possible exception of DAF) have sell-ers contracting for main carriage, thereby assuring that such documents willbe available to them. Further, sellers usually appoint the forwarders whencontracting for main carriage.

• DAF does not involve main carriage at all when the agreed place is on aborder of the seller’s country. In this case, the seller contracts for groundtransportation to the agreed place, and is assured access to the resultingtransportation document. This term may also be used with carriage by anymeans, provided the last leg is by ground, but the net result is the same asthe seller contracts for all the carriage up to the agreed border place, and istherefore assured access to the resulting transportation document or docu-ments.

• DDP may present an additional problem with some payment terms, as theseller is responsible for import clearance.This can place the shipped goods

174 Terms of Sale

well out of the seller’s reach should the buyer fail to take delivery or with-hold payment.

INCOTERMS AND SELECTION OF SERVICE PROVIDERS

Throughout this chapter and elsewhere in this book, we stress the importance ofcarrier and forwarder selection. The one very obvious reason is control of theshipment and of the resulting documents. However, there are other importantreasons for sellers to quote on C and D group terms.

No informed buyer will place an order without knowing the total cost. Thisincludes the cost of the goods plus the costs of freight, insurance, and importclearance. By quoting on freight-paid terms, sellers make it easier for the buyerto come to a decision.

Quoting C and D group terms and separately itemizing all non-product ele-ments enables the buyer to shop around for transportation and insurance alter-natives. The result may be an order placed on an F group term which, while notas attractive as a C group order, is better than no order at all.

As we will see in Chapter 10, larger shippers pay lower freight costs andreceive preferred attention from the carriers and forwarders they regularly use.These service providers are not concerned with who owns the goods, but withwho contracts for carriage. Lower freight costs reduce the total costs for buyers.Lower buyer costs results in increased exports and in greater buyer willingnessto accept C and D group sales terms.This, in turn, increases the volume of cargofor which the seller contracts, providing leverage to negotiate still lower freightcosts—and so it goes. Meanwhile, the level of forwarder and carrier serviceincreases.

INCOTERMS AND THE UNIFORM COMMERCIAL CODE

As mentioned earlier in this chapter, U.S. foreign traders are well advised to useIncoterms for their international sales contracts and the terms found in the Uni-form Commercial Code (UCC) for domestic business.Although both trade codesuse some of the same abbreviations, each attaches different meanings to them.

Concept of FOB

Both Incoterms and the UCC use the term FOB, but in very different ways. Aswe have seen, Incoterms restricts FOB to shipments by vessel where the buyerarranges and pays for main carriage.The UCC FOB may be used for any modeof transportation. Further, it may be used as either a shipment term or a deliv-ery term, depending on the accompanying place. If the place is the place of

Incoterms and the Uniform Commercial Code 175

shipment (such as FOB factory), the seller bears the expense and risk of puttingthe goods in possession of the carrier at the factory. However, UCC also pro-vides for FOB accompanied by a destination place (such as FOB customer’swarehouse) in which case the seller bears the cost and risk of transporting thegoods to that place. This puts FOB destination in roughly the same light as theDDU Incoterm.

UCC definitions combined with other commonly used definitions such asfreight terms from the National Motor Freight Classification have created awhole range of FOB permutations that are used every day in U.S. domesticcommerce. To give you a feel for how these differ, we will attempt to refer to anAPPROXIMATE Incoterm counterpart. Keep in mind that these are NOTexact matches and should not be substituted for each other.

• FOB Origin, Freight Collect resembles FCA accompanied by the originat-ing place

• FOB Origin, Freight Prepaid resembles CPT

• FOB Destination, Freight Collect resembles no Incoterm

• FOB Destination, Freight Prepaid resembles DDU

Passage of Title

As we saw earlier, Incoterms themselves never transfer ownership. The UCCterms may do so when the issue is not elsewhere agreed by the seller and buyer.When they do, the criterion they use is that title passes at the time and placewhere the seller completes physical delivery. This focuses on the differencebetween a shipment and destination, and explains why such a term as FOB Des-tination, Freight Collect could exist in the UCC. The seller and buyer haveagreed that the price does not include the cost of transportation, but that theseller should be responsible for the goods until they arrive at the destination,and (unless title is agreed elsewhere) continue to own them until they arrive.

Other UCC Shipment Terms

The UCC also has an FAS, C&F, CIF, and EX (ship, truck, etc.) that also do notsquare with the Incoterms definitions. However, these are less important indomestic business, given the tremendous versatility attached to the UCC’sFOB term.

Resources

Every state has its own version of the Uniform Commercial Code, but they arevery similar (except for Louisiana). Readers who wish more detailed coverage

176 Terms of Sale

but who are unwilling to delve into law books can find additional informationin Understanding the Uniform Commercial Code and Incoterms 2000 which isreferenced in Chapter 13 of this book.

INCOTERMS AND U.S. EXPORTS

Every successful seller-buyer relationship should reflect the legitimate concernsof both parties. Incoterms are designed to be country-neutral, but some favorsellers regardless of where the parties reside.

In the normal course of events, it is the seller who puts the first offer on thetable, often in the form of a price list showing “FOB Factory” prices (which wenow know is FCA Factory in Incoterms). This is often followed by a specificprice quotation, often in invoice format and called a proforma invoice (as wewill see in Chapter 9). This provides the seller with an opportunity to take theinitiative by proposing the Incoterm that best suits his or her purpose.

We will now cover those most commonly used Incoterms that most favorinformed sellers, along with reasons to support these conclusions:

• CIP is a seller’s dream. Forwarder and carrier selections are assured, pro-viding control over the shipment and resulting documentation. However,responsibility for the shipped goods ends on the seller’s side—literally oncethe goods are handed over to the first carrier. Further, the seller is obli-gated—no, entitled—to provide insurance cover and charge the buyer fordoing so. Add the fact that it may be used for all modes of transportation,and what seller could ask for more? One caution: Whenever the agreedplace is other than arrival point on the buyer’s side (airport, seaport, or bor-der), sellers should be sure they can arrange for either multimodal trans-portation or a reliable on-carrier. Trying to independently arrange overseason-carriage from the seller’s side can be difficult.

• CPT is almost as good, except that the seller is not entitled to provide insur-ance at the buyer’s expense. (If the parties were to agree that the sellershould insure, they would be back to CIP.)

• CIF would be a third choice, but only when main carriage takes place byship. Sellers should accept the fact that their risk for the condition of theshipped goods continues through vessel loading, as they select the for-warder and carrier. Besides, it is the sellers who arrange for insurance.

• CFR is almost as good, except for insurance.

• DDU is my fifth choice. This may come as a surprise, since the seller isresponsible for the condition of the shipped goods until they arrive at theagreed place on the buyer’s side. For this reason, I suggest that the sellerinsist on providing insurance at the buyer’s expense. Further, if the agreed

Incoterms and U.S. Exports 177

place is not an arrival place on the buyer’s side, the seller should be sure thateither multimodal transportation or a reliable on-carrier is available. This iseven more important than with CIP or CPT, as the seller would be respon-sible for the condition of the goods during on-carriage. The fact that DDUtasks (entitles) the seller with forwarder and carrier selection and the term’somnimodal nature will normally outweigh bearing the additional risk to thegoods in transport.

• FCA is by far the best bet for sellers forced to use an F group term. It cor-responds to present day reality in focusing on where the goods are actuallyhanded over to a carrier rather than placement alongside or on board a ship.The fact that it is omnimodal is another plus.

LINKAGES

Seller and buyer interests may either meet or clash when it comes to sales terms.Including the following parties in sales term selection can help produce harmo-nious transactions.

• Sales: Whoever establishes product pricing must obviously provide the FCAfactory selling price. Beyond that, it is worthwhile preparing freight-paid(C or D Group) quotations to make it easier for the prospect to buy.

• Traffic: Along with Manufacturing, and the Buyer, it can determine whetherany heroic export packing is required, bringing the total price to FCA pointof origin.

Traffic should also have a say in sales term selection as it develops freightcosts along with forwarders and carriers.

• Credit: Should also have a vote, particularly when the payment terms arelikely to be a letter of credit requiring absolutely correct documentationfrom forwarders and carriers.

• Compliance: Should be involved in sales term selection for tightly con-trolled items where controlling transportation and possibly obtaining deliv-ery verification are important considerations.

• The Buyer: Is likely to have something to say about which sales termbecomes part of the sales contract.

ENDNOTE

1. It is available from ICC Publishing Inc., 156 Fifth Avenue, New York, NY 10010 oronline at www.iccbooksusa.com.

178 Terms of Sale

Chapter 8

Insurance

Exporters regularly encounter several different kinds of insurance in day-to-day business. All insurance has one thing in common—it shifts the burdens of anumber of pure risks by pooling them over a large number of participants inreturn for premiums. A pure risk is defined as a situation involving a possibilityof loss or no loss but no possibility of gain. For example, insurance is placed onan air shipment in return for a predetermined premium. If the goods arrivewithout problem, the insurer profits by the amount of the premium paid butgains nothing further.

Another factor common throughout insurance is the concept of insurableinterest. This means that the party obtaining insurance coverage must face afinancial loss if the covered peril were to take place and there were no insurance.

Sellers of large capital equipment or those bidding on government tendersmay use surety bonds to comply with bidding or contract requirements. Suretyinsurance covers the risk of nonperformance of covered events, and it is nor-mally purchased by the party whose performance is being guaranteed. Insurerscalculate the risk based on the reputation of the performing party, and whetheror not the covered events seem achievable, and tend to be conservative in issu-ing surety bonds.

The type of insurance that exporters most commonly use—cargo insur-ance—covers shipped goods, and thereby protects both sellers and buyers. It issaid that in ancient Greece, a ship’s failure to return to port cancelled any loansmade on her. Lloyds of London adopted this idea in seventeenth-centuryEngland in insuring goods bound for the colonies.This marked the beginning ofthe huge industry we now call casualty insurance.

Casualty insurance covers the risk of property loss or damage or liability.Insurers benefit by determining the probability of “fortuitous losses” and charg-ing appropriate premiums to provide profits. (Unlike its everyday meaning of“fortunate,” the term fortuitous is used in insurance to mean a chance event asopposed to a deliberate act.) The insurer’s loss experience with the assured on

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previous business (if any) is an important consideration. The premium incomethat insurers charge costs those they insure far less than the potential cost of thecovered perils.

The term all risks is used throughout casualty insurance, which may lead toconfusion, particularly in marine cargo insurance. Generally speaking, all risksmeans that a casualty policy covers every cause that is not specifically excluded.Since excluded perils may vary from insurer to insurer, it is important for theassureds to understand exactly what is and isn’t covered in the protection theyhave. This important point will be addressed in more detail in the “MarineCargo” section of this chapter.

Some exporters purchase credit insurance to protect their export accountsreceivable.This enhances the receivables’ collateral and may thereby enable theexporters to offer attractive payment terms.

As life insurance differs significantly from the types commonly used inexporting, we will not consider it. However, health insurance is a legitimate con-cern to exporters who travel overseas and will be covered briefly at the end ofthis chapter.

SURETY

A surety bond is a contract whereby one party (the surety) undertakes an obli-gation to make good on the default or debt of a second party (called the princi-pal) to a third party (called the obligee). The surety’s obligation ends once theprincipal has performed. However, should the principal fail to perform, thesurety must make good or prove that the claim is unjustified. In doing so, it mayuse any defenses that would have been available to the principal had there beenno guarantee. Should it be forced to pay, it may then proceed against the princi-pal under what is called the surety’s right of exoneration.

Bid Bonds

Many governments make major purchases on a sealed-bid basis to reduce thepossibility of corruption. Interested bidders prepare their quotations and placethem in sealed envelopes that are opened at a certain time on a certain date ina quasi-public forum. Since these procedures usually take longer and involvemore preparation than more conventional procurement, it is important to thegovernments employing them that successful bidders actually enter into thecontracts they win.They accomplish this by requiring all bidders to post a suretybond for a minimum of a specified percentage of the bid amount.The bond stip-ulates that the surety will pay if the principal wins the bidding and fails to takeup the resulting contract.This document and the sealed envelope containing thebid are placed in a second envelope, which is submitted to the bidding authori-ties. Bids unaccompanied by bid bonds are simply not opened.

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Since the bonds cover only the actions of successful bidders, those of theother bidders become void once the contract is awarded. Most procurementsrequiring bid bonds also require that the successful bidder open a performancebond, which then replaces the bid bond.

Experienced bidders open their bonds for a higher-than-required amount tomislead competition.While the bids are sealed, the same isn’t necessarily true ofthe bonds, and their amounts may reveal the bid amounts to competition.There’s nothing wrong with misleading a nosy competitor with a higher-than-necessary bond.

Performance Bonds

As their name implies, these surety bonds are issued to guarantee specific per-formance, and are used worldwide in government procurement. They may alsosecure advance payments made in large contract purchases. Performance bondsmay also substitute for required contract holdback provisions to cover suchpostshipment obligations as installation, training, or guaranteed machinery out-put requirements.

Incidentally, insurance coverage is available to protect principals andsureties against the unfair calling of bonds, as was done en masse by Iran shortlyafter the Shah’s overthrow. It is offered as a subset of political risk coverage,which we will see later in this chapter.

Customs and Other Government Bond Requirements

Many governments, including the United States, require that bonds or refund-able cash deposits be issued to cover certain activities.

Some countries require that the duty and tax revenue due on imported goodsbe secured by a surety bond or cash deposit. While such rules are country-specific, the U.S. regulations are typical enough to use for illustration purposes.Under U.S. law, all formal entries (broadly speaking, commercial imports val-ued at over two thousand dollars) must be covered by a refundable cashdeposit or bond in favor of the U.S. Customs. The party providing the bond—usually the actual importer or a customs broker—is considered the importer ofrecord. Since this party is responsible for all uncollected duty and tax until theentry liquidation process has run its course, the bond must be valid for at leastthat long.

There are two types of acceptable entry bonds, single transaction and con-tinuous.As the name implies, single transaction bonds cover one entry.They arenormally opened for the total of the value of the goods and the amount of esti-mated import duty. Continuous bonds cover multiple imports. Their value isdetermined by the Director of the Port through which the imports will clear.Factors such as the principal’s prior record of compliance, the value and natureof the imported goods, and other circumstances enter into these decisions.

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Goods temporarily imported into many countries, including the UnitedStates, may be covered by a Temporary Importation Bond (TIB) in lieu of pay-ment of import duties and taxes.This is often done for imports of goods for exhi-bition, samples, and professional equipment. The allowable time that coveredgoods may remain varies from country to country. (In the United States it is oneyear, with the possibility of an extension not to exceed an additional year.) TIBsare typically arranged by customs brokers, and are cancelled when the coveredgoods are reexported. (Note: Customs uses the term reexport to mean exportinggoods that have been previously imported. This differs from the export controldefinition found in Chapter 2.) It is important that users follow the requiredprocedures for registering reexports, as the government to which a TIB is issuedmay claim against it if reexport cannot be proven. Penalties for not reexportinggoods covered by TIBs may be severe. In the United States, the assessment is200 percent of the normal amount of duty for most goods, or 110 percent forsamples. Since TIBs must be obtained on a country-by-country basis, partiesmoving the same goods from country to country on a temporary basis are oftenbetter served by a carnet, which is covered below.

Carnets

Officially called ATA carnets (after the French-English acronyms for tempo-rary admission), these documents act as passports for the temporary admissionand reexport of goods. A carnet resembles a TIB in that covered goods are notassessed import duties or taxes on importation provided they are reexportedtimely and in compliance with established procedures. A carnet differs from aTIB as it may be used in clearing the stipulated goods to and from about 60 par-ticipating countries under similar procedures and with the same documenta-tion. Once issued, a carnet is valid for one year.

Carnets are commonly used for temporary imports and reexports of com-mercial samples, professional equipment, and goods for exhibition at exhibi-tions and fairs. They are not used for consumable, disposable, or hazardousgoods. Obviously, they are not meant for goods intended for resale abroad.Although goods covered by carnets may be sold, doing so may prove expensive.The carnet user is responsible for the payment of all duty and taxes due at thecountry in which they are sold, plus a penalty fee of 10 percent of the duty andtaxes, plus an administration fee.

It is the carnet user’s responsibility to make sure that the carnet documentaccompanies the goods as they travel. Entries are made on the carnet as goodsenter and leave each country on their journey. On their return home, anothernotation is made by the customs service of the country from which the shipmentoriginated.

The carnet process functions under the auspices of the InternationalBureau of Chambers of Commerce, which operates through national guaran-

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teeing associations in participating countries. These associations issue carnets,and guarantee to honor valid claims made against them. A carnet-holder’sfailure to have the document noted when covered goods enter and leave vis-ited countries may result in claims which the issuing guaranteeing associationis bound to honor. To support their guarantees, these associations mustrequire security from applicants in the form of refundable deposits or suretybonds.

The U.S. Council for International Business (USCIB) is the guaranteeingassociation for the United States, and provides detailed information on theirwebsite www.uscib.org. It also administers a process called the TECRO/AIT foruse between the United States and Taiwan. This functions as a carnet, but cov-ers only commercial samples and professional equipment.

Some U.S. exporters haven’t bothered with carnets because one of ourbiggest markets, Mexico, has not participated. This is changing. Mexico hasacceded to the ATA Conventions in early 2002, and is implementing theprocess. Interested readers can receive updates and confirmation of full Mexi-can participation by registering with the USCIB by email at atacarnet@uscib.org or by phone (212) 703-5073.

CREDIT INSURANCE

As we will see in Chapter 12, extending export credit involves determining thecreditworthiness of both the buyer and the buyer’s country.This can be a daunt-ing task for new-to-export sellers or those that export infrequently. It may alsopresent cash-flow problems even for experienced exporters, as many U.S. banksare reluctant to loan against unsecured export receivables.

Credit insurance may be a useful solution. Insurers cover a certain percent-age (or all) of the commercial and country risk for pre-approved buyers. Somework on a case-by-case basis while others prefer to insure the “whole turnover”of sales to preapproved overseas accounts.There are probably as many differentapproaches as there are insurers.

The following list of major U.S. credit insurers comes from an October 2001Managing Exports article:

• Coface North America (New York) 212-389-6500, www.cofacerating.com.

• NCM Americas (Baltimore); 800-822-3223; www.ncmamericas.com.

• Euler ACI (Baltimore); 877-909-3224; fax 410-554-0631; info.eaci@eulergroup.com; www.eulergroup.com.

• CNA Credit (Monmouth Junction, NJ); cnacredit@cna.com; www.cnacredit.com.

• AIG (American International Group,New York) 212-770-8567;www.aig.com.

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• TUA (Trade Underwriters Agency, Jericho, NY; 516-681-2191; info@tuagroup.com; www.tuagroup.com.

• FCIA (Foreign Credit Insurance Associates, New York); www.fcia.com.

• Chubb Group (NJ); www.chubb.com/.1

In addition, refer to Chapter 12 for information on federal governmentcredit-guarantee programs provided by the Export-Import Bank of the UnitedStates, the Small Business Administration, and the Department of Agriculture.

CARGO INSURANCE

This is the general term for casualty insurance covering cargo in transit. Thereare many permutations to cargo insurance. Different insurers structure policiesin different ways by adding additional coverages to basic policies or combiningdifferent policy types to make “master policies.” While this customizing is doneto best serve the needs of the insurers and the assureds, it makes insurance dif-ficult to describe. What is fairly standard practice may not apply to a given situ-ation because of the way a particular policy was put together. So, rule one is thatany policy may differ from what is presented here. Rule two is to work withexperienced insurance suppliers, whether insurers or forwarders, to make cer-tain the coverage you get meets your needs.

There are two general types of cargo insurance: Inland Marine and MarineCargo. This section applies to both, and will cover the reasons for insurance aswell as who should be most concerned.

Why Insure

The most obvious reason for cargo insurance is that without an excess valuedeclaration, which significantly adds to the transportation cost, carrier liabilityis extremely limited. The U.S. Carriage of Goods by Sea Act (COGSA) sets thestandard maximum-carrier liability at US$500.00 per package, a figure that wasset when this law was passed in 1936. While there is interest in replacingCOGSA with either new domestic legislation or some sort of internationaltreaty, any such development will take years to happen. Enhanced-carrier lia-bility has become a bargaining chip in negotiating confidential shipping con-tracts since the Ocean Shipping Reform Act became law in 1999. However, onlythose shippers that wield huge volumes are in a position to benefit. Meanwhile,for most shippers, ocean-carrier liability remains ridiculously low.

The Warsaw Convention pegs maximum carrier liability at about US$20.00per kilo for international air shipments. For U.S. domestic common-carriageshipments (air, rail, truck, inland waterway, and domestic offshore), the carrierestablishes its own liability limits in its tariff (price list and conditions of car-

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riage).Typically, these are very low. Furthermore, for contract (i.e., not commoncarriage) transportation of all types, carrier liability is always subject to negoti-ation, and is set forth in the contract of carriage. This too is usually low.

Self-Insurance

Self-insured parties are those having insurable interest and lacking insurancefor all or part of the risks they bear. This may be the extreme of no insurance atall (called bare) or, more likely, a party’s taking on part of the risk throughdeductibles, co-insurance, and policy exclusions of certain risks in return forlower premiums. Total self-insurance is difficult to understand, given negligiblecarrier liability and the relatively low cost of insurance versus the value of thecargo it covers. If this were not enough, we’ll soon see an additional peril thatmay exceed the cargo’s value. Perhaps the term self-insured should be changedto self-uninsured.

Who May Insure

As with all forms of insurance, the principle of insurable interest applies here.Depending on how the transaction is structured, an unpaid seller, a prepayingbuyer, carriers and bailees, any third parties specifically financing the transac-tion, whoever owns the shipped goods, and/or whoever is responsible for theircondition up to delivery may have insurable interest. The claimant must alsohave insurable interest. For cargo shipments where goods move and ownershippasses, the insurer would probably demand proof of insurable interest of theclaimant if this were not obvious from the insurance or shipping documents.

Who Should Be Most Concerned

Within the confines of insurable interest, certain parties need to be particularlyconcerned with the existence and adequacy of insurance coverage. Theseinclude:

• Sellers that have committed to buy insurance as part of the sales contract,such as with sales made under the CIP or CIF Incoterm. While theseIncoterms require the seller to provide insurance, this obligation may be sat-isfied by minimum cover. As we will soon see, both sellers and buyers areusually better served with more extensive coverage.

• Sellers that have undertaken responsibility for the condition of the cargountil it reaches an agreed place on the buyer’s side, as with some sales madeunder the D group Incoterms. Because of their extended responsibilitypoint, such sellers are well advised to insure even though the sales term doesnot specifically require it.

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• Unpaid sellers may have difficulty convincing their customers to pay foruninsured damaged and/or missing goods, regardless of where the sales con-tract fixes the responsibility point.

• Buyers who prepay may have difficulty convincing their suppliers to shipreplacements for damaged and/or missing goods at no charge, a mirrorimage of the unpaid seller situation.

• Owners of goods shipped by vessel may be subject to the General Averageperil, a situation that creates liability to the shipowner and other shippers.

INLAND MARINE INSURANCE

This insurance covers ground and air shipments as opposed to shipments by ocean. It is the kind of insurance most businesses engaged in shipping activities already have, whether as a stand-alone policy or as part of a mastercorporate-property insurance package. (It could also conceivably result froman amendment, called a rider, to a marine cargo insurance policy—but we willnot consider this possibility because these permutations become extremelyconfusing.)

Generally, inland marine insurance is written on a blanket basis, whichmeans that in return for a predetermined premium all specified risks are auto-matically covered over a specified period of time without the need of detailedreporting. Individual shipments are not reported but claims are. Such policiesnormally have loss limits established to accommodate the assured’s normalactivity for the coverage period. Before the coverage period expires, the insurerand assured negotiate renewal terms, loss limit, and premium.

Depending on how the individual policy is written, inland marine coveragemay also include shipments by inland waterway, coastal vessel shipments, andshipments to Canada and/or Mexico. However, they would not normally coverocean shipments, and may or may not cover air shipments to foreign locations.

Occasional exporters sometimes believe that their ocean shipments areautomatically covered under their inland marine policy. Although it is possiblefor marine cargo insurance to be added to an inland marine policy by a rider,this creates another of those confusing permutations, so forget about it at leastfor now. More likely, the confusion comes from the term inland marine, whichsounds as though it should cover vessel shipments. (The name comes from thefact that marine cargo insurance came first, and it was marine underwriters whocrafted the earliest inland policies.) A good rule of thumb is that since mostmarine cargo insurance policies require shipment-by-shipment reporting, ques-tion whether ocean coverage is included in any policy that doesn’t have thisrequirement.

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MARINE CARGO INSURANCE

As mentioned earlier in this chapter, marine cargo is probably the oldest formof insurance. “Modern” practices began in seventeenth-century England, andhave evolved ever since. For this reason marine cargo insurance has archaic ter-minology, unusual definitions, and types of coverages that exist nowhere else. Agrasp of the following terms and concepts is vital to understanding marine cargoinsurance:

• Actual total loss. Insured goods are lost or so badly damaged that they can-not be salvaged.

• Adventure. A voyage.

• Assailing thieves. Individuals other than ship’s crew or master who seize aship and/or its cargo by force.

• Average. A verified loss. The insurance use of this term has no connectionwith the common arithmetic meaning.

• Adverse selection. The practice of covering only risky shipments under anopen marine cargo policy.This is contrary to the terms of most open policies,which provide that the policy owner must cover all shipments for which ithas the responsibility to insure.

• Barratry. Deliberate acts by a ship’s crew or master that result in damage,theft, or abandonment of the vessel and/or its cargo.

• Constructive total loss.A covered loss that, while not total, would cost moreto repair than the actual value of the goods.

• Contingency insurance. Insurance coverage against default by anotherinsurance company. Typically, it is used when one party arranges insurancecoverage and the other party does not have faith in the primary insurer’shonoring a claim. (Note: do not confuse this with political risk contingencyinsurance that is covered later in this chapter.)

• General average.A legal requirement that all parties in a voyage contributeproportionately to cover expenses incurred as a result of damage to a shipand/or its cargo, as well as those expenses incurred in taking direct action toprevent damage or additional damage to a ship and/or its cargo. All con-ventional marine cargo insurance coverage levels cover this peril, but it hasmajor consequences for uninsured shippers. Lacking coverage, they willlikely be required to place a cash deposit or surety bond to release theircargo. These are often tied up for years as general average proceedings areboth lengthy and involved. Many general average situations are covered bythe York-Antwerp Rules (YAR).

• Inherent vice. A situation where a loss is caused by the cargo itself ratherthan by external causes (e.g., spontaneous combustion).

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• Insurance certificate (also called special cargo policy). Evidence of insur-ance for a single shipment, identifying such particulars as level of coverage,amount, cargo information, voyage details, and the assured. Insurance cer-tificates are prenumbered and the originals or duplicates are normallyrequired to support any claim.

• Marine cargo insurance policy.An insurance policy covering specified perilsunder specified conditions.

• Nondelivery. The insured cargo is not available from the carrier.

• Open marine cargo policy. A single marine insurance policy issued to covermultiple shipments under somewhat flexible conditions over an indefinitetime. Since premiums are based on usage, policy owners are required toperiodically report all covered shipments to the insurer. Open policies arepopular with frequent exporters and forwarders that resell coverage to theircustomers.

• Particular average. Partial or total loss or damage to a single shipment,caused by a peril that does not cause a loss to other cargo in general or tothe vessel. A particular average is not subject to contribution by others, andis therefore the responsibility of the cargo owner (and hopefully its insurer).This is the opposite of general average.

• Peril. A specific kind of risk.

• Perils of the sea. Basic coverages, which for marine insurance are; sinking,stranding, collision, heavy weather, lightning, and seawater.

• Perils on the sea.Accidents at sea other than those stipulated in perils of thesea, such as fire, explosion, and piracy.

• Rider. A document attached to and modifying an insurance document.Changes or clarifications to the terms and conditions of existing policies areusually handled this way.

• Voyage policy. A marine cargo insurance policy covering specific cargo forone specific trip.

• “Warranted free of.” Contrary to what one would expect, this is not coverage,but the assured’s implicit acknowledgement that certain perils are not cov-ered. For instance,“warranted free of capture and seizure” means that, unlessotherwise stipulated, the insurance does not cover capture and seizure.

We will see other marine insurance-specific terminology under the various typ-ical clauses.

Levels of Marine Cargo Coverage

There are three basic levels of marine cargo insurance coverage. However, thedistinctions may become blurred through addition or deletion of one or more of

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the many “standard” clauses. The best rule of thumb: whenever in doubt, checkwith the insurer.

Free of Particular Average (FPA) This is the minimum, as it does not coverparticular average at all. Coverage is limited to general average and risks thataffect the vessel and multiple shipments like fire, boiler bursting, defects in hullor machinery, explosion, stranding, sinking, and navigational errors.When issuedunder American conditions (called Free of Particular Average American Condi-tions, or FPAAC), only losses directly caused by these few perils are covered.When issued under English conditions, called London Institute Cargo Clauses C(or Free of Particular Average English Conditions, abbreviated FPAEC), suchlosses are covered provided a covered peril occurs (i.e., they need not be directlycaused by the covered peril).

A comparison of FPA to the highest level of coverage, called “all risk,” willdemonstrate all the perils it doesn’t cover. In fact, it is seldom adequate forcargo with any real value. Despite this, both Incoterms 2000 and the UniformCustoms and Practice for Documentary Credits (UCP 500) accept FPA as sellercompliance with the insurance obligation unless otherwise specified. As we sawin Chapter 7, there are two reasons, and both revolve around the fact that thepremiums for this very limited coverage are quite low. First, some countriesobligate their citizens to procure casualty insurance from local insurers, andsuch coverage may be questionable. (A list of such countries may be found onthe American Institute of Marine Underwriters website www.aimu.org/brochures.html). The affected party would comply by purchasing low-cost FPAcoverage, while the other party would insure with a more confidence-inspiringinsurer. Second, goods are sometimes sold while on the water, and each subse-quent buyer may wish to purchase more inclusive insurance from its owninsurer.

Basic FPA may be enhanced by adding coverages for additional premiums.In fact, it may be upgraded this way to a more acceptable coverage level.

With Particular Average With Particular Average (WA) insurance addspartial losses for heavy weather, and adds lightning, sea water, and jettison tothe perils covered by FPA. Similar coverages are provided by London InstituteCargo Clauses B.

All Risk Americans call it All Risks, while everyone else calls it London Insti-tute Clauses A. Either way, this is the broadest level of coverage, adding freshwater damage, ship’s sweat, steam, condensation, damage by hook, impropercarrier stowage, theft, pilferage, mud and grease, nondelivery, breakage, andleakage to the with-particular-average perils. However, this coverage does notcover war or strike, riot, and civil commotion (SRCC). Coverage for these isnormally available for extra premiums, but in the wake of the September 11th

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attacks on the Pentagon and World Trade Center the insurance industry is stilldefining its position on terrorist activity.

Supplemental Coverages War risk coverage protects against the peril ofloss or damage caused by the actions of belligerents in declared or recognizedundeclared hostilities. Strikes, riots, and civil commotion coverage protectsagainst the peril of loss or damage caused by these, but not against warlike acts.Together, they provided fairly seamless coverage until the September 11 atroci-ties. These and the resulting “war against terrorism” give new meaning to thesepreviously well-defined coverages. Readers are urged to check their coverageagainst acts of terrorism with their insurer.

The Clauses

Marine cargo insurance consists of collections of clauses that have developedover many years of literally trial-and-error experience. The coverage levels wejust saw represent an attempt to bundle them into manageable groups, but theycan be as separate as the rubber stamps on which they originated.The followinglist includes only the most common, and the explanations are deceptively brief.(Otherwise, they would be unintelligible to anyone but an underwriter oradjuster.) Many of these clauses are “American Institute Clauses,” standardizedand promulgated by the American Institute of Marine Underwriters (websitewww.aimu.org).

• Abandonment clause. Provides the assured with the right to abandon dam-aged property and still claim full settlement from an insurer. Lacking this,the insurer is entitled to all rights to the covered property as a condition ofsettlement.

• Both-to-blame clause. Provision that when all ships involved in a collisionare at fault, all owners and shippers with monetary interests in the voyagemust proportionately share the losses.

• Delay clause. Exempts the insurer from claims for loss, damage, or deterio-ration arising from delay. A marine Extension Clause may counter this,unless it exempts coverage for delay-related losses caused by perishability,loss of market, or inherent vice.

• FOB/FAS clause. A secondary insurance coverage option added to an openmarine cargo policy permitting the assured to cover shipments only to thepoint where its responsibility for the condition of the goods ends (alongsideor on board the ship) for sales made under the FAS or FOB term.

• Free of Capture or Seizure Clause (F.C.&S.). Excludes the perils of war, cap-ture, or seizure.

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• Inchmaree clause. Covers losses caused by latent defect in a vessel’s hull ormachinery.

• Marine extension clause. Continues coverage during delay, deviation orchange in voyages, and other variations in normal transit beyond the controlof the assured. However, any such occurrences must be reported to theinsurer as soon as known. (See also South America clause.)

• Shore clause. Lists covered onshore perils at ports, such as fires, collapse ofdocks, sprinkler damage, lightning, natural disasters, and possibly lossesoccurring in local transportation.

• South America clause. Modifies both marine extension and warehouse-to-warehouse clauses for shipments to South America. It covers willful storageand/or delays after vessel discharge. However, it terminates 60 days aftervessel discharge.

• Subrogation clause. Upon settlement of a claim, the assured transfers to theinsurer its right to take action against any third parties that caused the loss.

• Sue and labor clause. Obligates the assured to take specific measures, suchas appropriate storage, to limit losses when a mishap occurs. These are nor-mally reimbursable by the insurer.

• Warehouse-to-warehouse clause. Covers goods from the point where theshipment begins (shipper’s door) to the point where the shipment ends(buyer’s warehouse) or a predetermined length of time (usually 15 or 30days) after the goods are discharged from the vessel. Extended coveragebeyond the predetermined time is usually available, usually for an addi-tional premium. (See also South America clause.) Care should be taken tomatch this coverage with the appropriate term of sale. For instance, if abuyer purchases insurance for a shipment made on the FOB Incoterm, cov-erage would attach once the goods are loaded on the carrying vessel. This isbecause under the FOB Incoterm, the seller remains responsible for thecondition of the goods until they are vessel-loaded.

The Policies

As its name implies, marine cargo insurance covers goods shipped by vessel.Most marine cargo policies may also be used to cover shipments made by othertransport modes, and warehouse-to-warehouse coverage includes precarriageand on-carriage to and from ports.

The easiest way to explain a marine cargo insurance policy is to consider acertificate issued against an open policy as illustrated in Exhibit 8.1. This onewas modeled on an actual certificate issued against an open policy owned by afreight forwarder that resells coverage to its shipper-customers. As such, it iswritten to be as general as possible rather than conform to a single user’s needs.

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CERTIFICATE OF INSURANCE NUMBER 703484 Insured Amount $ ______1__________We hereby certify that on the ____ day of ____2_____________, we, the undersigned, insured under, and subject to theterms and conditions of POLICY NO. HOGMF 270913 for WASHBURN & JONES INTERNATIONALIn the sum of______________3___________ Dollars, on _______________4_________________________.______________________________under deck. Valued at Sum Insured. Per_________5______________________ At and from____________6__________________ To ______________________7____________________.

It is understood and agreed that in case of loss the same is payable to the order of _____________8__________________ onsurrender of this certificate, which conveys the right of collecting any such loss as fully as if the property were covered by aspecial policy direct to the holder hereof, and free from any liability for unpaid premiums.______________________________________________________________________________________________________________

CONDITIONS This insurance is subject to the following currentMerchandise shipped under deck insured: Against all risks of American Institute Clauses: Amended F.C.&Sphysical loss or damage from any external cause, excepting those Warranty, S.R.&C.C. Endorsement, Marinerisks excluded by the F.C.&S. and S.R.&C.C. warranties. Extension Clauses, War Risk Insurance, 60 Day

South American Clause, American InstituteMARKS AND NUMBERS 9 Warehouse to Warehouse Clause.

______________________________________________________________________________________________________________ Shipments on deck (which must be declared to this Company at the time of reporting risks) are insured: Warranted free of particular average unless caused by the vesselbeing stranded, sunk, burnt, on fire, or in collision, but including risk of jettison and/or washing overboard. General Average and Salvage Charges payable according to Foreign Statement or per York-Antwerp Rules, if in accordance with the Contract of Affreightment. Including transit by craft, raft and/or lighter to and from the vessel. Each craft, raft, and/or lighter to be deemed a separate insurance. The Assured are not to be prejudicedby any agreement exempting lightermen from liability. It is understood and agreed, that in case any agreement be made by the Assured with any Carrier by which such Carrier stipulates to have, in case of any loss, for which hemay be liable, the benefit of this insurance, then and in that event, the insurer, shall be discharged of any liability for such loss hereunder. Held covered, at a premium to be arranged, in case of deviation or change of voyage or of any error or unintentional omission in the description of the interest, vessel orvoyage, or in the event of any interruption of the voyage or transportation, provided same be communicated in writing to the Company as soon as known to the Assured. When the property insured under this certificate includes a machine consisting when complete for sale or use of several parts, then in case of loss or damage covered bythis insurance to any part of such machine, this Company shall be liable only for the insured value of the part lost or damaged, or at the Assured's option for the cost andexpense, including labor and forwarding charges, of replacing the lost or damaged part; but in no event shall this Company be liable for more than the insured value of thecomplete machine. It is a condition precedent to any action, suit or proceeding for the recovery of any claim upon, under or by virtue of this Policy that such action, suit or proceeding shall becommenced within twelve (12) months next after the date of the accident, disaster or event causing loss of, or damage to, the insured goods or giving rise to a claim for sueand labor expenses or, in case of a claim for general average contribution, salvage and/or special charges, next after the date of actual payment thereof by the ASSURED:Provided, however, that if by the laws of the State or other place within which this Policy or any certificate thereunder is issued or where the action, suit or proceeding isinstituted, such limitation is invalid, then any such claim shall become barred and void unless such action, suit or proceeding shall be commenced within the shortest limit oftime permitted by the laws of such State or place to be fixed herein for the bringing of such suit, action or proceeding. No recovery for a Constructive Total Loss shall be had hereunder unless the property insured is reasonably abandoned on account of its actual total loss appearing to beunavoidable, or because it cannot be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred. In case of any loss or misfortune, it shall be lawful and necessary to and for the ASSURED, his or their factors, servants and assigns, to sue, labor and travel for, in andabout the defense, safeguard and recovery of the goods and merchandise insured hereunder, or any part thereof, without prejudice to this insurance, to the charges whereofthis Company will contribute according to the rate and quantity of the sum hereby insured; nor shall the acts of the ASSURED or of this Company in recovering, saving andpreserving this property insured, in case of disaster, be considered a waiver or an acceptance of an abandonment. The following Warranties shall be paramount and shall not be modified or superseded by any other provision included herein or stamped or endorsed hereon, unless suchother provision refers specifically to the risks excluded by the warranties and expressly assumes the said risks:A "Notwithstanding anything herein contained to the contrary, this insurance is warranted free from capture, seizure, arrest, restraint, detainment, confiscation, preemption, requisition or nationalization, and the consequences thereof or any attempt thereat, whether in time of peace or war, and whether lawful or otherwise; also warranted free, whether in time of peace or war, from all loss, damage or expense caused by any weapon of war employing atomic or nuclear fission and/or fusion or other reaction or radioactive force or matter or by any mine or torpedo, also warranted free from all consequences of hostilities or warlike operations (whether there be a declaration of war or not), but this warranty shall not exclude collision or contact with aircraft, rockets or similar missiles or with any fixed or floating object (other than a mine or torpedo), stranding, heavy weather, fire or explosion unless caused directly (and independently of the nature of the voyage or service which the vessel concerned or, in the case of a collision, any other vessel involved therein, is performing) by a hostile act by or against a belligerent power; and for the purposes of this warranty 'power' includes any authority maintaining naval, military or air forces in association with a power." "Further warranted free from the consequences of civil war, revolution, rebellion, insurrection, or civil strife arising therefrom, or piracy."B Warranted free of loss or damage caused by or resulting from strikes, lockout, labor disturbances, riots, civil commotion, or the acts of any person or persons taking part in any such occurrence or disorder. To conform with the Revenue Laws of Great Britain in order to collect Claims, this Certificate must be stamped within THIRTY DAYS afterreceipt in the United Kingdom. It is hereby agreed that any loss or damage shall be promptly reported to the office of this Company in New York or to the nearest located Agency as per back of thisCertificate.It is also understood and agreed that any loss or claim under this Certificate shall be paid at the current rate of exchange. Claims to be adjusted according to the usages of Lloyd's, but subject to the conditions of the Policy. In case of damage and/or loss (if covered by this insurance) claim must be immediately filed in writing against the vessel or other carrier, and a copy thereof and of thereply thereto must accompany any claim presented under this Certificate.

IN WITNESS WHEREOF, the said Company has caused these presents to be signed by its president, but this Certificateshall not be valid unless countersigned by an authorized representative of this Company or the Assured.

Countersigned by____________10_________________ PresidentIN CASE OF LOSS SEE LIST OF AGENTS ON REVERSE SIDE

THE VERY LARGE AND WELL-KNOWN INSURANCE COMPANY

Exhibit 8.1 An Open Marine Cargo Policy Insurance Certificate

Think of a policy beginning as a piece of paper with certain conditions. Infact, the conditions (also called perils) section outlines what the policy does ordoes not cover. There are some obvious contradictions within Exhibit 8.1, butthey take some close reading. For example, Exhibit 8.2 (enlargement) showstwo warranty clauses: (A) Free of Capture and Seizure and (B) Strikes, Riotsand Civil Commotion. It also states that they “shall be paramount and shall notbe modified . . . unless such other provision refers specifically to the risksexcluded by the warranties and expressly assumes the said risks. . . .” Remem-ber, in insurance jargon, warranty means the assured’s implicit agreement that aperil is not covered. Now, look at the following enlargement of the right handside of the Conditions section:

This insurance is subject to the following current American Institute clauses:Amended F.C. & S Warranty, S. R. and C.C. Endorsement, Marine ExtensionClauses, War Risk Insurance, 60 Day South American Clause, American InstituteWarehouse to Warehouse Clause.

The War Risk coverage trumps most of warranty clause A, and the S.R. andC.C. endorsement does likewise for B, so what happened? The answer is that the

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The following Warranties shall be paramount and shall not be modified or superseded byany other provision included herein or stamped or endorsed hereon, unless such otherprovision refers specifically to the risks excluded by the warranties and expresslyassumes the said risks:A "Notwithstanding anything herein contained to the contrary, this insurance is warranted free from capture, seizure, arrest, restraint, detainment, confiscation, preemption, requisition or nationalization, and the consequences thereof or any attempt thereat, whether in time of peace or war, and whether lawful or otherwise; also warranted free, whether in time of peace or war, from all loss, damage or expense caused by any weapon of war employing atomic or nuclear fission and/or fusion or other reaction or radioactive force or matter or by any mine or torpedo, also warranted free from all consequences of hostilities or warlike operations (whether there be a declaration of war or not), but this warranty shall not exclude collision or contact with aircraft, rockets or similar missiles or with any fixed or floating object (other than a mine or torpedo), stranding, heavy weather, fire or explosion unless caused directly (and independently of the nature of the voyage or service which the vessel concerned or, in the case of a collision, any other vessel involved therein, is performing) by a hostile act by or against a belligerent power; and for the purposes of this warranty 'power' includes any authority maintaining naval, military or air forces in association with a power." "Further warranted free from the consequences of civil war, revolution, rebellion, insurrection, or civil strife arising therefrom, or piracy."B Warranted free of loss or damage caused by or resulting from strikes, lockout, labor disturbances, riots, civil commotion, or the acts of any person or persons taking part in any such occurrence or disorder.

Exhibit 8.2 Enlargement of Paramount Warranties A & B

text on the bottom is preprinted boilerplate. The Conditions text may also bepreprinted boilerplate, or added to suit as it was always done in the good olddays. The problem is, in the good old days, this was usually done with a rubberstamp, so it was obvious that it was added to and therefore supersedes the corre-sponding boilerplate provisions. Nowadays, the entire certificate is likely to becomputer-printed on plain paper, so trying to figure what a certificate reallycovers often resembles watching a ping-pong match.

The Assured

The assured is the insured party. Many insurance certificate forms show theassured by name followed by the phrase “or order” or similar verbiage indicat-ing that the party entitled to make a claim may not be the original assured. Thisis very common with shipments made under letters of credit, where the issuingbank wants to be sure it can claim in case the goods it is financing are damagedor lost. Normally, such certificates are endorsed by each assured as they arepassed from party to party.

All assureds have a duty to behave as though there were no insurance coverin place. This means that they must provide adequate packing and eschew anyobvious avoidable risks—just as they would do if they had to bear any lossesthemselves.

The Value

The normal amount of marine cargo insurance is 110 percent of the CIF or CIPvalue (i.e., 110 percent of the value of the goods plus the cost of freight plus thecost of the insurance itself). Since the purpose of insurance is to restore theassureds to the positions they would have enjoyed if the covered peril hadn’thappened, this is the maximum insurers will pay unless special additional cov-erages have been purchased. The extra 10 percent is to compensate for loss ofuse of covered goods, for the proceeds being tied up during the claim processand for the time and bother involved in filing the claim.

The 110 percent of CIP or CIF value is also the default amount forIncoterms 2000 and the Uniform Customs and Practice for Documentary Cred-its (UCP 500). This will probably remain for future revisions.

Completing the Certificate

Referring to Exhibit 8.1:

1. Enter the amount of insurance coverage in numbers. This is usually 110percent of the CIP or CIF value.

2. Enter the date the insurance takes effect. It should be dated on or beforetransportation begins.

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3. Enter the insured amount in words.

4. Enter a description of what is being insured in terms that are both generaland specific enough to identify the shipment. For instance: “40 metric tonsof grade A wheat.”

5. Enter the vessel name and voyage number, or for air shipments the air car-rier name and flight number (if known).

6. Enter the place where coverage is to originate. For warehouse-to-warehouse coverage, this should be the place where the shipment origi-nates. For vessel shipments, also mention the port of embarkation(Columbus Ohio via Baltimore).

7. Enter the place where coverage is to terminate. For warehouse-to-warehouse coverage, this should be the place where the shipment ends.For vessel shipments, also mention the destination port (Frankfurt viaHamburg).

8. Enter the name of the party that should be paid in case of claim. It is oftena good idea to enter “order of” before the name if not already preprintedon a particular certificate form, so the named party may transfer coverageby endorsing and surrendering the original certificate.

9. Enter the shipping marks and numbers

10. An authorized employee of the policy owner countersigns here.

The Claim

Carriers at least superficially examine cargoes that they receive for shipmentfrom shippers or from other carriers. Any obvious damage or shortage is notedby the receiving carrier on the transportation document it issues. Documentsbearing such notations are called “foul,” while those without them are called“clean.” Given clean transport documentation, and barring an intensive cus-toms examination, the first party to discover any damage or shortage is likely tobe the buyer. Of course, an entire missing shipment becomes obvious because ofnondelivery.

Assureds have an obligation to file claims in a timely manner. Prompt atten-tion often keeps damage from getting worse. Further, the insurer’s subrogationrights against carriers depend on placing claims on them within permitted timeframes to avoid becoming time-barred.

Any damage or shortage noticed at time of delivery should be recorded onthe delivering carrier’s transport document, and the receiving party shouldmake and retain a copy. Incoming goods should be examined promptly onreceipt, and a preliminary notice of claim should be filed on the delivering car-rier for any damage or shortage that was not detected at delivery. This must bedone within the allowable time and in the form specified in the contract of car-riage. The same should be done with the insurer. The back of many insurancecertificates list names and addresses of claims agents in many countries. Should

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there not be a designated agent in the particular country, the notice should besent to the nearest Lloyds agent in that country, with a copy to the insurer’shome office.Where appropriate to the kind of goods, damaged goods should besegregated from undamaged goods, stored in such a way as to keep the damagefrom worsening, and removed from any wet packing. (Sue and labor.) Anydamaged packing should be retained, as it may be useful should a survey benecessary.

The following documents proving loss should then be submitted as a claim:

• A copy of the supplier’s invoice covering the entire shipment

• A copy of the packing list

• A copy of the contract of carriage (ocean bill of lading, sea waybill, air way-bill, truck bill of lading, postal receipt, or integrated-carrier waybill)

• A copy of the preliminary claim filed against the delivering carrier (withcarrier’s reply if available)

• A copy of any delivery receipts showing notations of apparent shortage ordamage

• A copy of the customs entry document

• The original or duplicate of the special cargo policy (insurance certificateissued against an open policy or voyage policy)

• Any applicable survey report

• If not obvious from the above documentation, proof of insurable interest

When an entire shipment is lost, a carrier notice of nondelivery should besubstituted for the preliminary claim and delivery receipt copies and surveyreport. Also, if the shipment were lost prior to customs clearance, there wouldbe no entry document.

The insurer will consider the following when processing the claim:

• Does the claimant have insurable interest?

• Were there any misrepresentations made? Were any material facts withheldfrom the insurer?

• Was the loss covered by an insured peril? Are there any applicable exclu-sions or warranties?

• Is the damaged or missing property the same as was covered, and did theloss take place within the geographic range of the policy during the timecoverage was in force?

• Is there any other insurance in force carried by the claimant covering theloss?

• Is the loss total, or is there any salvage value?

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• Is subrogation possible?

• Is there sufficient supporting documentation?

Reputable insurers process legitimate well-documented claims promptly. Alack of documentation, or failure by the claimant to fulfill its sue and laborobligations or to promptly claim on the carrier, may prolong the process. In aworst-case situation, it might even prejudice the claim.

Cost-Cutters

Probably the most remarkable thing about marine cargo insurance is its rela-tively low cost as compared to the value of goods it covers. Premiums paiddirectly to an insurer are usually expressed in cents per hundred dollars insuredvalue for all risk plus war plus strike, riot, and civil commotion coverage. Thoseare fractions of 1 percent! Still, the total premium bills can become a significantexpense for frequent users.There are ways for assureds to reduce their premiumcosts by assuming a greater part of the risks.

The most obvious way is to lower the overall level of coverage, say, from allrisks to with average.This involves excluding entire categories of perils, and maybe quite risky. There are better alternatives, namely:

• Co-insurance. Means that the assured retains the risk for a certain amountof the shipment value. It works in either of two ways. First, by prior agree-ment with the insurer, the assured under-insures by a predeterminedamount. (This may present problems with shipments made against letters ofcredit.) Second, some policies have fixed-dollar limits, and when shippersexceed them they are deemed to be self-insuring the excess amount.

• Deductible. Means that the assured agrees to self-insure a pre-agreed initialfixed amount or percentage of an insurable loss (for example, the first$500.00, or 10 percent of the cargo’s insured value, or a combination ofboth). Insurers like these because they keep the assured involved in the fateof its shipments, and therefore more interested in loss-prevention.They alsoreduce the number of small claims, which have relatively high processingcosts. Assureds like them because they often result in substantial premiumreductions.

• Franchise. Also called disappearing deductible, this works like a deductiblepercentage in that it frees the insurer from paying for covered perils up to apredetermined percentage of a shipment’s insured value. However, oncethat minimum is reached, the insurer pays for the entire loss. Therefore, theassured is self-insured for all covered losses up to the franchise percentage,and fully insured for all covered losses that exceed it. This has the sameattraction for insurers and assureds as found in deductibles.

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OTHER EXPORT-RELATED INSURANCE

There are additional types of insurance coverage that relate to export activity.Although rather specialized in the perils they cover, these may fill in gaps inmore widely used coverages.

Political Risk

Besides the country risk implicit in extending export credit, there are additionalperils that foreign governments may create. We have already seen one—unfairclaiming against demand bonds. The following are closely related.

Political risk cover is available from private insurers to protect assets againstfinancial loss from foreign government confiscation, expropriation, nationaliza-tion, war, revolution and inconvertibility of the host-country’s currency. TheOverseas Private Investment Corporation (OPIC), a federal—private sectorprogram, also provides this coverage for U.S. private investments abroad. Foradditional information, refer to its website at www.opic.gov.

Political risk contingency insurance is a specialized type of political risk cov-erage. It covers expenses incurred by businesses providing services against con-tracts in the event that the contracts are not ratified by a foreign government.

Political risk contract frustration coverage protects against loss caused by aforeign government’s failure to comply with the terms of a contract.

Carrier Insurance

Carriers need to provide insurance for their equipment and facilities as well as forthird-party liability.The following briefly describes the generally available types.

Hull insurance covers a vessel, its tackle, equipment, stores, and boats. Cov-erage is provided under three types of policies:

• Builders hull risk covers the builder against both prelaunch and postlaunchperils until possession of the vessel passes to the owner.

• Navigation risk insurance covers the vessel for damage to its own propertywhile it is operating. It also covers liability in case it collides with anothervessel (excluding damage to piers and wharves) and bodily injury.

• Port risk covers ships in port for long stays or for repairs. It covers the ves-sel on an all-risk basis, including movements from pier to pier.

Protection and indemnity (P&I) insurance provides broad marine legal-liability coverage, including hull, damage to another ship, its cargo, and itspotential earnings in case of collision, as well as liability to crew and other per-sons on board and damage to fixed objects such as piers. This coverage is oftenavailable through Protection & Indemnity clubs (i.e., mutual associations ofshipowners and operators providing insurance to members).

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Total loss only (TLO) insurance covers a vessel only against the unusualevent of total loss. It is quite inexpensive because its coverage is so limited.

Piers, wharves, docks, and slips insurance covers these facilities in the eventof high waves or collision by a vessel.

Stevedores legal-liability insurance covers dock workers against liability fordamage to cargo in their care.

Aircraft hull insurance covers aircraft whether they are in the air or on theground on an all-risk basis. The hull includes instruments, wings, motors, andwhatever other equipment is mentioned in the policy. The following exclusionsoften apply: illegal use, exceeding uses and/or geographic restrictions stipulatedin the policy, wear and tear, mechanical or structural failure, strike, riot and civilcommotion.

Error and Omission Insurance

As we will see in Chapter 10, freight forwarders have extremely limited liabilityto their shipper-customers. They may be held liable for gross negligence. Theycould possibly be vulnerable to suit if a customer were to incur fines or otherdamages levied by the government because of actions taken by the forwarder orby the customer based on a forwarder recommendation. Certainly, they wouldlose the business of a customer who suffered a considerable loss caused by for-warder error. For these reasons, forwarders may consider error and omission(E&O) coverage to be an attractive option.

Product Liability Insurance

As mentioned in Chapter 3, governments regulate products for health andsafety reasons. Consumer protection laws abound, and while most countries arenot as litigious as the United States, suppliers of defective products can usuallybe sued for damages.

Product liability coverage is well worth considering, particularly for majormarkets with highly developed consumer legislation. Given the number of con-sumer suits and the horror-story settlements awarded here, any insurable U.S.manufacturer should be able to add overseas coverage to an existing liabilitypolicy or find a willing insurer.

Health Insurance

Personnel traveling abroad need to consider their health insurance coverage.Does it cover medical treatment and hospitalization in other countries? Whatarrangements can be made to assure the foreign provider of payment, andthereby access treatment?

Many countries do not provide the level of medical care for serious injury orillness that is available in the United States. A company named Medjet offers an

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attractive supplement to health insurance by providing air transportation to itsmembers should they become hospitalized due to accident or illness virtuallyanywhere in the world. For details, visit their website www.medjetassistance.com.

LINKAGES

In establishing departments for the Linkage sections, we never allocated insur-ance since only large companies have specialized insurance departments. Wewill assign it to Traffic for exports, which is logical for either a user-owned openpolicy or for insurance purchased from a forwarder’s policy. Purchasing wouldprobably do the same for imports at companies that have their own open policy.

• Credit: Before presenting documents against letters of credit, check theinsurance certificate amount to make sure it agrees with the letter of creditconditions.

• Purchasing: Keep track of losses and insurance premium bills to determinewhether a cost-cutting strategy may be appropriate.

When possible, use the company’s open marine cargo policy to insureimported purchases.

• Sales: Check with the company’s bank and insurer to determine whetherany bid or performance commitments should be covered by performancebonds or standby letters of credit.

Be sure that the Buyer knows its obligations in filing claims.Make sure that Traffic knows the terms of sale (Incoterms) for each

order, so they may be aligned with appropriate insurance coverage.Try to get buyers to allow the company to provide insurance with its open

marine cargo policy.

• Everyone: Order The Ocean Cargo Handbook and The Ocean CargoClaims Handbook from the Chubb Group of Insurance Companies, 15Mountain View Road,Warren, NJ 07059,Attention: Marine Division.Thesetwo easy-to-read primers on insurance are both excellent and available atno charge.

ENDNOTE

1. “Cost Effectiveness Drives Exporters from L/Cs to Credit Insurance,” IOMA’sReport on Managing Exports, issue 01-10, October 2001, pages 1, 11.

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Chapter 9

Sales Contracts,Proforma Invoices,and Purchase Orders*

SALES CONTRACTS

The agreement between seller and buyer runs like a thread through every chap-ter in this book, because without it no export sale is possible. Consistent withtheir individual concerns, sellers should want to make it as easy as possible forbuyers to do business with them. Likewise, buyers, consistent with their individ-ual concerns, should want to make it as attractive as possible for sellers to sup-ply their needs. In this chapter, we will cover ways to create clear sales contractsthat address the concerns of both parties.

Whether multivolume tomes or three-line faxes, sales contracts all operateon the same principle: offer and acceptance. When these agree, you have a con-tract. The trick is to make sure that each party understands what the other iswilling to provide as well as when, how, where, and under what circumstances itwill be done.

This is often not as easy as it may seem. For instance, sellers are sometimesrequired to address regulations imposed by the buyers’ countries. These mayinclude preshipment inspection or documentary formalities such as consularinvoices (which we will see in Chapter 11). Such requirements add to the trans-action cost and may even increase the seller’s risk. Savvy sellers make the effortto learn which country-specific regulations require their participation, and pro-

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*This chapter is written from the perspective of an experienced international trader and cov-ers generally used commercial practice. It is not offered as legal advice. Common sense dictatesthat readers obtain the advice of competent legal counsel, particularly in drafting significantagreements and in creating boilerplate language to best express their objectives.

vide for them in their price quotations. Buyers, too, may incur some obligationsto the seller’s government, particularly with regard to U.S. export control com-pliance. U.S. exporters may want to build these into the sales contract, at leastfor products or destinations subject to a high level of export control.

Both parties entering sales contracts should take care to include those pointsthat are important to their respective situations. Obviously, the larger the con-tract, the more important this becomes. In case of a dispute, courts and arbitra-tors will look at the contract to determine what the parties agreed to. They willhave no choice but to fill in the blanks for issues that aren’t covered in the con-tract, sometimes providing results that neither party desired or even anticipated.

This section will cover those points that sellers and buyers normally con-sider important enough to include in their sales contracts.

The Basics

At an absolute minimum, a contract should indicate the following (in fact, it’sdifficult to imagine a contract without them):

• Parties directly involved (seller and buyer)

• Product (in at least sufficient detail for it to be identified)

• Quantity (or at least a range of quantities using commercial tolerances)

• Price (or at least a price schedule)

• Terms of sale (See Chapter 7)

• Terms of payment (See Chapter 12)

While perhaps less obvious, the following points should also be considered:

• Title transfer

• Possession rights

• Applicable law and venue

• Government regulations

• Dispute resolution

• Contract formation

Title Transfer

In international trade, the question of when ownership of the contract goodspasses from the seller to the buyer may be answered in several ways:

1. Ownership of goods shipped by vessel and covered by negotiable (order)ocean bills of lading.The original of this document conveys title as a bearer

202 Sales Contracts, Proforma Invoices, and Purchase Orders

instrument. We will cover negotiable bills of lading in Chapter 10. For now,simply consider it as an ocean bill of lading showing the word order in thebox marked “consignee.”

2. The preferred way to handle ownership of goods that are not shipped undernegotiable ocean bills of lading is to specifically cover it in the sales con-tract. Typical scenarios used to trigger ownership transfer include shipmentof the goods from (name of place) or arrival of the goods at (name ofplace). Ownership can also be tied to payment, or to some specified futureevent or time (handy for overseas inventory consignments).

3. Lacking a negotiable ocean bill of lading or a specific ownership transferclause in the sales contract, the issue would probably default to the provi-sions in the applicable law, which might consider such facts as how the par-ties conducted business with each other in the past. In the U.S. UniformCommercial Code, the term of sale may determine ownership for contractsin which this is not otherwise covered. However, this is not true ofIncoterms, which never indicate title transfer.

Possession Rights

Here we are addressing who gets to claim the goods on arrival, and under whatconditions. This is not necessarily tied to ownership. It is possible to own goodswithout possessing them, or possess goods without owning them (honestly aswell as by theft).

In practice, the party providing instructions to a carrier will specify what isto be done with the goods upon arrival. Should they be made available to a des-ignated party and only to that party? Should they be made available to whoeverpresents an original negotiable ocean bill of lading, regardless of who that partymay be? It normally follows that the party entitled to give such instructions isthe party contracting carriage with the carrier. In Incoterms, this would be thebuyer under Ex-Works or F Group terms, or the seller under C and D Groupterms.

Money can turn on these instructions, as some payment terms rely on thebuyer’s not being able to get the goods until payment has been made or promis-sory note-type instruments (called drafts) have been accepted. This securitymay be compromised when the buyer contracts for carriage, and is therefore ina position to provide carrier instructions that frustrate the payment terms.

Applicable Law and Venue

Given the fact that the seller and buyer must be in different countries in orderto have an international sale, what law should apply? Since most countries allowtheir citizens a fair degree of freedom of contract, the possibilities include thelaw of either country or some other mutually-acceptable body of law. This can

Sales Contracts 203

be a contentious issue, since parties normally prefer to use the law with whichthey are most familiar. Often, the stronger party decides, not because itsnational law is necessarily better but merely because it happens to be thestronger party.

The United Nations Convention on Contracts for the International Sale ofGoods (CISG, also known as the Vienna Convention) provides a way for sellersand buyers to meet in the middle. As its name implies, it is a body of interna-tional sales contract law developed by the UN. Countries wishing to participatemust ratify the CISG treaty, which then becomes a part of their national laws.

Readers can obtain current lists from the Status of Convention and ModelLaws section of the United Nations website www.uncitral.org.

The CISG covers only international sales of goods and does not apply to thefollowing sales:

• Goods bought for personal, family, or household use

• Auctions

• Securities or money

• Vessels or aircraft

• Sales done by operation of law

It also does not govern the validity of the contract or of its provisions, nordoes it cover the effect which the contract may have on the ownership of thegoods sold. It also does not address the seller’s liability beyond the contract.

The CISG automatically applies whenever the seller and buyer are bothdomiciled in different countries that have subscribed to it. Should the partieswish to use another body of law, they may do so, but this must be carefullyworded since the CISG has become part of the national law of their countries.For instance, to avoid it in the United States, a statement something like the fol-lowing would be needed: “This agreement is subject to the Uniform Commer-cial Code of the State of Ohio except for those portions that reference theUnited Nations Convention on Contract for the International Sale ofGoods . . .” or some such thing. Readers wishing to avoid the CISG are urged toobtain appropriate wording from an attorney.

Parties domiciled in countries that have not adopted that CISG may also useit if they wish and if their own laws permit. However, this may present a practi-cal problem in that attorneys and judges in countries that haven’t adopted itmay lack familiarity with it.

U.S. exporters will find some areas where the CISG differs from our nationalcontract law, the Uniform Commercial Code. The biggest difference is that U.S.law has a provision called the statute of frauds, requiring that contracts for thesale of goods over a certain (rather low) dollar amount be written. There is no

204 Sales Contracts, Proforma Invoices, and Purchase Orders

such requirement in the CISG; theoretically, million-dollar contracts may beentirely oral. There are also other differences, and readers are urged to consultcompetent counsel for a full picture of how using the CISG may affect the wayyou do business.

When a seller and buyer are in countries that have adopted the CISG, andagree to use it, the venue (place where any disputes would be resolved)becomes less important than it would otherwise be. After all, the same CISGapplies regardless of where the dispute resolution is handled. It is still an issue iffor no other reason than convenience, especially for deals between distant coun-tries. Venue obviously becomes far more important when the national law ofone or the other parties is used.

Government Regulations

Since sellers and buyers are domiciled in different countries in internationaltrade, there will be at least two sets of government regulations to address. U.S.sellers will be primarily concerned with the export control issues found in Chap-ter 2.These obligate foreign buyers to some extent, by restricting what they maydo with the goods, particularly items that are tightly controlled. Sellers maywant to consider incorporating into their sales contracts applicable use or resalerestrictions for tightly controlled items and their driving technology.

U.S. sellers are bound by anti-boycott regulations, which are also covered inChapter 2. Broadly speaking, these include prohibitions against refusal to dobusiness with any party here or in a friendly country for reasons of race, religion,gender, or national origin. They also preclude negative statements of origin orcarrier flag.

The Foreign Corrupt Practices Act (FCPA) also regulates export conduct.Again, broadly speaking, it prohibits U.S. parties from making payments to for-eign government officials, political parties, or political candidates for the pur-pose of securing or retaining business. On the other hand, it permits so-calledgrease payments to officials for expediting performance of functions that theyare bound to do anyhow—like getting one’s file closer to the top of an in-basketfor processing. While reference to the FCPA may seldom find its way into salescontracts, its provisions should be kept in mind while negotiating them. Self-blinding is not an acceptable excuse.

Naturally, foreign buyers are obligated to follow the regulations of their owngovernments. This can create an impasse when foreign government regulationsconflict with ours. The U.S. antiboycott regulations provide an excellent exam-ple. This was at one time a major problem and still sometimes happens withcountries boycotting other countries with which we are friendly. The buyer’scountry strictly prohibits imports of products made in the targeted country, andrequired certifications to that effect. For its part, the U.S. seller was prohibited

Sales Contracts 205

from making negative certifications. The impasse was finally resolved when theboycotting countries agreed to accept positive origin certifications, which U.S.sellers are permitted to issue. However, the problem still surfaces when some-one on the buyer’s side uses the wrong form calling for prohibited negative cer-tifications. It also arises with hiring practices or assignments to overseasprojects.

Although sooner or later every company involved in exporting will be askedto do so, it is illegal for U.S. sellers to create false invoices. The following articlefrom JoC Week illustrates the point.

A High Price to Pay—Double-invoicing case may indicate US is casting awider net for trading violations.When Advanced Computer Link Inc. exported components to an Irish companynamed ZRT in 1999, it billed the company $892.50. A few hours later, it sent thecompany a second, more accurate, bill for $89,250.

A simple mistake, you say? No harm, no foul? Not so, according to the U.S.attorney general’s office, whose yearlong investigation uncovered a pattern in theSan Jose, California–based company’s exports to Britain and Ireland. In January,the office elicited an admission of guilt: Advanced Computer was “double-invoicing” its clients to save them from paying the full amount of value-addedtaxes to their governments.

The Advanced Computer case is being interpreted by some as a sign that theU.S. government, in the wake of the September 11 terrorist attacks, is pushing itsenforcement authority beyond the nation’s borders, at least as it pertains to exportdocumentation.

“This whole thing about looking more carefully at international transactionsdoes seem like a trend for a whole range of reasons,” said Ronald W. Gerdes, a for-mer U.S. Customs Service staffer who is now with Sandler, Travis & Rosenberg, alaw firm specializing in international trade law. He noted that Advanced Com-puter, in pleading guilty to one count of wire fraud, waived the so-called revenuerule that prohibits courts of one jurisdiction from enforcing the revenue rules ofanother jurisdiction. It also waived a law involving the extraterritorial applicationof U.S. laws.

Some lawyers are warning their exporting clients to audit export documenta-tion to ensure that it accurately effects the commercial transaction. They acknowl-edge that exporters and forwarders are sometimes asked by their overseascustomers to engage in double invoicing, so they should beware of getting involvedin similar circumstances as Advanced Computer.

The risk is high. In exchange for its guilty plea, Advanced Computer agreed topay a $140,000 fine and forfeit $1.1 million in assets. The firm has been inactivesince early 2000, when it laid off all its employees. It said during court proceedingsthat it would cease operations after sentencing.

The reward, surprisingly, is low. The exporter gains nothing from “doubleinvoicing”—other than the overseas company’s continuing business, presumably.But the competitive nature of the business spurs many exporters to engage in thepractice.

206 Sales Contracts, Proforma Invoices, and Purchase Orders

Here’s how the Advanced Computer scam was run:

• Advanced Computer sold ZTR $89,250 worth of computer components.

• It sent ZTR an invoice for $892.50. ZTR submitted that invoice to the Irish gov-ernment, which assessed a value-added tax based on that amount.

• Advanced Computer sent ZTR a second invoice for $89,250, ensuring that itwould be paid the full amount for its exports.

Ultimately, Advanced Computer admitted to “double-invoicing” clients over ayear’s time, though the government settled for the one-count plea. When Britishauthorities suspected the scheme, they turned to the U.S. Customs Service for help.Customs turned the case over to the attorney general’s office.

Prosecutors say the case doesn’t signal any new policy. “We prosecute everycase on its own merit,” said Elizabeth de la Vega, chief of the San Jose branch ofthe U.S. attorney’s office for the Northern District of California. Assistant U.S.Attorney Marcia Jensen, who prosecuted the case, says she doesn’t have any otherdouble-invoicing cases pending.1

Besides inviting a violation of U.S. law, such requests say something aboutthe buyer. Anyone willing to risk fines and imprisonment by defrauding his orher government would probably think nothing of defrauding an overseas sup-plier. Even if clean business becomes possible with such people, this informationshould have a negative impact on payment terms.

U.S. sellers should have up-to-date knowledge of what they may and maynot do regarding compliance with foreign government regulations.We may facecompetitive disadvantages here, since no other country has similar anti-boycottregulations and few have anything like our FCPA. (In fact, some countries allowbusinesses to deduct the cost of foreign bribes from their taxable income as a“cost of doing business.” It should be noted, however, that most of the samecountries have strict laws prohibiting domestic bribery.)

Local sales representatives can be extremely helpful in making sellers awareof local regulations. They can also help convey and help explain seller concernsto local buyers.

Dispute Resolution

Despite the best intentions of sellers and buyers, and the most carefullydrafted contracts, disputes can happen. Generally, there are three choices forsorting out differences: litigation, arbitration, and alternative dispute resolu-tion methods.

Litigation places the issue in the hands of a court, and here is where choiceof law and venue become very important. Which court has jurisdiction, andwhat legal processes does it follow? What are the costs, and is appeal a realisticpossibility for either party? As court dockets are quite full in much of the world,

Sales Contracts 207

litigation may be both time consuming and expensive. Further, judges are notequally experienced in commercial practice, so there is the real possibility oftheir missing important issues in applying the law to specific situations.

Arbitration presents an attractive option. Here’s what the InternationalChamber of Commerce has to say about this touchy topic.

If disputes arise, how should they be solved? Litigation is by no means the onlyroute, nor is it necessarily the best one. Arbitration is an attractive alternative thatallows the parties a greater say in how their case is judged. Most arbitrations takeplace under the auspices of an arbitration institution offering a pre-established setof rules to govern the procedure. One of the most experienced with a worldwideoutreach is the ICC International Court of Arbitration. Parties who prefer arbitra-tion to litigation are strongly advised to include an arbitration clause in their con-tract. This clause will specify the institution and rules to which the parties will turnin the event of a dispute. It might also mention the applicable law, the number andchoice of arbitrators, as well as the place and language of the arbitration. Prior toor instead of arbitration, parties may prefer an amicable approach and seek toresolve their differences by conciliation, mediation or other consensual methods ofsettlement. Disputes are disruptive in any event, but the disruption can be mini-mized if the parties take time to agree in advance on how they will be settled.Whenever this point is covered in a sales contract, both the method and the forum(where and by whom) should be specified.2

When in drafting a sales contract the parties decide upon arbitration as thedispute resolution mechanism, they should specify as clearly as possible theform it will take. Attorney Jay Martin wrote an excellent article titled “How toDraft Arbitration Clauses in International Commercial Contracts” and may beviewed at http://iomanotes.com/exports/.

Mediation, or Alternative Dispute Resolution (ADR), is another dispute-resolution method that is growing in popularity. Assuming the disputing partiesare dealing in good faith—usually so if both exercised due diligence beforeentering the contract—many disputes can be successfully mediated by aninformed neutral party. This approach is particularly attractive when dealingwith cultures that abhor litigation (such as Japan). The ICC offers a structuredenvironment and a set of procedures that the disputing parties agree to followfor this process.

ICC Publishing provides its Rules for Arbitration in its publication 808(ISBN 92.842.1302.0, and ADR rules in its Guide to ICC ADR, publication 809(ISBN 92.842.1303.7). Both are available from www.iccbooksusda.com.

Contract Formation

While not intended to replace legal advice, the International Chamber of Com-merce has developed a product called “The ICC Model International Sales

208 Sales Contracts, Proforma Invoices, and Purchase Orders

Contract” to assist in drafting international sales contracts. It consists of a basicsales contract form (on both hard copy and floppy disk) with multiple choicesand blank spaces to be completed to address all the points we’ve seen, plus a fewothers such as: inspection of goods by the buyer, retention of title, cancellationprocedures, liability for delay, and time-bar (maximum time allowed for actionin case of non-conforming goods). Its three appendices include a sample com-pleted contract, an explanation of Incoterms, and the entire UN CISG. For fur-ther information, contact ICC Publishing Inc., phone (212) 206-1150, fax (212)633-6025, or visit their website www.iccbooksusa.com.

A new Internet variation called Paction became available in the Spring of2002. Now, instead of crating paper documents and passing them back andforth, sellers and buyers can create sales contracts online. The contract appli-cation form helps the initiator through contract creation by asking simplequestions that can be answered without extensive legal expertise. There arealso many help screens available. Once the application process is complete, atailor-made contract proposal is created for transmission to the counter-party.He or she will also have access to the full range of help facilities to explain theproposed contract’s contents and implications. The counter-party can thenaccept it as is, or edit the provisions to make a counter-offer. The originatorthen receives an automated e-mail notice that an amended draft with high-lighted changes is available. The two parties may continue to negotiate thisway until agreement is reached. The program records the entire process. Oncethere is a valid acceptance, the contract is fixed, and the parties cannot edit itfurther.

For further information on this leading edge product, refer to the ICC web-site www.iccwbo.org. The ICC is uniquely qualified to provide this information,as many of the relevant topics (Incoterms, payment terms, arbitration, etc.) arecovered by ICC trade codes.

PROFORMA INVOICES

Experienced exporters make their specific price quotations in the same formatthat they use for commercial invoices. Called proforma invoices, these quota-tions detail what the seller is willing to provide, as well as the cost for productand nonproduct services. The form they take is familiar to businesspeople in allparts of the world. Many times they are the “offer” portion of the “offer andacceptance” principle that we saw at the start of this chapter. When proformainvoices are prepared in sufficient detail, they often attract conforming pur-chase orders, and together form de facto sales contracts.

The following excerpt from IOMA’s Managing Exports article titled “Creat-ing Pro Forma Invoices That Recover All Your Export Costs” provides an excel-lent starting point:

Proforma Invoices 209

10 Steps in Preparing a Proforma InvoiceThe proforma invoice should be constructed with the same care you would use inactually invoicing a buyer. Following these 10 steps will help insure that you’vecovered all the bases.

1. Prepare the invoice on your firm’s letterhead or regular commercial invoice,clearly stating that it is a pro forma invoice. Assign it a unique number, date it,and include contact information for the seller, buyer, and any ship-to partyother than the buyer.

2. State the terms of sale and the Incoterm 2000 (international freight term), aswell as the body of law (i.e., CISG) that covers it.

3. State the proposed term of payment.

4. Specify a time limit for the validity of the proforma invoice (i.e., 60 days fromthe date of issuance).

5. Give an estimated shipment date (date of main carriage transport, not the datethe product leaves the factory), usually expressed in number of days (i.e., 90)following receipt of a conforming PO or L/C.” (Note: a PO is a purchase orderand an L/C is a letter of credit.)

6. “Indicate the currency of sale (especially crucial given currency fluctuations inemerging markets).

7. List quantity, description, unit prices, total price, and weight (net and gross, inpounds and kilos) of the exported goods.

8. Separately itemize all items you are adding to the selling price.” (These mayinclude such non-product services as export packing, prepaid freight charges,fees for required country-specific documentation, forwarding fees, bankingfees, and the cost of insurance.)

9. “Include an ‘all or nothing’ clause (i.e., ‘This offer is expressly limited to statedterms and can be only accepted in full’).

10. Notify the buyer of any ‘need to know’ information, such as requirements fora destination statement or product-specific export license.

Following this procedure will do even more than help ensure that you recover allexport-related costs.Your proforma invoice will also define the contractual elementsof a purchase agreement, thus containing all the information the buyer needs toopen a letter of credit or obtain an import license. In addition, your company’s pro-forma invoice will signal potential buyers that they are dealing with a professional.”3

To this I suggest the following information be added where appropriate.Some can be best handled in a covering letter (see Exhibit 9.2 on page 214)rather than included in the proforma itself.

• Buyer reference. Be sure to include any information that would help thebuyer reference the inquiry, such as any buyer-assigned number, the nameof the inquiring party at the buyer’s company, and the date of the communi-cation to which you are responding.

210 Sales Contracts, Proforma Invoices, and Purchase Orders

• Title. How, when and under what circumstances ownership of the offeredgoods is to pass from seller to buyer.

• HS Numbers. Harmonized System six-digit classification for each line-item.Before doing this, make sure that the buyer is in a participating country—otherwise, the HS numbers would probably not match the importing coun-try’s tariff classification system and cause confusion.

• Applicable trade codes. Some mature industries (often commodity trade)have industry-specific trade codes that everyone in that business under-stands and uses. They should be referenced to the extent they are includedin the proforma invoice.

• Origin. Specifying the origin of the goods may help the buyer determine theapplicable import duty. However, there are two points to watch.

1. Do not specify origin unless you are sure of where the goods actuallyoriginate. Sellers offering products with less than 100 percent U.S. con-tent to destinations other than NAFTA, Israel, or Jordan should con-sider asking the buyer for locally used origin criteria.

2. Always specify origin as a positive. As we’ve seen earlier, negative ori-gin certifications usually violate U.S. law.

• Dimensions. In addition to weights, specify approximate shipping dimen-sions if known. This will enable the buyer to shop for more advantageousfreight costs.

• Back orders. Since freight is often a major component in the total deliveredcost for international shipments, it is usually not a good idea to make partialshipments unless both parties agree. Sellers may wish to state their proce-dure for handling back orders, particularly when shipments typically includemany different items.

• Written requirement. Many companies include a proviso that all agreementsbe made in writing.This is particularly important when the covering law hasno such requirement, as is the case with the CISG.

• Payment term rules. Depending on the proposed payment method, specify-ing the governing rules may be a good idea. For letters of credit, use the cur-rent version of the Uniform Customs and Practices for DocumentaryCredits (presently UCP 500) for documentary credits or InternationalStandby Practices (presently ISP 98) for standbys. For collections (draftterms) use the current version of Uniform Rules for Collections (presentlyURC 522). Since all these rules come from the International Chamber ofCommerce, they are in worldwide use and should be readily available tobuyers through their bankers.

• Your bank. If requesting wire-transfer payment or a letter of credit, it is agood idea to mention the name, address, and SWIFT number of your bank.Many exporters attach a separate page with this information to all proformainvoices.

Proforma Invoices 211

• Signature. While not all buyers or countries require that such documents besigned, it is good practice to do so, since if all goes well they may becomepart of sales contracts. Besides, it is easier to establish a procedure to signthem all rather than attempting to keep track of which require signaturesand which do not.

• Certification. While it probably adds little substance, a brief statement like“We certify that this proforma invoice is true and correct” provides a nicetouch.

Not all businesses are affected by all these considerations, and sellers arefree to choose the ones they consider most important. The objective is to makethe proforma as informative as possible, without overloading it to the pointwhere it isn’t carefully read by the recipient.

The following proforma invoice from Incoterms for Americans4 illustratesthe CIP Incoterm.

Besides the advantages listed in the Managing Exports article we’ve justread, proforma invoices provide the seller with an opportunity to steer the dealby taking the initiative. Savvy exporters quote on C Group Incoterms wheneverpossible, as these provide them with both enhanced control and minimalresponsibility for the shipped goods.

PURCHASE ORDERS

For the seller, the whole purpose of the proforma invoice exercise is to get anorder. Detailed proforma invoices including freight and other charges make iteasier for the buyer to place one. After all, few buyers will enter a purchaseagreement without a reasonably good idea of what their total costs will be overand above the price of the goods.

Exhibit 9.3 shows a purchase order issued in response to the CIP proformainvoice shown in Exhibit 9.1 and its cover letter (Exhibit 9.2).

Importance of Checking Orders

In many cases, purchase orders serve as the “acceptance” part of sales contracts.This is particularly true for repeat transactions between sellers and buyers witha history of doing business with each other. For this reason, it is important thatsellers compare incoming purchase orders with the quotations to which theyrespond. If they differ from each other in a significant respect (such as price,quantity, promised availability, terms of sale, or payment), a sales contract nor-mally does not exist. Instead, there is an offer from the seller that was rejectedby the buyer. The purchase order then becomes a counter-offer from the buyer,which the seller would be free to accept or reject. However, sellers should

212 Sales Contracts, Proforma Invoices, and Purchase Orders

Purchase Orders 213

Proforma InvoiceExporter

Sold To

Forwarder

International Projects, Inc.PO Box 352650Toledo OH 43635-2650 USA

Callahan & Riddle LtdMaple Grove PlainsLondon E2E Q94England

Same C/O Zuhairbrit Heathrow Airport London, England

Zuhairbrit Customs & Car Wash ServicesHeathrow AirportLondon, England

Zuhair Forwarding12 Ruman DriveColumbus, OH

Proforma Invoice # Proforma Invoice Date

Proforma Validity Date Est'd Shipment Date

Payment Terms 30 Days

Sales Terms / INCOTERMS 2000

Reference #

5.03 August 23, 1999

30 days from Aug 23/99 30 days from order

Fax August 21, 1999

CIP Heathrow Airport

Quantitiy Units Description of Merchandise Unit Price Total Price

300 ea HOW TO BETTER YOUR GOLF GAME BOARD GAMES HS950490 5.00 1500.00

PACKING: 3 BOXESMARKS: 1/3 - 3/3

C&R London MADE WITH PRIDE IN USA

This proforma invoice is expressly limited to its stated terms and canbe accepted only in full. It, and any resulting sales contract, issubject to the U.N. C.I.S.G. We certify that this proforma invoice istrue and correct, and that the origin of these goods is the UnitedStates of America.

Signature

TOTAL ITEMS 1500.00EXPORT PACKING 75.00PRECARRIAGE 30.00MAIN CARRIAGE 190.00INSURANCE 23.07

TOTAL CIP 1818.07

Ship To

Notify Party

CURRENCY: U.S. Dollars

Title: Seller and buyer agree that sellerwill continue to own the contract goodsuntil payment of the total price hasbeen received.

Exhibit 9.1 Typical CIP Proforma Invoice

214 Sales Contracts, Proforma Invoices, and Purchase Orders

Exhibit 9.2 Covering Letter for the Typical CIP Proforma Invoices (Exhibit 9.3)

INTERNATIONAL PROJECTS INC.PO BOX 352650

TOLEDO, OHIO USA 43635-2650

August 23, 1999By fax and mail

Callahan &Riddle Ltd.Maple Grove PlainsLondon E2E Q94, England

Attn: Ms. Sue Riddle

Re: Your August 21, 1999 fax

Dear Ms. Riddle:

Thank you for the opportunity of quoting on your faxed requirements. Our pro-forma invoice 5.03 is enclosed.

It will take us about four weeks from receipt of order to print and substitute theplay books to your specifications (adding “u” to words ending in “or,” substitut-ing “whilst” for “while,” etc.), and we can ship immediately thereafter. If youneed them sooner, we can immediately ship our standard version with Ameri-can English play books.

Once we receive the air waybill from the carrier we will fax it along with a copyof the invoice to Zuhairbritt.

Please confirm that we are to send the original invoice and air waybill to Ginnyin your accounts payable department. Please also confirm that payment will bemade by a check payable at a U.S. bank.

Thanks again for your inquiry. We look forward to supplying you again, andhope to receive your order.

Very truly yours,

Mack CampbellMack Campbell

Export Manager

promptly inform the buyer of any such differences, and indicate whether or notthey are acceptable. Failure to do so could result in the buyer relying on theseller to perform. Worse, executing the order and catching the differences latercould result in the seller’s de-facto acceptance of the order as it was written.Lawyers call such conflicts a “battle of forms,” and different bodies of law treatthe situation differently.

Purchase Orders 215

PURCHASE ORDER Callahan & Riddle Ltd Maple Grove Plains London E2E Q94, England

The following number must appear on all invoices, bills of lading, and acknowledgments relating to this PO: Purchase Order: 82499

TO: International Projects Inc P.O. DATE 24-Aug-99 PO Box 352650 TERMS 30 Days Toledo OH 43625-2650 CIP Heathrow Airport USA SHIP VIA Air

QTY UNIT DESCRIPTION UNIT PRICE AMOUNT 300 ea Board Game- How to Better your golf game 5.00 $1,500.00

Re: Proforma #5.03

Please notify us immediately if this order cannot be shippedcomplete on or before: 24-Sept-99

SUBTOTALSHIPPINGINSURANCEOTHER

1,500.00 190.00 23.07 105.00

Ship To: Callahan & Riddle c/o Zuhairbrit Heathrow Airport London, England

Send Correspondence To:Callahan & Riddle LtdMaple Grove PlainsLondon E2E Q94, England

Approved by Date

$1,818.07TOTAL

NET

24 AUG 99

Exhibit 9.3 Purchase Order Responding to the CIP Proforma Invoice

It is also possible that a buyer may issue a purchase order without havingreceived a quotation from the seller. This happens often with small purchasesthat are ordered through catalogues or over the Internet. It may also happenwhen the seller and buyer are constantly involved in the same products, terms,and conditions, so that only the model, availability times, and quantity changefrom order to order. Whatever the reason, the positions are reversed. Thebuyer is now making an offer with a purchase order, which the seller may eitheraccept or reject. This would be done either with an order acknowledgement ifit is acceptable, or a counter offer in the form of a different proforma invoice ifit is not.

Purchase orders covered by documentary letters of credit (L/Cs) requirespecial attention.The L/C will be opened by the buyer’s bank, and will normallybe advised to the seller through a bank in the seller’s country. It will not arriveat the same time the order does, and will probably be sent to whichever depart-ment in the seller’s company that receives banking correspondence (i.e.,accounting or credit). As we will see in Chapter 12, the documents and timeframes required by the credit should reflect the seller’s responsibilities asagreed in the proforma invoice and the purchase order.This doesn’t always hap-pen because the L/C reflects the buyer’s banker’s understanding of the deal,which may differ from that of the buyer or the seller. For this reason, incomingL/Cs should be compared with both the proforma and the order. It is possiblefor the seller to request an amendment to the L/C, but these must originate fromthe buyer and the issuing bank.

Besides matching the order with the proforma (and any applicable L/C), itshould be checked for additional information not elsewhere covered. This mayinclude:

• Any required certifications or product descriptions that should appear incommercial invoices or other documents. Some countries require that all orat least specified portions of commercial invoices be in the local language.This may also include the local customs tariff line entry and its corre-sponding number. This can be particularly important for countries that donot subscribe to the Harmonized System and therefore have their ownunique classification-numbering system. Countries with import licensingand/or exchange control regulations often insist that the import licensenumber be referenced on commercial invoices, certificates of origin, orother documents. Sellers should comply with such requests where possible,but only if they believe the information they certify is accurate to the bestof their knowledge.As we saw earlier in the Advanced Computer Link arti-cle, knowingly producing false invoices can be a very expensive violation ofU.S. law.

• Additional “low maintenance” documentation such as certificates of origin.Unlike legalized documentation, this simple document typically does not

216 Sales Contracts, Proforma Invoices, and Purchase Orders

increase the seller’s cost or risk, and for this reason is not specifically con-sidered in the proforma invoice.

• The number of copies of relevant documents, and to whom they should besent.

• Any “ship to” or “notify” party other than the buyer, or a “ship to” addressif different from the buyer’s postal address. This could include such partiesas the buyer’s customs broker, an outside warehouse facility, or an on-carrier.

• Other parties to notify. The buyer’s local insurance company may need topromptly receive shipment details to effect insurance cover.

• Forwarder and carrier information for orders using the Ex Works or FGroup Incoterms.

• The name and address of the buyer’s bank of account, important for docu-mentary collection payment terms (as we will see in Chapter 12).

• Shipping-time preferences. While proforma invoices normally specify latestestimated shipping times, buyers sometimes prefer later shipments.

• Shipping marks.

None of the above information is typically found in an extensive formalsales contract or proforma invoice, and therefore would come only from thepurchase order. Unfortunately, in many U.S. companies, the purchase orderremains the great unread document for everything except pricing, quantities,and totals. Far too often, shipments are made contrary to instructions that buy-ers took the trouble to clearly indicate in their orders, but which sellers couldn’tbe bothered reading. The lame excuse “we didn’t notice that” ignores the factthat the guilty seller obviously did notice the quantity and price for the ship-ment to happen at all. In defense of sellers, this frequently happens when ordersare placed by fax or email, and are then followed by detailed instructions. Sell-ers can help avoid this by promptly replying to orders that do not appear to con-tain sufficient instructions rather than merely shipping them.

Failure to observe instructions provided by buyers can have far-reachingconsequences. Governments change their regulations frequently, and whatworked last time may now result in fines and detentions. Buyers change customsbrokers, forwarders, banks, and insurance companies, too—sometimes becauseof past disputes or unsatisfactory service. Using the wrong one could put thebuyer in a compromised position, and even adversely affect payment.

Acknowledgments

Regardless of how orders originate, the safest way to avoid controversy is tocarefully examine and promptly respond to any problems they contain. This isalso true for acceptable orders, which should be promptly acknowledged. Little

Purchase Orders 217

if anything irritates buyers more than placing an order and hearing nothing inreply. Did the seller receive it? Is it acceptable? For that matter, has it alreadybeen shipped? This is particularly maddening in international trade, where dis-tance, time zones, and often language make it difficult for a buyer to simply pickup the phone and follow up with the seller. It is also extremely rude.

Obviously, copies should be sent to any sales representative in the buyer’scountry. It can be very embarrassing to an otherwise attentive representativewhen the customer is better informed about what is going on.

Sellers are often in a better position to provide additional information whenacknowledging an order than they could when first quoting. An estimated ship-ment time of, say, within 30 days of receipt of order may turn out to be only 10days on the day the order is actually received. On the other hand, circumstancesmay prevent the seller from performing as promised. In this unfortunate situa-tion, the sooner the buyer is informed, the better for all concerned. Many buy-ers, especially those experienced in international trade, realize that things donot always play out like clockwork. Given adequate advance notice, buyers mayoften be able to change their own plans. Conversely, waiting until the lastminute to inform a buyer about such a problem is inviting trouble.

Order Entry

Once an order is received, all parties concerned should be made aware of it sothey can do their part toward successful fulfillment. Product must be allocated,produced, or purchased. For some products and/or destinations, export controlmay need to be revisited. Transportation reservations (called bookings) withcarriers may be required. The payoff for having requested this information atthe proforma stage is that this should go smoothly, as all concerned parties havealready signed on.

Savvy exporters keep their customers informed as the order progressesfrom entry to shipment. Obviously, the longer an order takes to process andship, the more important this becomes. Sales contracts covering long lead-timeitems such as machinery often provide for regular progress reports. Regardlessof the product involved, buyers appreciate this attention to detail. It goes a longway toward relationship building, which as anyone experienced in internationaltrade will tell you, is the name of the game.

Fulfillment

Once the order has been shipped in accordance with the selected Incoterm, theseller should have accumulated documents evidencing completion of eachoperation with which it has been tasked.The terms of payment will usually dic-tate where these documents go—to a bank for L/Cs or documentary collec-

218 Sales Contracts, Proforma Invoices, and Purchase Orders

tions, to the buyer for payment with order or open account, or perhaps to asales representative in the buyer’s country. Savvy sellers send copies to theirbuyers whenever the originals go elsewhere, but clearly mark them COPY—NON-NEGOTIABLE as they may otherwise effect possession rights to theshipped goods. These copies keep the buyer in the loop, and come in handy insituations where the originals become lost or the carrier fails to issue an arrivalnotice in a timely manner.

This brings us to item B1 in the buyer obligations found in every Incoterm2000, which says that the buyer is obligated to pay the price. It doesn’t say whenor how—the terms of payment do that—but it does say that it must happen. Bycompleting its assigned tasks and providing the documents that evidence this,the seller establishes its right to this, and brings the sales contract full circle.

LINKAGES

Perhaps the biggest advantage in using proforma invoices is that it imposes adiscipline on the seller’s organization. Information must come from manysources: product availability, product pricing, export packing, export controlcompliance, transportation issues and costs, sales terms, payment terms, andinsurance. Getting this information from those responsible for executing thesetasks BEFORE quoting should greatly enhance the chances of performing aspromised.

The same is not always true of more extensive sales contracts. Often, duringprotracted negotiation, important details are overlooked, with the result that aninvolved order is presented to hereto uninvolved operations people as a faitaccompli. “Here’s the deal, make it happen.” This is probably inevitable withlarge deals, but the drafters of such contracts should make provision for someflexibility so the fulfillment people on both sides can make it happen.

• Sales: Notify Compliance of any export control or boycott-related issues.Notify both Compliance and Credit of any requests for illegal behavior

(false invoicing, bribery, etc.).Try to steer the deal toward favorable Incoterms, which are usually in the

C group. (See Chapter 7.)Keep the buyer in the loop.The order fulfillment crew (order entry, order

processing, manufacturing) should keep you up-to-date on the progress ofany long lead-time items so you can do so.

• Traffic: Send non-negotiable copies of the documents for executed ship-ments to either the buyer, any local sales representative, or Sales (to sendthe buyer or representative) in situations where the original documents aresent elsewhere.

Linkages 219

ENDNOTES

1. Hensel, Bill Jr.,“A High Price to Pay,” Journal of Commerce, March 11–17, 2002, page26.

2. Reynolds, Frank, A to Z of International Trade, ICC Publishing, S.A., Paris, 2002, page289.

3. “Creating Pro Forma Invoices That Recover All Your Costs,” IOMA’s Report onManaging Exports, Issue 02-01, January 2002, page 4.

4. Reynolds, Frank, Incoterms for Americans, International Projects Inc., Toledo, OH,1999, pages 27–30.

220 Sales Contracts, Proforma Invoices, and Purchase Orders

Chapter 10

Transportation

Given the fact that distances are generally longer between the United Statesand its trading partners, the cost and speed of transportation takes on greaterimportance than in the domestic market. The fact that several carriers are ofteninvolved in a single international shipment makes understanding transportationeven more important.

The following basic definitions are necessary to understand internationaltransportation. Most have been extracted from the December 10, 2001 CMIDraft Instrument on Transport Law prepared by the United Nations Commis-sion on International Trade Law (UNCITRAL). While originally written formarine transport, they have been paraphrased for use in international airfreightshipments:

• Carrier. A party that enters into a contract of carriage with a shipper.

• Consignee. A party entitled to take delivery of goods under a contract ofcarriage or transport document (or electronic equivalent).

• Consignor. A party that delivers goods to a carrier for shipment.

• Contract of carriage. A contract under which a carrier undertakes to carrygoods in return for payment.

• Goods. The items received for carriage.

• Shipper. A party that enters into a contract of carriage with a carrier.

International transportation is governed by a hodge-podge of internationalrules. The TT Club of London provides an excellent summary of these rules, aswell as a list of countries subscribing to each, on its website www.ttclub.com.

221

CONTRACTS OF CARRIAGE

In order for transportation to take place, someone and one or more carriersmust enter into a contract of carriage. That someone could be the seller, thebuyer, or an agent acting on behalf of either. Regardless of who it is, it is obli-gated to pay the carrier for transportation. The carrier may be a nonoperatingcarrier or a performing carrier (also called an undercarrier). Either way, the car-rier provides transportation in return for payment.

Before we can consider the different contracts, we need to review the differ-ent types of carriage used in international transportation:

• Precarriage: transportation from the point where the shipment originates tothe departure point (airport, seaport, border) on the seller’s side.

• Main carriage: transportation from where the shipment leaves the seller’sside to the arrival point on the buyer’s side.

• On-carriage: transportation from the arrival point on the buyer’s side to theplace where the shipment ends.

Thus, in a full container shipment from Toledo, Ohio to Baden-Baden, Ger-many, the movement from Toledo to the port of Baltimore is precarriage, fromBaltimore Port to Hamburg Port is main carriage, and from Hamburg Port toBaden-Baden is on-carriage.

All three transportation legs must happen unless the goods actually begintheir shipment from a departure point (such as from a foreign trade zone at aport or airport), or are intended to remain at their overseas arrival point (suchas actual use at an overseas port or airport).

Here’s the way these play out in transportation contracts:

• Door-to-Door. One carrier contracts for precarriage plus main carriage pluson-carriage from the place where the shipment begins (“seller’s door”) tothe point where the shipment ends (“buyer’s door”). This carrier may per-form all the transportation itself, as integrated carriers like UPS, FedEx,BAX, and Airborne frequently do. More often, a single carrier will subcon-tract part of the transportation to other carriers. For instance, a full con-tainer may be shipped from Toledo to Baden-Baden under a door-to-doorcontract of carriage with a ship line. The ship line does not own the truck orrail line that moves the container from Toledo to Baltimore, or the truck orrail line that delivers it in Germany. In fact, it possibly may not even use itsown vessel, but instead rent space on another ship line’s vessel under whatis called a slot charter arrangement. However, it is responsible for gettingthe goods from the agreed starting point to the agreed delivery point,regardless of how it does so.

222 Transportation

• Door-to-Port (or Airport). One carrier contracts for precarriage plus maincarriage from the point where the shipment begins (“seller’s door”) to thearrival point on the buyer’s side. As with door-to-door, the contracting car-rier may handle the actual transportation itself, or may sub-contract someor all of it with other carriers. In any case, it is responsible for getting itdone.

• Port (or Airport)-to-Door. One carrier contracts for main carriage and on-carriage from the point where the shipment leaves the seller’s side to theagreed delivery point on the buyer’s side, which would be somewhere otherthan the arrival point.

• Port (or Airport)-to-Port (or Airport). This is main carriage only, and doesnot include pre-carriage or on-carriage. Therefore, three separate contractsof carriage would be needed to get a full container from Toledo to Baden-Baden using a ship line that offers only port-to-port service (namely, pre-carriage in the United States, main carriage to Germany, and on-carriage inGermany).

In the preceding definitions, we saw that a shipper is that party entering intoa contract of carriage with a carrier. Since the contract is between the shipperand the carrier, it follows that the shipper will normally provide instructions asto how the shipment will be handled and to whom the transport document willbe provided.

Those new to export often assume that they are shippers merely by virtueof tendering cargo for shipment, and that consequently the carriers are boundto follow their instructions. In other words, they confuse the notion of con-signor with shipper. One can hardly blame them, as many of the forms used inforeign trade tend to muddle the point. While consignors may very well alsobe shippers, this happens only when they contract for carriage, as in the C andD Incoterm groups.With sales made under the Ex Works or F Incoterm group,it is the buyer who contracts for at least main carriage, and the carrier may beexpected to follow the buyer’s instructions. This point may be extremelyimportant with payment terms, since most documentary credits and documen-tary collections rely on the seller’s access to correctly executed transportationdocuments.

Another point to consider is that parties that frequently contract for car-riage can usually negotiate lower freight costs than those that don’t. Carrierswould consider a large company that habitually sells on F Group Incoterms asmall customer. Conversely, even a small trading company doing business on Cor D terms (and thereby frequently contracting for carriage) is often takenmore seriously. We will see this issue again in the forwarder section of thischapter.

Contracts of Carriage 223

PERFORMING VERSUS NONOPERATING CARRIERS

Carriers may be broadly divided into two types: performing carriers that actuallytransport the goods, and nonoperating carriers. The latter contract for carriagewith shippers and then subcontract with performing carriers (which in this situa-tion are called undercarriers). Nonoperating carriers are typically Non-Vessel-Operating-Common-Carriers (called either NVOCCs or the recently createdterm Ocean Transportation Intermediaries, OTIs), and air-freight consolidators.

NVOCCs began as purely container consolidators, combining less-than-containerload shipments to fill containers. Ship lines favor NVOCCs with low“freight of all kinds” (FAK) freight costs because the lines prefer containerizedcargo and because many of the NVOCCs command large freight volumes.Using their low FAK freight costs, NVOCCs often can compete with ship linesfor full container business, an activity viewed less cordially by the lines. Perhapsthe best definition of an NVOCC is that it acts as a carrier to a shipper, and as ashipper to a carrier.

Air-freight consolidators perform much the same role for air cargo asNVOCCs do for ocean cargo.

Ship lines have formed alliances whereby they engage in slot-chartering (i.e.using space on each other’s vessels).When this happens, what is normally a per-forming carrier acts as a nonoperating carrier, while another ship line becomesthe performing carrier by actually transporting the cargo.

Some carriers act in both performing and nonoperating capacities for thesame shipment. This usually happens when more than one mode of trans-portation is used (multimodal). For instance, a ship line providing door-to-doorcarriage usually subcontracts the pre-carriage and on-carriage to ground trans-porters, while handling the main carriage itself. (If it is involved in slot-chartering, it might not be the main carrier either!)

In view of these possible permutations, it is important to focus on the car-riage contract or contracts to determine who is responsible for doing what, andat what cost.

FORWARDERS

To say that forwarder selection is extremely important would be a gross under-statement. It is absolutely vital for successful exporting of tangibles larger thanintegrated small package carriers handle. (As we will soon see, the integratedcarriers have already bought into the forwarding business.)

Forwarders typically provide most or all of the following services:

• Determine carrier availability to various destinations

• Shop for competitive freight costs consistent with desired transit times

224 Transportation

• Apprise their clients of any country-specific documentary requirementsimposed by the destination country

• Make the shipping arrangements, often selecting the carrier or carriers

• Prepare the main carriage (or multimodal) transport document for the carrier

• Provide insurance coverage when necessary

• On occasion, bank documents under letter of credit or documentary collec-tion terms

The last four activities intimately involve the forwarder with shipment-execution and even payment term compliance. Given these important functions,forwarder selection and the right to provide handling instructions are equallyimportant.

Although they charge a per-shipment fee and pass on out-of-pocket costs,forwarders derive most of their income from the brokerage they receive fromthe carriers they favor with freight bookings. (Since brokerage is unavailable bylaw to shippers in the United States, this represents no extra cost to the ship-pers.) It therefore follows that the forwarder that makes the booking will han-dle the shipment (i.e., the forwarder representing the party that contracts forcarriage). As we saw earlier, this may be the seller (under C and D Incoterms)or the buyer (under Ex Works or F Incoterms). Everything we saw about theshipper-carrier relationship applies to shipper-forwarder.

There are more reasons to use one’s own forwarder whenever possible. For-warding is not a particularly high-profit business, and in order to survive most(probably all) must handle more shipments than they can adequately control.Forwarders will give first priority to their repeat customers and handle any“walk-ins” on a time-available basis.The problem is that you are always a “walk-in” when using the other party’s forwarder.

The pecking order gets more exacting, as all customers are not equal to aforwarder. Some make more and larger shipments than others, and therefore goto the head of the line. Again, it’s carrier selection that counts, not necessarilycompany size.

In the good old days, forwarders represented shippers in their dealings withall involved parties, including carriers. However, most large forwarders nowhave their own NVOCC and/or air freight consolidation operations, and havetherefore become non-performing carriers. Further, the larger integrated carri-ers have purchased forwarding companies, so we now have operating carrier–forwarder combinations as well. This can have strange results. For instance,FedEx owns Tower, UPS owns Fritz, and if you use either Air Express Interna-tional or Danzas, your forwarder is the German Post Office! This trend towardmerger and acquisition is likely to continue. A customer enjoying large shipperstatus with a medium-sized forwarder may be considered small potatoes by anacquiring giant. For these reasons, exporters seeking adequate service levels and

Forwarders 225

attractive rates from both forwarders and carriers should attempt to contractfor main carriage whenever possible.

There is always a trade-off between large and smaller forwarders. Large for-warders can usually provide more in the way of services, using their networks ofoffices throughout the world. (However, service levels may vary considerablyfrom office to office.) They are also often able to obtain lower freight costs fortheir customers because of the large number of shipments that they control. Onthe other hand, smaller exporters may find a higher level of tender love and carewith smaller forwarders simply because their continued business is more impor-tant. Smaller forwarders have formed alliances both here and overseas, enablingthem to approach the worldwide service capabilities that their larger competi-tors offer.There are also niche forwarders that specialize in one kind of productor one geographic area.

There is no convincing argument for using any one of these types as opposedto another. However, savvy exporters agree on one thing—when you find onethat works well, route as many shipments through it as you can.

U.S. law requires that forwarding companies be licensed by the Federal Mar-itime Commission (FMC) in order to receive brokerage on vessel shipments.They must also maintain a surety bond with the FMC. Apart from this, there isno particular licensing requirement or required examination. Forwarders havevery limited performance liability except for acts of gross negligence, which arealmost impossible to prove. While some forwarders will help make large cus-tomers whole in case of forwarder-error, this is done as a goodwill gesture forcommercial reasons rather than a legal responsibility. Many forwarders carryerrors and omissions (E&O) insurance to protect themselves and their cus-tomers from serious repercussions.

Most serious forwarders belong to the National Customs Broker andFreight Forwarder Association of America (NCBFAA). This organization pro-vides a membership directory and may be reached by phone at (202) 466-0222or at its website www.ncbfaa.org. It also promotes training by offering a Techni-cal Certification Program leading to the Professional Ocean Forwarder creden-tial, which is recognized as a mark of excellence throughout the industry.

Exporters are well advised to question buyer-designated forwarders whenrequired to use them. Some smaller firms may lack the FMC license—a good rea-son for not using them. It’s also a question of competence, as a forwarder’s per-formance is only as good as the people in each office. Speaking of which, it mayalso be a good idea to ask whether they carry errors and omissions insurance.

SHIPPER’S LETTER OF INSTRUCTION

The Shipper’s Letter of Instruction (SLI) (see Exhibits 10.1 and 10.2) is the wayshippers convey their instructions to forwarders and carriers. As previously

226 Transportation

Shipper’s Letter of Instruction 227

TO:

DATE: OUR REFERENCE:

Please handle the referenced shipment as follows, showing us as shipper on all transport documentation.

CONSIGNEE: The following must appear in the consignee field of the resulting main carriage transport document:

SHIPMENT PARTICULARS* Terms of Sale (Incoterms 2000): term place* Mode: Main Carriage by air ocean* Consolidate: yes no* Freight payment: prepaid collect* Your charges: bill to us bill to consignee* Insurance: insure at 110% of the CIF or CIP value. Do not provide insurance.

EXPORT CONTROL STATUS No license required. The following ECCNs or license exception codes apply

Shipment against export license, a copy of which is attached. Shipment against export license, the original of which is in your possession.

EXPORT REPORTING We are authorized AES filers (code ) and will report the export ourselves. Please report the export in our behalf. Our EIN number is No export declaration necessary because of low value.

HAZARDOUS MATERIAL This shipment contains no hazardous material. This shiment contains the following hazardous materials. A completed hazardous materials declaration will accompany the cargo.

BANKINGShipment is covered by a letter of credit. Please prepare conforming documentation and:

Return it to us soon enough for timely presentation. Forward the L/C and documentation to our bank for review.

Attention: . Send copies to us. If, and only if, you find that the documentation conforms to all L/C terms and conditions, forward it to the U.S. advising or confirming bank by courier, with copies to us.

No letter of credit is involved: Send all documentation to us.

Send all original documentation to the following party with copies to us:

FROM: A Very Large and Important Shipper1 George Baty Drive, Torchville, OH 43567

Phone (419) 112-1212 Fax (419) 112-1213 Email: pres@taita.com Contact party: email:

1

2

3

4

5

6

7

8

9

Exhibit 10.1 Shipper’s Letter of Instruction

mentioned, the seller’s instructions are more likely to be followed when itappoints the forwarder and contracts for carriage. However, it should giveinstructions to forwarders and/or carriers regardless of the terms of sale, sincefailure to do so would be giving them carte-blanche authority. It may even beargued that clear instructions are more important when dealing with an unfa-miliar buyer-appointed forwarder than with one’s own.

The SLI was for many years married to the Shipper’s Export Declaration bypatterned carbon multi-form sets used to avoid repetitive typing of the sameinformation on different documents. Computer assisted documentation andelectronic export reporting combined to eliminate the need for these sets, givingthe SLI a life of its own. This is a big advantage, since much of the standardinformation found on the old forms had little to do with shipper instructions,while the pertinent information was too often lost among data that properlybelonged on the export declaration.

We may now use this document for its intended purpose. The pertinentinformation includes:

1. Forwarder or carrier name and address.

2. Date and shipper’s reference.

3. Consignee name and address. In this case, we are using the term consignee inits literal sense; the party to appear in the Consignee field of the main car-riage document.This may be the buyer or a mutually acceptable party namedby the buyer. For vessel shipments, the word order may be placed here so thatthe resulting document would be a negotiable ocean bill of lading.

4. Shipment particulars:

• Terms of sale (see Chapter 7)

• Mode. State the type of main carriage.

• Indicate whether the shipment should be consolidated with other cargoor proceed by itself. Consolidation may result in longer transit times,but at least for ocean freight provides the benefits of containerization.This point obviously does not apply to full container shipments.

• Indicate whether main carriage (and possibly on-carriage) is to be paidby the shipper (C or D Group Incoterms) or by the consignee (ExWorks or F Group Incoterms).

228 Transportation

For use when the shipper does not prepare the Shipper’s Export Declaration

SCHEDULE B DESCRIPTION QUANTITY WEIGHT D/F ECCN STATUS VALUE

Exhibit 10.2 Shipper’s Letter of Instruction—Supplement

• When this is sent to a forwarder rather than a carrier, indicate whetherthe consignor or the consignee will pay forwarding fees. The normalpractice is that they be paid by the party paying the main carriagefreight charge.

• Indicate whether the forwarder or carrier is to insure the shipment.While most forwarders and air carriers can insure, few ship lines pro-vide insurance.

5. Export control status. Indicate whether a license is required and whetherany Export Control Classification Numbers or license exceptions apply.

6. Export reporting. Indicate who is to file the export declaration.

7. Hazardous Material. Indicate whether and what “hazmat” is included in theshipped goods.

8. Banking. Indicate whether the shipment is covered by a letter of credit.

• If so, indicate whether the original documents should be sent to theshipper (or consignor), the shipper’s bank, or the U.S. advising or con-firming bank. (See Chapter 12 for details on how letters of credit work.)Experienced exporters often have letter of credit documentation sentdirectly to their banks for pre-screening.

• If no letter of credit is involved, the payment terms dictate where theoriginal documents go. If other than open account, they should be sentto the shipper (or consignor). If open account, they would usually besent directly to the consignee with copies to the shipper.

9. The consignor should prominently identify itself. Large shippers shouldalso provide the name of a contact party.

The supplement page lists reportable Schedule B numbers, product descrip-tions, Schedule B reporting quantities, weights, domestic or foreign statuses,ECCNs, export license statuses, and values. It is needed only when the shipperdoes not prepare the export declaration.

THIRD-PARTY LOGISTICS PROVIDERS

Third-party logistics providers (3PLs) are companies that provide a full range oftransportation and related services, such as scheduling, storage, shipping, importclearance, picking and packing, and onward distribution. To a great extent theyreplace many of the functions of an in-house traffic department. This distribu-tion pattern gained considerable popularity in the 1990s. When they work well,they may provide huge cost savings, but mismatches can lead to serious logisti-cal problems.

The following article from IOMA’s Managing Exports provides some usefulpoints in whether 3PLs in general and any one in particular could be right for you.

Third-Party Logistics Providers 229

7 Steps to Choose the Right 3PL for Your Export OperationsAs exporters further expand their operations into global markets, the logisticalchallenges involved become daunting. These can include transport, warehousingand distribution, not to mention negotiating the customs regimes of dozens of dif-ferent nations and complying with complex U.S. export laws. Faced with such chal-lenges, export pros at both large and small companies are opting to outsourcemany functions to Third-Party Logistics Providers (3PLs).

If your company is one of the growing number considering this option, what doyou need to know to make informed choices—both with regard to what specificactivities to outsource and to which 3PL to choose as a partner?

Reasons to OutsourceExporters are considering 3PLs for three fundamental reasons:

1. Lower costs: While specific companies will realize different cost savings,experts say that exporters can expect an average savings of approximately 15percent on their logistics bills when outsourcing.

2. Improve customer satisfaction: This will result from factors like guaranteeddelivery times and greater overall flexibility and responsiveness to customerneeds.

3. Increase competitive advantage: With the 3PL market growing in double dig-its annually and showing no signs of slowing down, chances are that some ofyour competitors will soon be taking advantage of 3PL services to win andkeep international customers.

What Functions Can You Outsource?A recent poll of U.S. companies by Ernst & Young and the University of Tennesseefound five of the most outsourced logistics functions:

1. Outbound transportation: Many 3PLs have developed from freight forward-ing and customs brokerage firms and have links to worldwide transportationservices.

2. Freight bill auditing/payment: Invoicing and collections are options offered bymany 3PLs.

3. Warehousing: Due to their size, 3PLs can lower per-unit costs of overseaswarehousing.Their facilities also include modern electronic inventory trackingsystems. Since inventory is the single largest supply-chain cost, taking advan-tage of 3PLs “just-in-time” operations can result in significant savings.

4. In bond transportation.

5. Freight consolidation/distribution.

In addition to these functions, many 3PLs now supply a host of other “valueadded” services to exporters, including the following:

• After-sales support. Many 3PLs can stock parts near your customers, providein-field repair facilities, and manage merchandise returns when necessary.

230 Transportation

• Merge-in-transit. Under this arrangement, a 3PL receives your company’sgoods from multiple origin points and assembles them at a single place nearyour international customer.

• Foreign customs expertise.

• U.S. export law compliance.

• Multiple overseas offices.

• Expertise in EDI systems.

Export pros can decide to outsource any or all of these functions, depending onyour company’s particular areas of strength and how much control you wish tomaintain. However, an important consideration to note when negotiating is that the“plain vanilla” package isn’t always the cheapest in the long run.“Value added” ser-vices are billed by the hour—unless you negotiate them up-front in your contract.

Choosing A 3PL: 7 StepsRandall M. Terlfer, head of The Progress Group, a supply chain consulting com-pany, has developed a seven-step methodology for 3PL selection:

1. Conduct a baseline analysis of what you want to outsource. This analysisshould include a full description of the financial and service elements.

2. Assess risk. Make sure you have full support from top management and thatyour firm’s employees don’t oppose the shift to outsourcing.

3. Benchmark other operations that are managed by potential 3PLs. Once you’venarrowed down your list to a few finalists, assemble a cross-functional team tobenchmark their operations. Use site visits to evaluate the 3PLs’ “logisticsplanning ability, technology, culture, career paths and development of man-agers and executives, business team integration, quarter and year-end profi-ciency, cost-effectiveness, service quality focus, and performance againstmetrics.”

4. Issue an RFP. This should provide extensive operational detail; ask who willrun the implementation.

5. Select the right partner.

6. Contract for value. Don’t rush the contracting process. Aim for a partnershipas opposed to (an) adversarial relationship.

7. Implement. Implement on a full-year calendar cycle in order to make pre- andpost-outsourcing quality and financial comparisons clear.You should maintaina monthly or quarterly “report card” that tracks factors like on-time delivery,picking and loading errors, timely and accurate receipt of invoices, and physi-cal inventory.

Export professionals should also consider what industries the 3PL specializesin and make sure the provider has a disaster-recovery plan.1

Need more help? The previous Managing Exports article made the follow-ing recommendations:

Third-Party Logistics Providers 231

• Who’s Who in Logistics? Armstrong’s Guide to Third Party Logistics ServiceProviders (6th Edition), Armstrong & Associates, Stoughton, Wisconsin–based 3PL consultants, phone (608) 873-8929.

• The Progress Group, Roswell, Georgia–based supply chain consulting firm,phone (770) 641-8929.

Point five in the previous article recommended that the right partner beselected. However, this may not always be a given. Helen Atkinson makes some“what if” recommendations and introduces us to the next generation—4PLs—in the following JoC Week article.

Get a Pre-nuptial AgreementNot all marriages are successful, and that goes for businesses too.When a companyenters a contract with a third-party logistics provider, it’s always prudent to plan anexit strategy in case things don’t work out.This advice has become more importantas 3PLs have increased their emphasis on technology.

Stacie Kilgore, a senior analyst for Boston-based Forrester Research Inc., saidthat if a company hires a 3PL and becomes dependent on its software, the disrup-tion can become severe if the partnership turns sour.

She noted the growth of 4PLs, or lead logistics providers that combine theofferings of other third-party logistics companies, including software providers,while managing a company’s entire logistics operation. “Lead logistics providersmake sense for complex global firms like Ford and Hewlett-Packard (because)supply-chain partners enable them to focus on core competencies like design andmarketing,” Kilgore said in a recent report. “But users should protect themselvesfrom irrevocably losing control of their logistics operations.”

Shippers should walk into a partnership with a 4PL “with a clear grasp of futureownership or controlling software rights,” Kilgore said. Many logistics providersoffer software and services that are “embedded” in their package—Excel PLC hasincorporated tracking and supply chain management software from G-Log; MenloLogistics uses customer management software from Baan Corp.

In such cases, Kilgore said, it may be advisable for a customer to negotiate soft-ware rights for those software applications. That way, if the shipper decides to partcompany with the lead logistics provider, it can continue to use the cargo visibilityor customer management systems its staffers have learned to use.

Advances in technology have helped large logistics companies refashion them-selves as 4PLs.“Without information technology, we couldn’t run this kind of busi-ness,” said Klaus Herms, chief executive of Kuehne & Nagel International AG,which this month contracted to manage all distribution of finished products world-wide for Nortel Networks Corp.

Tom Dorval, Nortel’s leader of strategic initiatives, said the contract withKuehne & Nagel has a “strong governance process for operations and an escala-tion process for issues if they should arise. The success of the 4PL model we areentering into with K&N rests on both the operational expertise they bring imme-diately and the long-term value of leveraging information to optimize the supplychain.”

232 Transportation

A 4PL must immerse itself in a shipper’s logistics operations and get “an over-all view of the logistics needs of a client” if it is to save them money, Herms said.Any lead logistics provider also must coordinate the disparate information-technology systems that most clients have inherited from acquired companies ordeveloped piecemeal in separate regions or departments.

Helms said Kuehne & Nagel plans to coordinate 40 or 50 data systems or Nor-tel, a process that will take about six months. “Then we’ll see how well the 4PLproduct will work and how the expectations are filled on both sides,” he said. Heemphasized that although Kuehne & Nagel has hired many of Nortel’s logisticsstaff, it doesn’t own Nortel’s logistics operation.“It’s a long-term contract,” he said,“but it has a beginning and an end.” He added that “the software we provide is aninterface between their system and our system. It’s tailor-made, so it’s useless ifyou don’t continue.’ In the event of a split, he said, ‘It’s our software.”

Steve Banker, director of supply chain solutions at ARC Advisory Group, saidthere have been a few examples of “quick explosions” in which logistics outsourc-ing contracts suddenly fell apart. But he said the break-up usually occurs moregradually.

“The more common experience is that they work in the first three years, andbecome progressively less productive in year four or five,” he said. “It’s provenvery difficult to put together flexible contracts so that as a company’s businesschanges, the 3PL’s relationship changes as well in a productive way.”2

The Logistics World website www.logisticsworld.com has an extensive listing of 3PLs.

AIR TRANSPORTATION

There are several different kinds of airfreight carriers:

• Performing carriers may be either combination carriers transporting bothpassengers and cargo or all-cargo carriers. They issue their own air waybilltransport documents, and usually provide airport-to-airport service.

• Airfreight consolidators act as nonoperating carriers and place cargo withperforming air carriers (called undercarriers).They issue their own “house”air waybills (HABs or HAWBs) which are supported by master air waybills(MABs or MAWBs) issued by the performing carriers. Note: Keep in mindwhenever using nonperforming carriers that the undercarrier always has theright to be paid. Should a nonoperating carrier go out of business or other-wise fail to pay the undercarrier, the shipper remains liable regardless ofwhether or not payment was made to the nonoperating carrier.

• Integrated carriers like Airborne, BAX, FedEx, and UPS use both their ownequipment and performing air carriers.They normally provide door-to-doortransportation, and their air waybills are often computer-generated at thepickup point by consignors using carrier-provided programs.

Air Transportation 233

Some airlines and all airfreight consolidators and integrated carriers pro-vide forwarding services.

Air cargo has been deregulated in the United States for many years, and car-riers are free to price as they see fit. Most issue price lists (called tariffs) andoffer volume-based discounts, and airfreight consolidators in particular areoften open to negotiating freight costs for particularly attractive shipments.Tar-iffs may be either commodity-specific or zone-based for nonhazardous freightof all kinds (popular with integrated carriers).

Freight charges are calculated on a comparison of weight to volume, and thefollowing formulas effective on or about October 1, 2003 are more-or-less stan-dard for determining pure freight:

• Cubic inches / 138 = dimensional pounds versus actual gross weight inpounds

• Cubic centimeters / 5000 = dimensional kilos versus actual gross weight inkilos

In either case, the higher number (dimensional versus actual weight) is roundedup to the next whole unit and multiplied by the freight rate.

We qualified these formulas as more-or-less standard because some air car-riers provide favored customers who ship volume-rated cargo with higher con-version numbers than the typical 138 or 5000. This way, the customer gets alower cost but does not get a lower per-pound or per-kilo price to use as a bar-gaining tool with competing carriers. Remarkably, this game persists, eventhough everyone knows how it works.

Since the September 11 atrocities, air carriers have incurred substantialincreases in their operating costs for enhanced security procedures, increasedinsurance costs, etc.The cost of aviation fuel has also seen some serious changesover the past few years. Carriers are passing these charges on, often as accesso-rial charges (surcharges) to reflect the fact that no one knows for sure whetherthey will stabilize in the foreseeable future.

The September 11th attacks also caused a reduction in passenger flights.This reduced the cargo capabilities of combination carriers and, to a lesserextent, those of integrated carriers to destinations for which they rely on com-bination carriers.

Most international airfreight shipments are covered by the Warsaw Con-vention, which sets carrier liability at 17 Special Drawing Rights (approximatelyUS$20) per kilo. However, most air carriers offer insurance either for a separatepremium or as a valuation surcharge. Further, as we saw in Chapter 8, airfreightshipments may be covered by marine cargo insurance policies.

Sellers should avoid using the following Incoterms 2000 for sales contractsinvolving main carriage by air: FAS, FOB, CFR, CIF, DES, and DEQ. Theseterms are marine-restricted.

234 Transportation

Air waybills (see Exhibit 10.3) may be issued by either operating carriers orairfreight consolidators. When issued by operating carriers, they have only onenumber called the Master Air Waybill Number (MAB or MAWB).When issuedby consolidators, they have two: a “house” Air Waybill (HAB or HWAB) num-ber issued by the consolidator as well as the Master Air Waybill Number. Ourexample is a multipurpose air waybill that is favored by consolidators.

Unlike marine transport documents, air waybills can never be made in nego-tiable (i.e., ORDER) form. This may present problems when a seller wishes tokeep the buyer from obtaining the goods without first dealing with a local bank.(See sight draft, documents against payment in Chapter 12.) In such cases, ship-ment may be made to a trusted third party in the buyer’s country—such as thebuyer’s bank—but only with prior agreement from that party:

1. The shipper’s name and address go here.

2. Either a house or master air waybill number goes here. If an HAB, theMAB will appear elsewhere on the document (for this example, infield 9).

3. The carrier’s name goes here.

4. The consignee’s name and address go here.

5. The U.S. destination control statement is so often required that it isusually preprinted.

6–8. The departure airport, code, requested routing, and destination gohere.

9. In this consolidator air waybill example, the master air waybill numbergoes here.

10. These fields indicate the currency in which the freight charges arepayable as well as whether the weight and valuation charges are pre-paid or collect.

11. This is the value declared for carriage. If a higher value than the carriertariff liability amount is shown, the carrier’s liability is increased inreturn for a valuation charge.

12. This is the value for customs clearance purposes (i.e., the dutiablevalue of the shipment).

13. The destination airport goes here.

14. The flight(s) and date(s) are shown here.

15. The amount of any carrier-provided insurance, if any, goes here.

16. Any special handling instructions go here.

NOTE: Fields 17 through 23 are completed for each differently ratedcommodity in the shipment.

17. Number of shipping pieces.

Air Transportation 235

236 Transportation

Shipper’s Name and Address Non Negotiable

Air Waybill(Air Consignment Note)

Issued by

Consignee’s Name and AddressThese commodities, technology, or software were exported from the UnitedStates in accordance with the Export Administration Regulations. Diversioncontrary to U.S. law is prohibited.

Aiport of departure (Addr. of first Carrier) and requested routing

code By first carrier [Routing and Destination] Air Waybill Number Currency CHGS Wt/Val Other Declared Value for Carriage Declared Value for CustomsCode

PPD COL PPD CollAirport of Destination Flight/Date For Carrier Use Only Flight/Date Amount of Insurance INSURANCE: If Carrier offers insurance and such insurance

is requested in accordance with conditions on reverse hereof,indicate amount to be insured in figures in box marked“amount of insurance”.

Handling Information

No. of Gross kg Rate Class Chargeable Rate Total Nature and Quantity of GoodsPieces Weight lb Commodity Weight Charge (incl Dimensions or Volume)RCP Item No

Prepaid Weight Charge Collect Other Charges

Valuation Charge

Tax

Total Other Charges Due Agent

Total other Charges Due Carrier

.................................................................................................................................................Total prepaid Total Collect Signature of Shipper or Agent

Currency Conversion Rates cc Charges in Dest. Currency

............................................................................................................................................................Executed on (Date) of (Place) Signature of Issuing Carrier or its Agent

House Air Waybill Number

House Air Waybill Number

Shipper certifies that the particulars on the face hereof are correct and that insofar as any part of the consignment contains dangerous goods, such part is properly described by name and is in proper condition for carriage by air according to the applicable Dangerous Goods Regulation.

1

2

3

4

5

6

7 8 9 10 11 12

13 14 15

23

24 2526

27

28

17 18 19 20 21 22

16

Exhibit 10.3 The Air Waybill

18. Gross weight in the chargeable unit, either pounds or kilos.

19. The rate class and commodity item number found in the carrier’s pricelist (tariff).

20. Chargeable weight—the greater of the actual or dimensional weight.

21. The rate goes here.

22. The product of the chargeable rate multiplied by the rate goes here.

23. The shipped goods are described, including their export-packeddimensions.

24.–25. The air freight and accessorial charges are entered into either the pre-paid or collect columns.

26. Any charges other than those preprinted in 24 and 25 are itemizedhere.

27. The shipper or forwarder signs, certifying that all the provided infor-mation is correct.

28. The carrier signs and dates the document, thereby executing a contractof carriage.

Each of the integrated small package carriers has its own air waybill varia-tion. Shippers usually complete and transmit these on line, printing a paper bar-coded copy for the carrier to scan when the shipments are picked up.

An appropriate exemption code must appear on air waybills covering ship-ments that do not require Shipper’s Export Declarations because of low valueand those that are reported electronically. For details visit the Census Bureau’sForeign Trade Division website at www.census.gov/foreign-trade/regulations/ftsrletters/index.These rules change from time to time, so work backwards fromthe latest letter.

It is possible to charter aircraft, that is, to rent them anywhere from a singleflight to long-term. Conditions range from equipment only to inclusion of crew,ground support, and provisions (called wet chartering).

MARINE TRANSPORTATION

Marine transportation has existed for thousands of years and, as such, has manyage-old customs and a large industry-specific vocabulary. It is also subject toseveral bodies of regulations, some of which are also quite old.We will cover theobvious points in this book. Readers seeking more detailed knowledge of thisfascinating subject may consider investing in Bes’ Chartering and ShippingTerms. While the 11th edition is out of print, the 12th is promised soon. Readersin the United States may then obtain it from the N.Y. Nautical InstrumentCorp., www.newyorknautical.com.

Marine Transportation 237

Vessel shipments differ from other modes of transportation in at least fourobvious ways. First, they normally spend more time in transit than do shipmentsby air or ground. Cargoes must typically wait for some days at departure portsbefore vessel loading, and ships obviously move slower than aircraft, trains, ortrucks. Next, cargoes are exposed to damp environments during the voyages inaddition to the time they spend near water at port facilities.Also, they tend to behanded over from one carrier to another more often. Finally, cargo shipped byvessel is generally heavier than that of air shipments.Together, these differencesmake adequate export packing for vessel shipments more critical than for mostair shipments.

As mentioned previously, there are several different international conven-tions that cover marine transport. The oldest, The Hague Rules of 1924, formsthe core of U.S. law called the Carriage of Goods By Sea Act (COGSA) of 1936.Although hopelessly obsolete, U.S. COGSA applies to all vessel shipments inforeign trade made to or from the United States. The second international con-vention, the Hague-Visby Rules of 1968, has been accepted by 27 countries andis the core for the U.K. Carriage of Goods by Sea Act. U.K. COGSA applies toall vessel shipments in foreign trade made to or from the United Kingdom. (Seethe potential for confusion?) The third, the Hamburg Rules (officially the U.N.Convention on the Carriage of Goods by Sea 1978), has few adherents.

A new attempt at a more-or-less generally accepted set of rules for marinetransport has passed the final drafting stage. Called the CMI Draft Instrumenton Transport Law, this proposal was developed by the Belgium-based ComiteMaritime International for the United Nations Commission on InternationalTrade Law, and is now in the hands of national governments for consideration.It reflects up-to-date shipping practice, and if ever adopted would be a welcomereplacement to the current muddled collection of antiquated rules. For details,visit the CMI website, www.comitemaritime.org.

In the meantime, U.S. shippers labor under a U.S. COGSA that limits carrierliability to $500 per “package,” which may be a 40-foot container. However, theOcean Shipping Reform Act of 1998 (OSRA) permits shippers and carriers tonegotiate confidential shipping contracts. Not only does this permit confidentialfreight rates, but carriers and shippers may negotiate other points, such as car-rier liability. This means that at least large shippers may be able to achieve rea-sonable liability limits for their cargoes.

There are several different kinds of marine carriers, and we will cover themindividually.

Ship Lines

Ship lines (also known as liners) are carriers that offer transportation to thegeneral public and operate on a scheduled basis among the ports they serve.Since they have facilities at their normal ports of call, they provide service on

238 Transportation

“liner terms” (also called “berth” terms) which means they load and unloadtheir own vessels.

Modern ports are secure areas with two gateways—one on the land side andthe other at the piers where vessels load and unload.These can be literally milesapart. Each port has its own way of operating, but the following steps are gen-erally true:

• The consignor ships or brings its outbound cargo to the port’s land gatewayby truck or rail. The latest arrival date at the port (called the cut-off date) isoften five or more days before vessel loading begins.

• Each shipment receives at least a cursory inspection, and if no adverse con-ditions are found, a clean dock receipt is executed. (We will see this in moredetail in Exhibit 10.3 later in this chapter.)

• The cargo is then removed to the ship line’s terminal where it is staged forvessel loading.

• Sometimes, the cargo is removed from the terminal and placed on the piernext to the vessel for a short time prior to loading. (This practice is decliningat modern ports, as automated handling equipment reduces the number oftimes cargo is picked up and put down.)

• The vessel is loaded.

Under liner terms, ship lines handle all the steps from the port’s land gate-way, and do the reverse at the port of discharge. They normally incorporatethese costs in their freight rates but add others like terminal handling charges asaccessorial surcharge items, as they vary from port to port. This can create anodd situation for sellers using the FAS or FOB Incoterms.Although under theseterms terminal-handling charges should be for the seller’s account, ship linesnormally bill them to the buyer as the party contracting for carriage and payingthe freight bill.

Ship lines operate various types of vessels. Containerships are configured tohandle the maximum numbers of containers both below and above deck, andseldom transport anything else. Roll-on-Roll-off (RO-RO) vessels loadwheeled cargo by means of ramps, while Lighter Aboard Ship (LASH) vesselstransport pre-loaded shallow draft barges much the same as container shipscarry containers. There are also general cargo vessels that can handle noncon-tainerized cargo and containers or both. Bulk cargo vessels, however, are largelywithin the province of chartering rather than ship line service.

Containerization has become the dominant method of ship line transport. Itprovides both enhanced cargo safety for shippers and huge shipping economiesfor carriers by drastically reducing vessel loading and unloading times. Whilemany consignors make full container shipments, ship lines can accommodateless than containerload cargo by loading containers themselves or by acceptingconsolidated containers from NVOCCs.

Marine Transportation 239

Pricing Ship lines issue price lists called tariffs. These are usually commodity-specific and include a range of ports that the line serves, such as U.S. East Coastto Bordeaux-Hamburg Range. Formerly, the rates shown in these tariffs wereavailable to all shippers of similar products under similar conditions. Thiscaused some very tight commodity descriptions such as “pleasure boats origi-nating in Knoxville, Tennessee.” The Ocean Shipping Reform Act of 1998(OSRA) permits confidential freight contracts with confidential pricing. Theresult is that carrier tariffs now apply only to small shippers lacking bargainingpower, and merely serve as a starting point for negotiations with large shippers.

The antitrust exception long enjoyed by ocean carriers was continued underOSRA. This means that they may freely discuss pricing among themselves.

Shippers have a remedy called shippers associations. OSRA permits ship-pers to join these non-profit organizations, which use their combined purchas-ing power to negotiate favorable service contracts with carriers.

Freight Calculation Pure ocean freight is what ship lines charge for trans-portation only. It is calculated by comparing size to weight. (We saw this conceptwith air transport, but the numbers are larger for ocean.) There are three waysof doing this, and each carrier determines which it follows.

1. Metric.The greater of the total cubic meters versus the total gross weight inmetric tons. This has become the dominant method for calculating oceanfreight. Readers who pack in U.S. measurements should use the followingcalculations for each shipping piece:

a. Inches of length × inches of width × inches of height = cubic inches

b. Cubic inches / 1728 = cubic feet

c. Cubic feet / 35.31 = cubic meters

d. Total gross weight in pounds / 2204.6 = metric tons

e. Multiply the larger of c or d by the freight rate.

2. U.S. Short Ton

a. Cubic feet / 40 = measurement tons

b. Gross weight in pounds / 2000 = short tons

c. Multiply the larger of a or b by the freight rate.

3. U.S. Long Ton

a. Cubic feet / 40 = measurement ton.

b. Gross weight in pounds / 2240 = long tons

c. Multiply the larger of a or b by the freight rate.

Ship lines often quote full container shippers on a per-container basis. How-ever, the above arithmetic is implicit in their internal calculations as they strive

240 Transportation

to obtain the optimum mixture of bulky cargo and heavy cargo to maximize ves-sel capacity usage.

Some types of cargo are quoted in unique ways. For instance, one ship linequotes pleasure boats that are within maximum length and width parameters ona lineal foot basis.Again, the ship lines keep the above arithmetic in mind whendoing so.

In addition to “pure” freight, ship lines impose surcharges reflecting costitems that may change substantially on a day-to-day basis or are port-specificand therefore cannot be included in the pure freight rates. These include:

• Currency Adjustment Factor (CAF). Reflects changes in the value of thecurrency in which the freight is billed.

• Fuel Adjustment Factor (FAF, also called BS for Bunker Surcharge).Reflects major changes in the cost of fuel.

• Terminal Handling Charge (THC). Reflects the port-specific cost of vesselloading and unloading.

• Port Congestion Surcharge. Reflects the carrier’s increased cost due tocongestion-related delays.

• Container Rental Surcharge. Reflects the additional cost of delivering acontainer to a port that generates little return cargo.

• Arbitrary. Reflects the additional costs of serving ports outside of a shipline’s normal range.

• Vessel Insurance Additional Peril. Reflects the additional cost of insuranceon a vessel (hull insurance) entering a war zone.

There will undoubtedly be additional surcharges as governments implementenhanced security measures in the wake of the September 11th atrocities.

Dock Receipt This is an intermediate document (see Exhibit 10.4) used byship lines to receive and track outbound cargo at their terminals. It is preparedby the forwarder or shipper and may either accompany the shipment or morelikely will be faxed to the ship line’s terminal. On arrival at the port, the ship-ment is subject to at least a cursory inspection for obvious shortage or damage.If none is found, the receiving clerk signs off, and the shipper has a clean docu-ment proving that the shipment arrived in apparent good order. On the otherhand, any apparent shortage or damage will be noted, creating a foul documentproving that the shipment was in some way defective when it arrived at the port.Such adverse notation will be carried forward on all subsequent transport doc-uments, including the marine transport document. It is therefore best that anyapparent shortage or damage be corrected before the shipment moves on, sothat clean transportation documents will result.

Marine Transportation 241

242 Transportation

SHIPPER BOOKING NUMBER

EXPORT REFERENCES

FORWARDING AGENTCONSIGNED TO

NOTIFY PARTY

DOMESTIC ROUTING

PRE-CARRIAGE BY PLACE OF RECEIPT BY PRE-CARRIER

LOADING PIER/TERMINAL

ONWARD INLAND ROUTING

PORT OF LOADINGEXPORTING CARRIER

FOREIGN PORT OF UNLOADING

MARKS AND NUMBERS NUMBER

OF PACKAGESDESCRIPTION OF COMMODITIES GROSS WEIGHT

(KILOS)MEASUREMENT

ONLY CLEAN DOCK RECEIPT ACCEPTABLE

DELIVERD BY

LIGHTER TRUCK

ARRIVED........Date Time

UNLOADED......Date Time

CHECKED BY FOR THE MASTER

BY PLACED

IN SHIP

ON DOCKLOCATION

RECEIVED THE ABOVE DESCRIBED GOODS OR PACKAGES SUBJECT TO ALL THETERMS OF THE UNDERSIGNED’S REGULAR FORM OF DOCK RECEIPT AND BILL OFLADING WHICH SHALL CONSTITUTE THE CONTRACT UNDER WHICH THE GOODSARE RECEIVED COPIES OF WHICH ARE AVAILABLE FROM THE CARRIER ONREQUEST AND MAY BE INSPECTED AT ANY OF ITS OFFICES.

(RECEIVING CLERK)

DATE

10

1

2

3

9

11 12

14 15

4

5

6

7

8

13

16 17 18 19 20

21

22

Exhibit 10.4 The Dock Receipt

Dock receipts are usually made from the same master document as maincarriage marine transport documents, and the information shown in fields 1through 20 of both documents will be identical. It is important that whoeverprepares the dock receipt includes exactly any particular information requiredto be on the transport document, particularly the Exporter, Consigned to, andDescription of Commodities fields.

1. Enter the shipper’s name and address.

2. Enter the consignee.This may be the buyer, a buyer’s agent, or to the orderof another party such as the shipper, a bank issuing a letter of credit, or any-one else the buyer and seller agree upon. See the Marine Transport Docu-ment section that follows for the significance of consignment instructions.

3. A notify party is anyone designated to receive an arrival notice from theship line.

4. The booking number is issued when space is reserved on a particular vesselsailing.The carrier, forwarder, and shipper use it thereafter to reference theshipment.

5. Enter any export references that are to appear on the ocean bill of lading.

6. Enter the forwarder’s name, address, phone, fax, and FMC license numbers.

7. This is a handy blank field that may be used for any additional export ref-erences.

8. Enter any domestic routing (precarriage) instructions or reference num-bers here.

9. If the shipment is made on a door-to-door or door-to-port basis, enter theprecarrier’s name.

10. If the shipment is made on a door-to-door or door-to-port basis, enter theplace where the pre-carrier picked up the shipment.

11. Enter the ship line name.

12. Enter the port of loading.

13. Enter the name of the ship line’s terminal or the pier number.

14. Enter the name of the port of discharge.

15. If shipment is made on a door-to-door or port-to-door basis, enter the finaldestination and routing.

16. Enter the package marks and numbers.

17. Enter the number of packages.

18. Enter the commodity description(s). Since this is what will appear on themarine transport document, be careful to match verbiage required by anyletter of credit or customer purchase order.

19. Enter the gross weight(s) in kilos.

20. Enter the overall measurements (length, width, and height) in cubic meters.

Marine Transportation 243

21. The receiving clerk signs here.

22. This is the most important information on the dock receipt. It tells thereceiving clerk not to accept delivery unless he or she is prepared to sign aclean dock receipt. The consignor should correct any apparent damage orshortage that would cause the clerk to make a foul notation and have thecargo redelivered to obtain a clean dock receipt. Situations like this are areason for putting the forwarder’s name and phone number and the book-ing number on the dock receipt.

Marine Transportation Document This is the main carriage documentused for transport by vessel. It may be issued by an operating carrier or by aNon-Vessel-Operating-Common-Carrier (NVOCC).

These documents serve as contracts of carriage and, depending upon theinformation found in the “consigned to” field, may also convey title to theshipped goods. The applicable rule of thumb for title is that whenever the wordORDER appears in this field:

• The marine transport document is a negotiable bearer document.

• Ownership of the goods may be transferred from one party to another bysimply endorsing and passing the document on to the subsequent buyer.

• The carrier will insist on the surrender of an original marine transport doc-ument before releasing the cargo.

• The carrier will release the cargo to anyone who first presents an originalmarine transport document.

• In British English, this and only this is called an ocean or marine bill of lad-ing. Since the International Chamber of Commerce uses British English asits operative language, this narrow definition applies to many of the rulesused in international trade.

Conversely, whenever the word order does not appear in the Consigned tofield, we have the following situation:

• The marine transport document is not negotiable.

• The marine transport document does not transfer ownership to the goods.

• The carrier will release the cargo only to the party named in the Consignedto field.

• The carrier may or may not require that an original marine transport docu-ment be surrendered. However, the party claiming the cargo must presentidentification proving that it is the party shown in the Consigned to field.

• Although in American usage this document is called a straight or non–negotiable ocean or marine bill of lading, it does not fit the tight BritishEnglish definition. Instead, it is called a sea waybill or data freight receipt.

244 Transportation

Marine Transportation 245

SHIPPER BOOKING NUMBER

EXPORT REFERENCES

FORWARDING AGENTCONSIGNED TO

NOTIFY PARTY

DOMESTIC ROUTING

PRE-CARRIAGE BY PLACE OF RECEIPT BY PRE-CARRIER

LOADING PIER/TERMINAL

ONWARD INLAND ROUTING

PORT OF LOADINGEXPORTING CARRIER

FOREIGN PORT OF UNLOADING

MARKS AND NUMBERS NUMBER

OF PACKAGESDESCRIPTION OF COMMODITIES GROSS WEIGHT

(KILOS)MEASUREMENT

10

1

2

3

9

11 12

14 15

4

5

6

7

8

13

16 17 18 19 20

21These commodities, technology, or software were exported from the United States in accordance with the ExportAdministation Regulations. Diversion contrary to U.S. law is prohibited.

PREPAID COLLECT

PREPAID COLLECT

TOTAL DATED

RECEIVED the goods or the containers, vans, trailers, pallet units or otherpackages said to contain goods herein mentioned, in apparent good order,except as otherwise indicated, to be transported, delivered or transhipped asprovided herein. All the provisions written, printed, or stamped on eitherside hereof are parts of this bill of lading contract.

IN WITNESS WHEREOF, the Master or agent of said vessel hassigned bills of lading, all of the same tenor and date, one ofwhich being accomplished, the others to stand void.

BY

B/L NO.

22

2324

25

26

Exhibit 10.5 The Marine Transport Document

Besides allowing for sale of goods in transit, negotiable ocean bills of ladingmaybe used to keep the buyer from getting the shipped goods by withholdingthe original documents.This is normally done with documentary collection pay-ment terms, as we will see in Chapter 12. Since these are title documents, theycan also be used to establish security interests for third parties having a stake inthe goods.

Marine transport documents are customarily issued in sets of three originalsand three or more copies, unless the documents themselves indicate otherwise.This presents an element of risk with negotiable ocean bills of lading, as carrierswill release cargo against the surrender of any ONE of the originals.When morethan one original is issued, sellers should make sure that they control all ofthem. Conversely, subsequent buyers should demand all of them as a conditionof purchase.

Regardless of whether they are negotiable or not, marine transport docu-ments have another area of distinction: “on board” as opposed to “received forshipment.” “On board” is the carrier’s promise that the shipment was actuallyloaded on the vessel. For this reason, shippers do not get on board documentsuntil some time after the vessel has been loaded.“Received for shipment” is thecarrier’s promise that it has control of the shipment and that it is scheduled togo on the intended vessel. However, the carrier does not promise that it hasalready been loaded. Either way, the resulting marine transport documents lookmuch the same. The difference is that on board documents clearly indicate thisby rubber stamp or notation within the text initialed and dated by an agent ofthe carrier. The on board date may be different from the date of the document,in which case the later of the two is considered to be the shipping date. (SinceExhibit 10.5 does not bear the phrase “on board,” it is to be considered a“received for shipment” document.)

Fields 1 through 20 have already been covered in the previous (DockReceipt) section.

21. The destination control statement is required to appear on main carriagetransport documents for most shipments.

An appropriate exemption code must appear on marine transport docu-ments covering shipments that do not require Shipper’s Export Declarationsbecause of low value and those that are reported electronically. For details visitthe Census Bureau’s Foreign Trade Division website at www.census.gov/foreign-trade/regulations/ftsrletters/index. These rules change from time totime, so work backwards from the latest letter.

22. Indicates whether the freight charges are prepaid or collect.

23. Shows the pure freight and accessorial charges (Fuel Adjustment Factor,Currency Adjustment Factor, Terminal Handling, etc.).

246 Transportation

24. Indicates the number of original marine transport documents that havebeen issued.

25. An agent of the ocean carrier signs, thereby executing a contract of car-riage.

26. An individual bill of lading number is entered here.

Great strides have been made toward paperless marine transport documen-tation. For years, sea waybills have been electronically transferred and printedas originals, when necessary, on the arrival side. However, the negotiable natureof ocean bills of lading has provided a stubborn obstacle.The technology of issu-ing and controlling a paperless negotiable document has been developed by theBOLERO Project, a joint effort of the TT Club (a London-based vessel trans-port organization) and the international banking cooperative S.W.I.F.T. Majorbanks have proven more receptive than ocean carriers, but the latter are gradu-ally being won over. Meanwhile, individual carriers are independently workingon electronic documentation, and American President Lines introduced its pro-prietary entry in November 2001.

Incoterms Sellers should avoid using the FAS, DES, and DEQ Incoterms2000 in sales contracts calling for main carriage by liner vessel, as these do notcorrespond to the way ship lines actually handle cargo at modern ports. FCACFR, CIF, CPT, CIP, and DDU do correspond to modern liner shipping practice.FCA accompanied by the place where the shipment originates works well forfreight collect main carriage contracts that include precarriage. CPT, CIP, andDDU are particularly useful with freight prepaid main carriage contracts thatinclude on-carriage.

Nonvessel Operating Common Carriers (NVOCCs or OTIs)

As mentioned previously, NVOCCs are nonoperating carriers.Their operationsare always confined to container movements. In fact, for years they wererestricted to container consolidations before branching out into the full-container market.

NVOCCs must be licensed by the Federal Maritime Commission, and mustmaintain a surety bond. Most are either forwarder-owned or provide forward-ing services.

While these carriers provide lower overall transportation costs for both full-container and less-than-containerload (LCL) shippers, their benefits are mostobvious in the latter case. Knowing that a small shipment will be containerizedenables sellers to avoid much of the kind of heroic and expensive export pack-ing that would be necessary without containerization. (Note: containerizationdoes not completely remove the need for export packing.There is still the mois-ture factor to consider, plus the fact that cargo may shift inside a container.)

Marine Transportation 247

Further, container operating carriers would charge a much higher price forsmall shipments, as they would need to consolidate them into containers them-selves using high-priced longshore labor.

There are downsides to NVOCC service:

• Since these carriers pay a low per-container freight charge while chargingtheir LCL customers on a volumetric basis; they will attempt to completelyfill every container. LCL shipments arriving at the NVOCC’s warehouseright after a container has been shipped may wait for some time untilenough additional cargo is accumulated to fill the next container. To reducethis risk, some NVOCCs make a commitment that a container will go everyso often, full or not.

• While NVOCCs must observe hazardous materials regulations in loadingcontainers, there are some non-hazardous products whose very naturemakes them incompatible traveling partners (such as pre-recorded mediaand strong magnets, or blotter paper and odoriferous items). Unless specif-ically instructed to the contrary, such goods may be inadvertently packednear each other for a long ocean voyage.

• Undercarriers always have the right to payment. Should an NVOCC go outof business or otherwise fail to pay the undercarrier, the shipper remainsliable regardless of whether or not payment was made to the NVOCC.

Full-container shippers use the same documentary process that we sawunder liner shipping, except that the marine transport document they receivewill be issued by the NVOCC. (The NVOCC document will be backed up by amarine transport document issued to it by the undercarrier.)

LCL shippers deliver their cargoes to the NVOCC’s warehouse, where theyare consolidated to fill containers.The documentary process between the NVOCCand the undercarrier is the same as we saw for liner shipments. Once the NVOCCreceives a marine transport document for the full container from the undercar-rier, it issues its own marine transport documents to each shipper for its individualshipment. Once the container arrives at the discharge port, it goes to theNVOCC’s warehouse where each consignee arranges to claim its shipment.

As we will see in the “Cargo Security” section of this chapter, the wayNVOCC operations presently function (mid-2002) presents potential risks. Theundercarriers must rely on the NVOCCs to observe hazardous materials regu-lations when loading containers. Further, undercarriers do not know what isloaded in NVOCC-stuffed containers nor the identity of the shippers, since theirdocumentation covers containers of freight of all kinds and shows the NVOCCas shipper. On the other hand, NVOCCs are reluctant to reveal their customers’identities for fear that the undercarriers will attempt to directly solicit theirbusiness.

248 Transportation

Vessel Charter

Simply put, chartering (also called “affreightment”) is renting all or part of avessel to transport goods. The vessel owner and the party renting the vesselenter into a contract called a charterparty (or “charter party”) specifying theterms and conditions of the rental agreement. As we will see, there are manypossibilities.

Vessel chartering predates scheduled liner service, and at one time was theonly way to ship by sea. It has lost most of the manufactured goods trade to shiplines and is most commonly used for bulk commodities or very large projectcargo shipments (e.g., an entire truck assembly factory).

There are as many kinds of charter arrangements as there are needs. Forinstance:

• A voyage charter covers a single voyage, while time charter covers multiplevoyages within an agreed time frame. Besides being the obvious factor intime-charters, time plays a critical role in voyage agreements. A voyagecharter typically provides a window during which the charterer receives,uses, and returns the vessel—often including agreed loading and unloadingtimes (called laydays). Completing the agreement early may earn the char-terer a bonus called “dispatch money,” while delaying beyond the agreedtime frame often results in a penalty called “demurrage.”

• Bareboat (also called “demise”) charter provides only the vessel, and this isoften used by operating carriers wishing to add capacity without investing inthe cost of another vessel. At the other extreme, charterers wanting trans-portation only would opt for a space charter, as it provides the vessel andeverything needed for its operation (provisions, crew, captain, etc.)

• Slot Chartering. Operating carriers often rent space on each other’s vesselsthat serve the same lanes. This enables them to provide a larger range ofsailings with fewer vessels than if it were limited to their own fleets.

• Subchartering.Where a charterer makes all or part of the vessel available toothers (called subcharterers).

There are many intermediate possibilities between these extremes. It is alsocommon for a large shipper such as an oil company to charter vessels for itsexclusive use through a subsidiary for liability reasons.

Since charter vessels normally go where demand dictates, vessel owners sel-dom have their own port facilities (with the exception of company-owned fleetsmentioned above). This means that they are not always equipped to provideport-related services like vessel loading and unloading the way ship lines do.When they do, they offer “liner” or “gross” terms and function as though theywere ship lines. There are other possibilities of shared responsibility such as:

Marine Transportation 249

• Liner In, Free Out (LIFO) where the vessel owner is responsible for thecost of vessel loading but not unloading.

• Free In, Liner Out (FILO) where the vessel owner is responsible for thecost of vessel unloading but not loading.

There are also other less common divisions.When the vessel owner takes on none of these port-related tasks (called

Free In and Out or FIO), they must obviously be handled by someone else.Often, this falls to the seller and the buyer and brings four Incoterms 2000 thatare best used for chartering into play.

• FAS. Seller’s cost and risk end when goods arrive alongside the buyer-designated vessel at the agreed port on the seller’s side. (Buyer arranges andpays for both loading and unloading.)

• FOB. Seller’s cost and risk end when goods are loaded on the buyer-appointed vessel at the agreed port on the seller’s side. (Seller arranges andpays for loading, buyer does the same for unloading.)

• DES. Seller’s cost and risk end when the carrying vessel arrives at theagreed port on the buyer’s side. (Seller arranges and pays for loading, buyerdoes the same for unloading.)

• DEQ. Seller’s cost and risk end when the goods are placed alongside thevessel at the agreed port on the buyer’s side. (Seller arranges and pays forboth loading and unloading.)

Under the FAS and FOB terms, the buyer designates the vessel. Under the DESand DEQ terms, the seller bears the risk and cost of main carriage, and presum-ably designates the vessel. NOTE: Since FOB and DES split loading andunloading between sellers and buyers, they are obviously incompatible withliner terms.Although FAS and DEQ have the same party handling both loadingand unloading, they are still not suitable for sales contracts for which main car-riage will be provided by ship lines.The reason is that ship lines do not normallyleave cargo on piers alongside vessels, but keep them in their terminals whileawaiting loading or after unloading.

Many industries such as oil or grain that frequently use charter vessels havedeveloped their own industry-specific model charterparty contracts.

The normal transport documents for vessel charter are a mate’s receipt(similar to a dock receipt but signed by an officer of the chartered vessel) and amarine transport document issued according to the terms of the charterparty.Incoterms 2000 made an important change from previous versions, as a C or Dterm buyer is no longer automatically entitled to see a copy of the charterparty.Buyers may well be curious to know the transportation costs, which is exactlywhat many sellers want to prevent.

250 Transportation

Vessel chartering is a highly specialized discipline. Most parties involved arealready familiar with the way it works, particularly if they are involved in anindustry that has developed its own model agreements. However, a seller mayfind itself blessed with a huge order that brings it into vessel chartering for thefirst time. These fortunate few are advised to obtain the services of an experi-enced consultant, which they should be able to afford given the size of the order.Vessel chartering is no place to learn as you go along because the consequencesof getting it wrong can be very expensive.

HAZARDOUS MATERIALS

Adequate coverage of hazardous material (hazmat) requires a book of its own,and in fact many exist, including U.S. Department of Transportation (DOT) reg-ulations. The good news is that under long-standing regulations, anyoneinvolved in consigning shipments containing hazardous materials must betrained and tested in compliance a minimum of every three years. (See Chapter13 for a list of hazmat seminars.) Therefore, most readers involved in hazmat areor should be already up to speed.

In the United States, the DOT writes the regulations for hazmat trans-portation. (In addition, the Occupational Health and Safety Administrationand the Environmental Protection Agency have their own regulations thatcover hazardous materials.) Other countries have their own hazmat regula-tions, and most agree with United Nations standards for international ship-ments. However, while a good rule of thumb, this isn’t always the case, andexperienced exporters always check with their customers before consigninghazmat shipments.

Hazmat determinations, packing, marking, and documentation complianceare always the responsibility of the party consigning the shipment. Civil penal-ties can run up to $27,500 per single violation, while criminal penalties for will-ful violation can reach $500,000 plus prison terms of up to five years.

Whether a particular item is considered hazardous depends on the mode oftransportation, the quantity, and its nature. The United Nations InternationalCivil Aviation Organization (ICAO) has defined standards and procedures forair transport along with the International Air Transportation Association(IATA). These include identification and classification of hazardous materials,stipulation of permissible quantities, required packing, and required markingand documentation. The United Nations does the same for vessel shipmentsthrough its International Maritime Organization (IMO). U.S. law requires thatthese U.N. regulations be strictly observed.

Until recently, preventing tragic accidents was the crux of hazmat regula-tions. However, in the wake of the September 11th atrocities, the potential forterrorists using hazardous materials as weapons has become obvious. This will

Hazardous Materials 251

undoubtedly bring a new series of regulations to prevent unauthorized personsfrom getting their hands on potentially weapons-grade hazmat.

We end our brief coverage by reiterating that any reader involved in haz-ardous materials transportation must receive appropriate training. This is moreimportant than ever, given the likelihood of new regulations and increased dan-ger from terrorists.

CARGO SECURITY

This is, and will probably always be, a work in process. We now know that air-craft can be used as missiles, and that ocean shipping containers can conceal analmost unimaginable variety of horrors.

When it comes to cargo, our first concern is naturally imports, and wealready have a head start in this direction thanks to drug interdiction programs.However, we will be largely relying on other countries to pre-screen U.S. boundcargoes so as to “move our borders overseas.” This implies reciprocity. As manycountries prohibit or closely restrict some items that abound here (e.g.,firearms), they will expect U.S. cooperation in monitoring our export shipments.Worse, imagine the repercussions if a tragedy were to visit another countrybecause of something deadly introduced into a container here. In some respects,this could be even worse than importing a tragedy.

The immediate response to the September 11th atrocities was focused onair. At first, all flights were grounded. Then, service was restored on an airport-by-airport basis. In the meantime, the “known shipper” rule was initiated. Thisapplies to FAA-licensed indirect air carriers (airfreight forwarders/consolida-tors) and all parties wishing to consign airfreight shipments. For goods movingon a passenger airline, a known shipper is defined as one that was doing busi-ness with the forwarder before September 1, 1999, and that had moved at least24 air shipments with that forwarder during that time. If the consignor doesn’tmeet both criteria, the forwarder must visit the consignor’s premises and com-plete a checklist to certify that it is a legitimate business. Passenger airlines nat-urally refuse cargo except from known shippers or indirect air carriers withFAA-approved security programs in place. Since most nonhazardous air ship-ments may be shipped on passenger aircraft, the regulation was broadly applied.This rule had some unavoidable unintended consequences. General Motorswould be considered an “unknown shipper” to any forwarder that had not han-dled at least 24 of its airfreight shipments within a two-year period since Sep-tember 1999!

As of this writing (mid-2002), air transport security has been considerablytightened. However, little in the way of new regulations have been enacted forocean transport.This doesn’t mean that they will not come—they will.The ques-

252 Transportation

tion remains from whom and under which agencies. U.S. regulatory candidatesand their websites include:

• The Transportation Department’s new Transportation Security Administra-tion (TSA) www.tsa.dot.gov.

• The Customs Service, under its new program, the Customs Trade PartnershipAgainst Terrorism (C-TPAT) www.customs.gov.

• The Coast Guard www.uscg.mil.

• The Bureau of Industry and Security (BIS, formerly BXA) www.bis.doc.gov.

• The Department of Homeland Security www.whitehouse.gov/homeland.(For a grasp of what is involved, visit the National Homeland SecurityKnowledgebase at www.twotigersonline.com/resources.html.)

While it probably will not be writing regulations for the shipping public,the Federal Maritime Commission will have a role to play through its licens-ing of freight forwarders and NVOCCs. It is also charged with the responsibil-ity of making sure that NVOCCs properly describe the cargoes they place incontainers.

Meanwhile, the United Nations International Maritime Organization’s(IMO) Maritime Safety Committee is preparing an International Port FacilitySecurity Code. It takes the approach that since assuring port and ship security isrisk management, an individual risk assessment must be made in each case. Thecode’s purpose is to provide a uniform framework for risk evaluation forauthorities to use in offsetting changes in threat with changes in vulnerability.Each contracting government would conduct port security assessments. Eachsecurity assessment would identify and evaluate critical port assets and infra-structures as well as actual threats. (For further information on the IMO, visit itswebsite at www.imo.org.)

Hopefully, regulations will come through a consensus of all these agencies,tasking each with its particular area of expertise with minimum overlap. Realitydictates that things may not work out quite this way. Everyone wants to dosomething for home security, and few legislators have a grasp of how trans-portation really works. Industry, spearheaded by the Journal of Commerce, hasbeen volunteering expertise and cautioning government to avoid inadvertentlyparalyzing commerce. The World Customs Organization reinforces this posi-tion, warning against imposition of inspection requirements for imports thatmay be taken as non-tariff barriers.

A private sector initiative named the Strategic Council on Security Technol-ogy has been established by some leading transportation, communication, aca-demic and consulting parties. The 10-member council’s mission is to “identifyand bring to light the most practical approaches for improving the security of

Cargo Security 253

the global supply chain while also enhancing productivity,” said its chairman,retired General John Coburn. The council will then work to persuade othercargo-security initiatives to adopt the same approach so as to coordinate theirefforts.

To get an idea of just what is involved in cargo security for exports, let’s fol-low a typical full-container shipment.

• The container comes from the carrier’s container pool, possibly hours awayfrom the consignor’s facility. Small quantities of deadly bacteria could besecreted at the pool or any time prior to arrival.

• The consignor loads the container and could theoretically put anything in it,especially if harmless cargo were stowed at the rear, so as to be seen in theunlikely event that the container is inspected.The container is sealed with a“tamper proof” metal or plastic closure bearing a number. Creating a dupli-cate should be no problem for a determined terrorist.

• The sealed container goes to the port, either by truck or often by both truckand train. In the latter case, potentially hundreds of people could access it.(Some drivers bring containers home over weekends for early Monday portdelivery!)

• The container clears the port’s land gateway and is placed at the carrier’sterminal facility awaiting loading. (If the port prescreens persons withaccess to cargo, this is probably the safest place we’ve seen so far.)

• The container is vessel loaded, joining perhaps thousands of others. Thecrew may have limited access, particularly to containers positioned at theends of stacks. Also, the vessel could possibly be stopped and boarded byterrorists. Piracy is not unknown, particularly in certain Asian waters.

• The vessel arrives, the container is unloaded, and is now in the destinationcountry.

Some fixes are likely to help reduce security issues. For instance, there areelectronic seals with transponder-like devices that monitor a container’s where-abouts and detect tampering. Enhancing security checks of all parties havingaccess to outbound cargo is another possibility, but this would have to includetruck drivers, railroad workers, and others who have only occasional access. Wemay also see mandated security procedures for consignors that load full con-tainers or furnish less than containerload shipments to NVOCCs, as well as theNVOCCs themselves. This would mirror Customs’ C-TPAT enhanced cargosecurity program for imports.

Beyond this, everything is conjecture. Readers are strongly advised toconsult one or more of the daily references found in Chapter 13 and periodi-cally check websites of the agencies mentioned earlier in this chapter.

254 Transportation

LINKAGES

Successful international transportation requires the ongoing coordinated effortsof the seller and any outstanding transportation service provides it may engage.

• Credit: Inform Sales when carrier and forwarder selection are critical topayment term execution (letter of credit and documentary collection).

At Traffic’s request, prequalify the credit of any non-operating carrierssuch as NVOCCs and air freight consolidators.

If using 3PLs for overseas inventory maintenance, be sure that suchgoods are title-protected (retention of title procedures).

• Compliance: Keep traffic up to date on transshipment points that may entaillicenses for shipments that would otherwise not require them.

• Sales: Attempt to secure orders on Incoterms that empower the seller toselect the carrier and forwarder (C and D Groups).

Before quoting on delivery to interior locations, check with Traffic or theForwarder to make sure on-carriage can be arranged, preferably on a dooror port or airport-to-door basis.

If the FAS or FOB Incoterms are used, make sure the buyer is creditedfor any terminal handling charges at the embarkation port that it may havebeen billed along with the ocean freight.

• Traffic: Get Credit to prequalify all nonoperating carriers.Determine the need for export packing with the Forwarder. Keep in mind

that storage conditions on the other side may not be up to U.S. standards.With the Forwarder, develop contingency plans for handling in-transit

damage from the origin point to the departure port or airport to avoid fouldocumentation. For properly prepared shipments this should normally belimited to repacking.

When using a buyer-appointed carrier or forwarder is unavoidable, try toget their agreement (preferably in writing) that your instructions will be fol-lowed, particularly concerning consignment and access to correct documen-tation.

With the Forwarder, try to locate suitable carriers when on-carriage is aseller responsibility.

For full-container freight quotations, be sure to determine whether allsurcharges are or are not included, as well as how promptly empty contain-ers will be available.

• Everyone: Exercise well considered judgment before opting to use a thirdparty logistics provider, and due diligence if selecting one.

Linkages 255

ENDNOTES

1. “7 Steps to Choose the Right 3PL for Your Export Operations,” IOMA’s Report onManaging Exports, Issue 03-00, March 2000, pages 6, 7, 10.

2. Atkinson Helen, “Get a Pre-nuptial Agreement,” Journal of Commerce, February18–24, 2002, page 32.

256 Transportation

Chapter 11

Documentation

Documentation enables international trade to happen. This broad statement isa fact of life, not an apology for an admittedly tedious and often confusing seriesof procedures. The reasons aren’t hard to understand when comparing them toless document intensive domestic commerce.

First, by definition, international trade involves at least two different coun-tries that inevitably have regulations that differ from each other to some extent.Most governments insist on documentary evidence of regulatory compliance,and this is most often true for imported goods. Second, distances tend to begreater in foreign trade. This implies longer transit times and increased use ofmultimodal transport often involving more than one carrier. If these weren’treasons enough for documentation, consider the fact that sellers and buyers(and their respective governments) frequently speak different languages.

Despite the need for documentation, the good news is that it needn’t alwaysbe on paper. Electronic documentation is gaining acceptance worldwide. Notonly is it faster, but it comes with programs that help eliminate redundant dataentry. Some programs even edit the output. AES Direct, the Census Bureau’selectronic export reporting program, provides an excellent example. For details,visit their website at www.aesdirect.gov.

There are two types of electronic documentation programs. One simply pro-vides computer assistance in preparing paper documents while allowing storageof frequently used data, enabling users to tweak new documents from similarprevious shipments. When used with laser printers, the forms and their data areproduced simultaneously.The second type does the same but also transmits thisdata electronically. The recipient may either accept the data in its electronicstate, or use it to print any required paper documentation.

This chapter will illustrate and explain the functions of the more commonlyused international trade documents with the exception of transport documents,which are covered in Chapter 10, and the insurance certificate, which is found inChapter 8. Since most electronic documents convey the same information as

257

their paper counterparts, the illustrations will serve for both. Although we willindicate which information goes in which fields, this is not intended as a coursein how to prepare forms. The intention is to show what purposes they serve andhow they may be sometimes used to advantage—or at least how to avoid mak-ing potentially expensive mistakes.

FORM DESIGN

Rule number one in document preparation is to never leave a titled field blankunless expressly permitted to do so. A titled box lacking information provokesquestions, regardless of how irrelevant the information may be to the transac-tion.

Preprinted forms were real timesavers in the days when most documenta-tion was manually typed.This reached a high point with the introduction of pat-terned carbon form sets that enabled completion of several dissimilar forms atone typewriter pass-through. The drawback was that every field of every formhad to be addressed, although all the information did not appear on every com-pleted copy. Since the one unchangeable form was the U.S. Shipper’s ExportDeclaration (SED), the other documents in the set, such as the shipper’s letterof instructions to a forwarder or carrier, commercial invoice, packing list, andcertificate of origin, all closely resembled SEDs. While the SED was a perfectlylogical document for export reporting purposes, no sane person would haveused it as a model for these other documents if not forced to do so by the formspackage.

Some documents, such as paper SEDs, remain in fixed formats, and provideno latitude except by replacing them with fully electronic counterparts. Otherdocuments, like commercial invoices and packing lists, may take any form thatthe preparing party chooses, provided they include all of the minimum neces-sary information. Computer-assisted document programs and laser printinghave made this a popular alternative to pre-printed forms. They free exportersto include information that is truly useful to themselves and to the buyers.Equally important, they eliminate the need for loading documents with infor-mation that is useless for their purpose, just for the sake of completing apreprinted form set.

Finding themselves suddenly free to design their own invoices and packinglists, many exporters sought to create “one true” versions, suitable for all cus-tomers in all countries. While the goal is admirable, too often the approach wasto provide for every conceivable piece of possibly required information withtitled fields. The result was that if country X required that the gross weightappear on the invoice, a gross weight field was programmed into the invoicemaster so that every export invoice showed it. Since every country has the sov-ereign right to write its own peculiar regulations, invoices attempting to accom-

258 Documentation

modate all of them become very busy. The computer may provide so much helpthat these cluttered documents require little additional time for preparation bythe seller. However, the buyers and their customs authorities wind up with verycluttered paperwork, full of information they not only haven’t requested butprobably don’t care about. Further, all documents are not prepared by the samecomputer. Since it is possible to have conflicting data on documents prepared bydifferent parties (seller, forwarder, carrier), it makes sense to show only theminimum information needed to achieve each document’s purpose.

Computer programmers may be particularly vulnerable to the “one true”solution. They sometimes get so far into the computer’s capabilities that theymiss the fact that they are providing everyone with superfluous information.

There is a way to achieve “one true” documents, and that is to minimize theamount of information that they provide, and to include plenty of free untitledfields to accommodate country-specific or buyer-specific requirements. Mostdocumentation programs have files where such information can be tucked awayfor inclusion for each individual buyer. Untitled fields also come in handy for anyrequired transaction-specific verbiage, such as import license or letter of creditnumbers. This minimal approach should provide versatile formats that usuallycan be used as is, or easily adapted to particular situations whenever necessary.

This is the approach we will take in illustrating documents that provide theuser with forms creation capability. We’ll also mention some examples of addi-tional information that may be required to demonstrate how these untitledfields may be used.

PROFORMA INVOICE

As we saw in Chapter 9, proforma invoices are the preferred means for makingquotations in international trade. This invoice-type format is familiar to busi-nesspeople worldwide. By providing detailed proforma invoice quotations, sell-ers demonstrate a familiarity with exporting that often provides a level ofcomfort to prospective buyers. Sellers may also use this quotation to steer thedeal, by proposing sales and payment terms that favor them.

COMMERCIAL INVOICE

The commercial invoice summarizes the transaction by identifying the partiesand showing the pertinent information (see Exhibit 11.1). It is important tomany parties:

• It identifies the amount due the seller.

• It identifies the shipment for customs clearance on the buyer’s side.

Commercial Invoice 259

260 Documentation

61

Terms of Payment

2

Shipped To

3

410

US$

16 17 Merchandise Total

18

19US$

Grand TotalCertifications

20

21

Exporter

Sold To

Commercial Invoice #5

Invoice Date

Purchase Order # 7

8

Sales Terms

9

Quantity Units Description of Merchandise Unit Price Total

11 12 13 14 15

Authorized Signature

Exhibit 11.1 Commercial Invoice

• It identifies the shipment for any third parties financing the transaction,such as banks issuing letters of credit, buyers’ accounts payable depart-ments, and factors financing seller receivables.

• It identifies the shipment for insurers.

Untitled blank fields are particularly handy for invoices, since any requiredtransaction-specific verbiage is normally shown on this document.

1. Exporter. Name and address of seller (if not preprinted).

2. Sold to. Name and address of buyer.

3. Shipped to. If the shipment is consigned to anyone or anywhere other thanshown in field 2, enter details here. Otherwise, enter the word “same.”

4. Untitled field. An untitled box is handy here for required buyer-specific ortransaction-specific information.

5. Invoice number. Every invoice should have a seller-assigned unique number.

6. Invoice date: This is normally the date the goods leave the point where theshipment originates, such as seller’s factory or warehouse.

7. Customer purchase order. Enter the order number and/or date for buyerconvenience.

8. Terms of payment. Enter the payment terms. This box should be ratherlarge to include any required letter of credit numbers. Many sellers pro-gram their computers to include some or all of the following boilerplate inthis field:

Letters of credit are subject to the Uniform Customs and Practices for Docu-mentary Credits, ICC Publication UCP 500.Documentary collections are covered by the Uniform Rules for Collections,ICC Publication URC 522.

If the computer program permits some selectivity, it may be best not to usethe documentary collection sentence when letters of credit are used. Other-wise, buyers paying by letter of credit may start requesting the more liberaldocumentary collection terms. Of course, the converse doesn’t hold. Buyerspaying on documentary collection terms do not mind seeing that the sellerrequires that others pay by letter of credit. Naturally, these sentencesshould be updated to reflect any revised versions of these rules.

9. Terms of Sale. Enter the sales term and the place. If using Incoterms,include the following boilerplate after the place (Incoterms 2000, ICC Pub-lication 560). Naturally, this should be updated for any revised versions.

10. Untitled field. Another untitled box to match field 4 would be handy, andwould balance the form.

Commercial Invoice 261

11. Enter the invoiced quantity for each line item here.

12. Enter the kind of chargeable unit (each, kilo, liter, board meter, etc.)

13. Description of merchandise: Enter the merchandise description, takingcare to use descriptions required by any covering letter of credit and anyterminology the buyer may legitimately request.The latter is often found inthe buyer’s purchase order. Including the six-digit Harmonized System(HS) classification number may provide a nice touch, but only if the ship-ment is going to an HS member country, and even then only if the buyeragrees with the proposed classification. Effective May 1, 2002, Canadabegan requiring that exporters include the correct ten-digit Canadian Har-monized Tariff numbers in their invoices as part of their line item descrip-tions. This should come from the Canadian importer who is ultimatelyresponsible for its accuracy. Readers interested in finding the Canadiannumbers themselves may do so at the Canada Customs and RegulatoryAgency website www.ccra-adrc.gc.ca/eservices/customs/business. Click Tar-iff Wizard 2002 and highlight “Tariff Number (number or portion of),” thentype in the six-digit HS number and click “search.”

14. Unit price. Enter the selling price per line item.

15. Total. Multiply quantity by price to show the total for each line item.

16. Another untitled box is handy, as some buyers may require that marks andnumbers be shown on the commercial invoice.

17. Merchandise total. Enter the subtotal for the merchandise value.

18. Miscellaneous charges. Enter any nonmerchandise charges, such as exportpacking, freight, forwarding, insurance, and any legalization fees.

19. Grand total. Enter the total of fields 17 and 18.

20. Certifications. This field should be large enough to accommodate anyrequired country-specific certifications.The following provides a nice touchfor shipments to countries not requiring specific certifications:

We certify that this invoice is true and correct.

While all shipments do not require the following certification, enough do tomake including it in the boilerplate worthwhile:

These commodities, technology or software were exported from the UnitedStates in accordance with the Export Administration Regulations. Diversioncontrary to U.S. law is prohibited.

Note: An appropriate exemption code must appear on commercial invoicescovering shipments that do not require Shipper’s Export Declarations becauseof low value and those that are reported electronically. For details visit theCensus Bureau’s Foreign Trade Division website at www.census.gov/foreign-

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trade/regulations/ftsrletters/index.html. These rules change from time to time,so work backwards from the latest letter.

21. Signature. Some countries require that invoices be signed while othersdon’t. Rather than bothering to keep track of this, it may be easier to alwayssign an original invoice.

PACKING LIST

The packing list must seem to be the most overrated, detail-intensive documentto everyone just starting out in international trade. Experienced traders knowbetter—it can be a lifesaver.

Packing lists are a must whenever shipments consist of more than one ship-ping piece because they:

• Act as a double-check that everything ordered has been shipped

• Determine the identity and value of any missing cargo, particularly impor-tant for noncontainerized shipments

• Allow selective inspections by customs services

• Provide a map for buyers receiving incoming shipments

• Are a must for insurance claims

Packing lists have no particular format as long as they convey all the neces-sary information. As usual, we are using a generic form (see Exhibit 11.2).

1. Exporter. Name and address of seller (if not preprinted).

2. Sold to. Name and address of buyer.

3. Commercial Invoice Number and Date. This allows the buyer’s customsauthorities to match the invoice and packing information.

4. Customer purchase order. Enter the order number and/or date for buyerconvenience.

5. Package marks. Each shipping piece (i.e., box, carton, drum, etc.) should beconsecutively numbered, and the individual number should be shownalongside the total number of pieces (1/23, 2/23, etc.). This way, anyonealong the transport chain will know by glancing at a single piece which oneit is and how many there are in the total shipment.

6. Package number. A separate line should be prepared for each shippingpiece.

7. Quantity. Enter a quantity for each different invoice line item packed in theshipping piece.

Packing List 263

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Exhibit 11.2 Packing List

Exporter

Sold To

Commercial Invoice #: 3 Invoice Date:

Purchase Order #: 4

Package Marks and Numbers:

5

Package Number Quantity Units Description of Merchandise Net Weight Gross Weight

6 7 8 9 10 11

Shipment Totals: 12

1

2

8. Units. Enter the unit count for each quantity.

9. Description of merchandise. Describe each quantity item, preferably usingthe same words as the product description in the commercial invoice.

10. Net weight. Unless the product is sold by weight, it is normally sufficient toprovide the total net weight in kilos of all the items in the shipping piecerather than for each quantity item. The need for any net weights is some-times questioned, but post–September 11th enhanced security proceduresmake it advisable to have as much packing information as possible.

11. Gross weight. Enter the scale weight in kilos of each shipping piece.

12. Shipment totals. Enter the total net and gross weight for the entire ship-ment.

SHIPPER’S EXPORT DECLARATION

Use of the paper Shipper’s Export Declaration (SED) is declining in favor ofelectronic filing under the Census Bureau’s AES Direct system. If you are stillfiling paper SEDs or are new to export, you should consider electronic filingbecause it is easier, faster, more accurate, and will eventually become manda-tory. For further information, visit the Census Bureau’s AES direct websitewww.aesdirect.gov.

Although paper SEDs are becoming obsolete, our illustration (Exhibit 11.3)serves its purpose, as almost the same information is required for electronic fil-ing. Unless specifically mentioned to the contrary, throughout this chapter theterm SED refers to both paper and electronic reporting. However, code num-bers for such data as locations are frequently used in place of written nameswith electronic filing.

Much of our coverage is excerpted from a Census Bureau publication titledCorrect Way to Complete the Shipper’s Export Declaration Form 7525V, whichmay be obtained in its entirety from the Census Bureau Foreign Trade Divisionwebsite www.census.gov/foreign-trade. Any questions on the correct use of theSED may be directed to this website, or phoned to the Regulations, Outreachand Education Branch at (301) 457-2238. Also check Chapter 2 of this book forexplanations of terms used in export control.

For export reporting purposes, a shipment is defined as all merchandisesent from one exporter (U.S. principal party in interest) to one foreign con-signee, to a single foreign country of ultimate destination, on a single carrier, onthe same day.

SEDs must be filed for all export shipments from the United States to allforeign countries (as well as to Puerto Rico and the U.S. Virgin Islands) underany of the following conditions:

Shipper’s Export Declaration 265

266 Documentation

Exhibit 11.3 Shipper’s Export Declaration Form 7525-V

• All shipments covered by export licenses or Justice Department DrugEnforcement Administration permits, regardless of the dollar amount ordestination.

• All shipments subject to the State Department, Office of Defense Controls,International Traffic in Arms Regulations that do not require an exportlicense, regardless of dollar amount or destination.

• All postal shipments (except final destination Canada) with a total value ofover $2500.00.

• All nonpostal shipments (except final destination Canada) containing oneor more Schedule B line items totaling over $2500.00 at the point where theshipment leaves the United States.

Note: Only those Schedule B line items that exceed $2500.00 or those cov-ered by an export license should be shown on the paper SED. Electronic fil-ers may show all items if they prefer.

• All shipments destined to Cuba, Iran, Iraq, Libya, North Korea, Serbia(excluding Kosovo), Sudan, and Syria, regardless of dollar amount orlicense status.

• Canadian exception: For shipments to Canada when final destination isCanada, SEDs are required only for those shipped under an export license(or DEA permit). It bears repeating that this applies only when the finaldestination is Canada, not for shipments transiting Canada.

Whenever a shipment does not require an SED for value reasons, the fol-lowing statement must appear on the bill of lading, air waybill, truck bill of lad-ing, or other loading document: “No SED required—no individual Schedule Bnumber valued over $2,500.” Besides shipments of low value and shipments toCanada, there are several limited situations where an SED may not be required.For details, refer to the Correct Way to Complete the Shipper’s Export Declara-tion Form 7525V.

A separate SED is required for each shipment per U.S. Principal Party inInterest, including each rail car, truck, ocean vessel, airplane, or other vehicle.(This means that more than one SED may be required for a container consoli-dated with shipments from two or more USPPIs—a departure from pre-2000regulations.) Shipments covered by more than one Commerce Department(BIS) license and/or license exception may be shown on the same SED. BothCommerce-licensed and nonlicensed goods may be combined on the sameSED. However, goods licensed by other government agencies should bereported on separate SEDs.

Paper SEDs must be prepared in English and signed (signature stamp isacceptable). They must be typewritten or in other nonerasable medium.

Shipper’s Export Declaration 267

One of the problems that paper SED filers encounter is getting it to the rightparty. For postal shipments, it should be presented at the post office along withthe parcel at time of mailing. If the postal official does not know what to do withit, as often happens, refer him or her to the U.S. Postal Service’s InternationalMail Manual. For other modes of transportation, the SED should be deliveredto the exporting carrier with the merchandise. This becomes difficult for vesselshipments, and normally the SED is transmitted to the carrier by the freight for-warder.

By contrast, electronic filers may choose from three possible reportingdeadlines. Option Four permits reporting as late as ten days after the shipmentis exported, providing ample time to assemble all the required information for asingle, complete filing.

SED information is protected by law. Neither it nor its contents may be dis-closed to anyone except the exporter or its agent by those having possession ofor access to any official copy.

Corrections to a previously filed paper SED should be made on a copy ofthe originally filed SED. Mark it “Corrected Copy,” draw a line through thefields requiring correction and insert the corrected data, and file it with the PortDirector at the export port, airport, or border crossing. Corrections to SEDsfiled for postal shipments should be mailed to the U.S. Census Bureau, NationalProcessing Center, Attention: Foreign Trade Section, 1201 East 10th Street, Jef-fersonville, IN 47132.

The following information is to be recorded on the SED in the field num-bers shown on Exhibit 11.3:

1a. Enter the name and address of the U.S. Principal Party in Interest (USPPI).This is the person in the United States that receives the primary benefit,monetary or otherwise, from the export transaction. Generally, that personis the U.S. seller, manufacturer, order party, or foreign entity. The foreignentity (buyer) must be listed as the USPPI if in the United States when theitems are purchased or obtained for export.

1b. Enter the USPPI’s Employer Identification Number or Social Security num-ber. If the foreign entity is entered in field 1a, enter the border crossing num-ber, passport number, or an identification number assigned by Customs.

1c. Indicate whether the parties are related (for example, by 10 percent ormore equity ownership).

2. Enter in MM/DD/YYYY format the date the shipment is scheduled toleave the United States. If the actual date is unknown, estimate.

3. Enter the booking number for ocean shipments or the air waybill numberfor air shipments. Leave blank for other modes.

4a. Enter the name and address of the foreign party actually receiving the mer-chandise for the designated end-use or the party so designated on any

268 Documentation

applicable export license. For ground shipments to Mexico, be sure toinclude the Mexican state.

4b. Enter the name and address of the party in a foreign country who makesdelivery of the merchandise to the ultimate consignee, or the party sonamed in any export license.

5. Enter the name and address of the forwarding or other agent authorized bya principal party in interest.

6. If shipment is made from a foreign trade zone, enter the zone number. Ifshipment is not made from a foreign trade zone, enter the two-characterU.S. Postal Service abbreviation for either:

a. the state from which the merchandise actually starts its journey to theport, airport, or border crossing of export, or

b. the state from which the commodity of greatest value originated, or

c. the state in which consolidation took place.

7. Enter the country in which the merchandise is to be consumed, furtherprocessed, or manufactured, the final country of destination as known tothe exporter at time of shipment, or the country of ultimate destination asshown on any applicable export license.

8. For vessel shipments only, enter the name or number of the loading pier.

9. Enter the method of transport by which the merchandise exits the UnitedStates, such as vessel, air, rail, truck, etc. Specify “own power” if applicable.

10. Enter the name of the exporting carrier (for vessel shipments, vessel’s name).

11. Enter either:

a. For ground shipments. The U.S. Customs point at which the carriercrosses the border.

b. For vessel and air shipments. The name of the U.S. Customs port orairport where the shipment is loaded on the vessel or plane that is tak-ing it out of the United States.

c. For postal shipments, the U.S. Post Office from which the parcel ismailed.

12. For vessel or air shipments to foreign countries, enter the foreign port orairport and country where the shipment will be unloaded from the export-ing carrier. For vessel and air shipments to Puerto Rico, enter the ScheduleC Code (U.S. Customs District Port Code). Note: This is available on Cus-toms’ website www.customs.gov/impoexpo/app_g.pdf.

13. For vessel shipments only, check the YES box for cargo originally bookedas containerized cargo and for cargo that has been placed in containers atthe vessel operator’s option.

14. Enter the four-character Standard Carrier Alpha Code (SCAC) of the car-rier for vessel, rail, and truck shipments, or the two or three-character Inter-

Shipper’s Export Declaration 269

national Air Transport Association (IATA) Code of the carrier for air ship-ments. In a consolidated shipment, if the ultimate carrier is unknown, theconsolidating carrier’s ID code may be reported. The National MotorFreight Traffic Association (703) 838-1831 or www.nmfta.org issues theSCACs for ocean carriers, trucking companies and consolidators. Since theyprovide these only in a directory that they sell for over $100 per annual sub-scription, infrequent exporters may consider approaching the carrier or for-warder for this information. The American Association of Railroads,Railinc (919) 651-5006 issues the SCAC codes for rail carriers.The Interna-tional Air Transportation Association (IATA) issues air carrier codes,which are available on the Census website www.census.gov/foreign-trade.

15. Create and enter a unique reference number that will remain unique forfive years.

16. When the export transaction is used as proof of export for import transac-tions, such as In-Bond, Temporary Import Bond, or Drawback, etc., enterthe Import Entry Number. Also, an Import Entry Number is required formerchandise that is entered as an import and then exported out of theUnited States. Otherwise, enter NA.

17. Check the YES or NO box to indicate whether or not the shipment is haz-ardous as defined by the Department of Transportation.

18. Enter one of the following in-bond codes:

70—Not in Bond

36—Warehouse Withdrawal for Immediate Exportation

37—Warehouse Withdrawal for Transportation and Exportation

62—Transportation and Exportation

63—Immediate Exportation

67—Immediate Exportation from a Foreign Trade Zone

68—Transportation and Exportation from a Foreign Trade Zone

19. Indicate whether or not the transaction is “routed” by checking the YES orNO box. A routed export transaction occurs when the foreign principalparty in interest (buyer) authorizes a U.S. forwarding or other agent toexport the merchandise out of the United States.

20. Using columns 22, 23, and 24, enter the commercial description of the com-modity being exported, its Schedule B Number, the quantity in Schedule Bunits, and the shipping weight in kilograms.

21. Enter D for domestic, F for foreign, or M for military sales using the fol-lowing definitions:

a. Domestic—merchandise that is grown, produced, or manufactured inthe United States (including imported merchandise that has beenenhanced in value or changed from the form in which imported by fur-ther manufacture or processing in the United States).

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b. Foreign. Merchandise that has entered the United States and is beingreexported in the same condition as when imported. (Note:This use ofthe word reexport differs from the export control use as described inChapter 2.)

c. Military. Merchandise sold under the foreign military sales program.

22. Enter the 10 digit Schedule B Number and commodity description for eachSchedule B line item. Schedule B Numbers are found in the Schedule B—Statistical Classification of Domestic and Foreign Commodities Exportedfrom the United States. Items classified under the same Schedule B numbershould be grouped and reported as a single Schedule B line item for paperSEDs. Electronic filers may decide to either group into Schedule Breportable line items or report everything in the shipment. Be sure to entersufficient commodity descriptions to enable verification of the Schedule BNumber or the commodity description as shown on any applicable exportlicense. Include marks, numbers, or other identification shown on the pack-ages, and the kinds of packages (boxes, barrels, baskets, etc.). Note: Wherepossible, mirror the word description found in any applicable export licenseor the Schedule B classification.

23. Enter the reportable quantities appropriate to each Schedule B number.Also report the unit specified on any applicable export license if different.

24. Enter the shipping weight in whole kilograms for vessel and air shipmentsonly.

25. For used self-propelled vehicles only, enter the unique Vehicle Identifica-tion Number (VIN); Product Identification Number (PIN) for used self-propelled vehicles for which there are no VINs; and the Vehicle TitleNumber. Otherwise, enter NA.

26. For each Schedule B line item enter the selling price (or cost if not sold) fromthe USPPI to the foreign principal party in interest (buyer). Include the costof freight, insurance, and other charges to get the shipment to the U.S. port,airport, or border point of export. Exclude unconditional discounts from thereporting value. Many filers get this wrong by failing to include the costsinvolved in pre-carriage (inland freight and insurance), thereby understatingtheir exports. Sometimes, this information is unavailable, particular withdoor-to-door (or door-to-port or airport) transportation. In these cases, filersmay increase the value at the point where the shipment originates (Ex Worksvalue) by 3 percent to arrive at the reportable value. Note: This formulareduces the minimum Ex Works amount required for SED filing from $2,500to $2,427 (that is, $2427 + 3 percent = $2,500).

27. Enter either:

a. The number of any applicable export license or licenses. Filers usingpaper SEDs must also include the expiration date(s) of any applicableCommerce Department license(s).

Shipper’s Export Declaration 271

b. The correct License Exception symbol.

c. The “No License Required” designator code NLR.

28. Enter the correct Export Control Classification Number (ECCN) for allSchedule B line items that appear on the Commerce Control List. Fordetails, see Chapter 2.

29. For paper SEDs, the USPPI must sign here to authorize the forwardingagent to effect the export, unless a formal power of attorney or other writ-ten authorization has already been provided.

30. For paper SEDs, the USPPI, or authorized forwarding or other agent signshere to certify the truth and accuracy of the information. Enter the signa-tory’s title, phone number, email address, and the date the SED is signed.

31. This is reserved for Customs use.

GENERIC CERTIFICATE OF ORIGIN

This document (see Exhibit 11.4) is used for shipments to countries that requirecertificates of origin but do not have a prescribed form. Presently, there is noworldwide standard formula for determining origin. Each customs union (suchas the European Union) and free trade agreement (such as the NAFTA andU.S.–Israel and U.S.–Jordan) has its own origin criteria.Aside from these, sellersshould check with their buyers or the consulates of the buyers’ countries if indoubt.

Many countries requiring generic certificates of origin also require that theybe signed by a recognized chamber of commerce in the seller’s country.The rea-son is that chambers of commerce are extremely powerful organizations insome countries, and would be in a position to persuade member firms to provideonly true and accurate information. The fact that this is not the case in somecountries including the United States has become lost in regulatory ether.

1. Enter the name of a seller’s employee authorized to sign in behalf ofthe firm.

2. Enter the seller firm’s name and address.

3. Enter the name of the exporting vessel, air carrier, or truck line.

4. Enter the date of the main carriage transport document.

5. Enter the consignee name and address as shown on the main carriagetransport document.

6. Show the marks and numbers of shipping pieces.

Note: Columns 7, 8, 9, and 10 should be completed for each packing listline item.

7. Number of shipping pieces.

272 Documentation

Generic Certificate of Origin 273

Exhibit 11.4 Generic Certificate of Origin

The undersigned (Owner or Agent)

for declares(Name and Address of Shipper)

that the following mentioned goods shipped on S/S(Name of Ship)

on the date of consigned to

are the product of

Marks and Numbers No of Pkgs., Weight in Kilos Description Boxes or Cases Gross Net

6 7 8 9 10

Sworn to before me

This day of 20

(Signature of Owner or Agent)

The , a recognized Chamber of Commerce under the laws of the State of , has examined the manufacturer’s invoice or shipper’s affidavit concerning theorigin of the merchandise and, according to the best of its knowledge and beliefs, finds that the products named

originated in .

Secretary

Dated at on the day of 20

1

2

3

4 5

11

12

13

14

16

15a

15b

8–9. Gross and net weights in kilos.

10. Enter the commodity description. Since this document is for thebuyer’s government, it is important to use any justifiable verbiage citedin any applicable letters of credit or purchase orders.

11–12. Date and sign the certificate before a notary.

13. The notary’s certification, signature, and seal go here.

14. The name of the authenticating chamber of commerce goes here.

15a&b. Enter the country or countries of origin for the referenced goods.

16. An authorized employee of the certifying chamber of commerce signsand seals here.

NORTH AMERICAN FREE TRADE AGREEMENT CERTIFICATE OF ORIGIN

Together, Canada, Mexico and the United States form the North American FreeTrade Agreement (NAFTA). With few exceptions, NAFTA-eligible products ofCanada and the United States receive duty-free treatment in both countries.The duty situation for NAFTA-eligible products with Mexico is still phasing outand should be almost completely eliminated by 2005.

As we saw in Chapter 6, “NAFTA-eligible” means goods that have satisfiedone of the six preference criteria (A through F). With the exception of goodsthat are completely produced in one or more of the three NAFTA countriescompletely from materials that also originated within NAFTA, these preferencecriteria are extremely product-specific. In order to determine eligibility for mostcriteria, it is important that the seller have accurate six-digit Harmonized Sys-tem classifications of both the product and all materials from which it was made.(Note: The first six digits of either the Schedule B number or the U.S. Harmo-nized Tariff Schedule number are harmonized.) To comply with some criteria, itis necessary to compare the classification of the product with the materials fromwhich it was made. It may also be necessary to obtain supplier assurances ofwhether purchased materials are or are not NAFTA-eligible. Some criteria relyon a regional content test, which is the percentage of value added withinNAFTA as compared to either the export selling price or the cost of production.There are also special rules for some products such as textiles, automobiles, cer-tain agricultural goods, and electronic data processing equipment.

With the exception of very obvious eligibility decisions, the instructionsfor completing the NAFTA origin certificate do not provide enough informa-tion (see Exhibit 11.5). Readers are urged to contact the nearest CommerceDepartment Export Assistance Center or visit the NAFTA website www.nafta-customs.org. There are also many seminars available, and a number ofthem are listed in Chapter 13. A thorough understanding of the eligibility cri-

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North American Free Trade Agreement Certificate of Origin 275

Exhibit 11.5 NAFTA Certificate of Origin and Instructions

276 Documentation

Exhibit 11.5 (Continued)

teria and record-keeping requirements is essential, as U.S. law requires dili-gent compliance.

The NAFTA certificate of origin must be completed by the exporter. It maybe completed either on a shipment-by-shipment basis or on a “blanket” basisfor the same exporter, importer, and goods. Blanket certificates are valid for onecalendar year. Experienced exporters have them all expire on the same date andhave them all come up for renewal at the same time to avoid missing any—atleast a month before they expire.This may mean issuing a blanket certificate forless than a full year for new customers. It is also a good idea to include every-thing the customer is likely to buy, since products must be listed on the certifi-cate in order to be covered by it. This may result in additional sales, by callingthe buyer’s attention to the seller’s full range of products.

NAFTA regulations require that the importer have a valid NAFTA certifi-cate of origin on hand in order to claim NAFTA duty treatment. Failure to pro-duce one on demand may result in severe penalties (up to ten thousand dollarsand forfeiture of preferential treatment for each shipment in question).

All three countries accept the same certificate of origin form. The U.S. ver-sion (CF434) is in English only, and is available from many office stationerysuppliers, Commerce Department Export Assistance Centers, or may be down-loaded from the NAFTA Customs website.

U.S.–ISRAEL FREE TRADE AGREEMENT CERTIFICATE OF ORIGIN

Qualifying products of the United States and Israel have enjoyed duty-freetreatment in each others’ countries since 1995. In order to claim duty-free treat-ment, the Israeli importer must present a certificate of origin (see Exhibit 11.6)completed by the U.S. exporter for each shipment except:

• Commercial shipments of goods valued under $50.00

• Certain printed matter

• Shipments of no commercial value

• Gifts valued under $100.00 from individuals

There are only two origin requirements, but one is rather liberal, as itrequires only 35 percent U.S. value content of the ex-works price. However,there is no blanket certification permitted. An individual certificate is requiredfor each eligible shipment not covered by the above exceptions.

1. Enter the exporter’s name and address.

2. Consignee’s name and address.

3. Means of main carriage transportation and routing to Israel.

4. Leave blank.

U.S.–Israel Free Trade Agreement 277

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Exhibit 11.6 U.S.–Israel Free Trade Certificate of Origin and Notes

U.S.–Israel Free Trade Agreement 279

Exhibit 11.6 (Continued)

5. Assign a sequential number for each line item.

6. Enter the marks and numbers on the outside of the package(s) to which theline item applies.

7. Enter the number of packages and commercial invoice description for eachline item.

8. Enter the applicable origin criterion: either P for wholly grown, producedor manufactured in the United States or Y and the percentage of U.S. valueadded.

9. Enter the gross weight or other quantity for the line item as shown in thecommercial invoice.

10. Enter the commercial invoice number and date.

11. This is the chamber of commerce certification. The agreement stipulatesthat chamber certification is not required when the exporter is also theproducer. However, Israeli Customs largely ignores this provision, andinsists that every certificate of origin be chamber-certified. Many U.S. pro-ducers complete the “Exporter As Producer” field along with chamber cer-tification to call Israeli Customs’ attention to the fact that they are causinga needless imposition.

12. The exporter signs the declaration in the presence of a notary. Like cham-ber certification, this is theoretically not required, but in fact is necessary tocomply with Israeli Customs procedure.

This form is printed on protected green paper, so copies are not permitted.Forms and assistance with completing them are available from Rapid Forms,(800) 257-8354, Unz & Company (800) 631-3098 or the America-Israel Cham-ber of Commerce and Industry, Inc. (212) 819-0431.

For additional information, visit the Trade Compliance Center at www.mac.doc.gov/Tcc/e-guides/eg_isrft.html.

U.S.–JORDAN FREE TRADE AGREEMENT

Products of the United States and the Hashemite Kingdom of Jordan becameeligible for preferential duty treatment in both countries in December 2001.Thetotal duty phase-out is estimated to take ten years.

In order to qualify, most products must originate in the exporting country.There are many exceptions, but for many U.S. products, “originate” meanseither that they are wholly produced or substantially transformed with a mini-mum U.S. content of 35 percent of the customs value. As a further requirement,most shipments must be shipped directly from the U.S. to Jordan.

Breaking with most free trade agreements, there is no requirement that theexporter complete a certificate of origin. Origin certification is handled by the

280 Documentation

importer. However, the importer will require sufficient information from theexporter to complete this for Jordanian Customs. Details on origin criteria, spe-cial treatment for various products, direct transportation, and importer require-ments are available at www.usembassy-amman.org.jo.

OTHER COUNTRY-SPECIFIC DOCUMENTATION

Country-Specific Certificates of Origin

Some countries have their own certificate of origin forms and instructions forcompleting them. Savvy sellers ask their buyers or consulates of their buyers’governments about such formalities. The following reference sources also offersuch country-specific information in book and CD-ROM or Internet-directform on an updated basis:

• The Exporters’ Encyclopaedia, Dun & Bradstreet Information Services,Parsippany, NJ, website www.dnb.com;

• Export Reference Manual, The Bureau of National Affairs,Washington, DC,website www.bna.com;

• Official Export Guide, Commonwealth Business Media, Inc. Newark, NJ,website www.cbizmedia.com.

Every U.S. Department of Commerce Export Assistance Center has a copyof one or another of these references.

Legalized Documents

Some countries require that certain documents be legalized (also called con-sularized or visaed) by a consulate in the country from which shipment is made.Most countries with such requirements are located in Latin America, Sub-Saharan Africa, or the Middle East.

Procedures and documents vary from country to country. For example, someArab countries require that a generic certificate of origin be completed. It isthen sent to the Arab-American Chamber of Commerce for verification thatthe certifying chamber of commerce is actually a bona-fide chamber. It thengoes to the embassy or consulate of the importing country for further certifica-tion, and finally returns with more seals than a high-school diploma.

Clean Report of Findings

Approximately 35 countries require that import shipments be inspected by anauthorized inspection company in the country of shipment. Some require

Other Country-Specific Documentation 281

inspection for all shipments, while others limit the requirement to shipmentsover a certain value or to a certain kind of goods. These governments lack con-fidence in their own customs services and their local trading community.

As we saw in Chapter 6, such countries suffer from economic problems thatthey attempt to cure through licensing imports, controlling foreign exchange,imposing high import duties on non-essential goods, or all three. This makes itattractive for their importers to engage in under-invoicing, over-invoicing, orout and out smuggling.

Because these tactics often involve complicity on the part of corrupt cus-toms officials in the buyer’s country, some governments conclude that private-sector inspectors are more reliable.They also require that these inspections takeplace on the seller’s side, beyond the reach of their own customs officials. Suchgovernments will engage one or more inspection companies. Although proce-dures will differ from country to country, the following scenario is typical:

1. The importing country issues regulations that imports must be preapprovedand that all or certain imports are subject to preshipment inspection by itsdesignated inspection agency.

2. Buyers applying for import approval are required to submit quotationsfrom their overseas suppliers.

3. Copies of the quotations and import licenses are sent by the buyer’s gov-ernment to its designated inspection agency in the sellers’ countries.

4. The sellers are informed by the inspection agencies, the buyers, or fre-quently by means of documents required by letters of credit (bank guaran-tees) that preshipment inspection must take place.

5. The inspection agencies compare the sellers’ quoted prices to their data-bases of “typical and reasonable” selling prices.

6. The inspection agencies send personnel to view the goods prior to exportpacking in order to verify product descriptions and quantities.

7. In some cases, inspection agencies also audit prepaid nonproduct chargessuch as freight, forwarding, and insurance.

8. The inspection agencies issue “clean reports of findings” documents forshipments that they consider correct. These documents enable buyers toclear customs. Since most countries with preshipment inspection require-ments also have exchange control regulations, the “clean reports of findings”may also trigger release of convertible currency in payment for the import.

9. Whenever inspection companies suspect that shipments are not correctlyhandled, they withhold their “clean report of findings” documents, therebycreating both import clearance problems for buyers and payment problemsfor sellers.

282 Documentation

Robert Abrahams, manager of the U.S. Department of Commerce’s ToledoExport Assistance Center, periodically prepares the following table of countriesrequiring pre-shipment inspection along with their requirements. Data found inExhibit 11.7 was current as of mid-2002.

The “Threshold” column indicates the amount of U.S. dollars that triggersan inspection requirement. Some are approximate, as they are expressed inlocal currency and converted to dollars at the June 4, 2002 prevailing exchangerates. The “Term” column indicates the basis for threshold valuation. Forinstance, the $5,000 amount for Angola applies to the CIF term (i.e., the total ofthe goods and the freight and the insurance). Depending on the mode and costof transportation, this might relate to an Ex Works value of a little over $4,000.When no term is specified, the safest course is to check with the buyer or theappropriate inspection company. If estimating, use an F Group Incoterm.

For some countries, not all goods are subject to preshipment inspection. It isalso possible that a letter of credit may call for a clean report of findings even ifthere is no requirement for the product or shipment amount. Any such require-ment should be amended out of the credit prior to shipment. Inspection compa-nies will handle only those situations that the destination country mandates,since they would not be paid for unnecessary inspections.

The following inspection agencies are listed in Exhibit 11.7:

• Bureau Veritas, Miami, Florida, phone (305) 593-7878, website: www.bureauveritas.com

• Cotecna, Miami Lakes, Florida, phone (305) 828-8141, website: www.cotecna.com

• Inspectorate America, Miami, Florida, phone (305) 599-1124, website www.bsi-global.com

• Intertek, Miami, FL, phone (305) 513-3000, Pasadena, TX, phone (713) 475-2082 or (713) 475-9184, website: www.itsglobal.com

• Societe Generale de Surveillance (SGS), Miami, FL, phone (305) 592-0410,website: www.sgsgroup.com

Mexico has a preshipment inspection requirement for non-NAFTA goodsthat are subject to antidumping and countervailing duties. See Chapter 3 fordetails.

Since there are a number of pre-shipment inspection companies, there is avariety of clean report of findings documents. Several companies handle this byplacing a flimsy hologram counterfoil on a copy of the exporter’s invoice,thereby avoiding the possibility of typographical errors.

The preshipment inspection process puts the exporter at risk, especially asmany shipments to such countries are made under documentary letter of credit

Other Country-Specific Documentation 283

284 Documentation

Exhibit 11.7 Preshipment Inspection Table

COUNTRY THRESHOLD TERM INSPECTION AGENCYAngola $5,000.00 CIF SGS

Bangladesh $5,000.00 N/S Bureau Veritas

Belarus $5,000.00 N/S Check with buyer.

Benin Approximately $4,300.00 FOB Bureau Veritas

Bolivia $1,000.00–$12,000.00 FOB Inspected at point of entry in Bolivia

$12,001.00–$50,000.00 FOB Inspection in Bolivia or origin at importer’s discretion

over $50,000.00 FOB Must be done at origin. SGS or Inspectorate America.

Burkina Faso Approximately $4,300.00 FOB SGS

Burundi $3,000.00 CFR (food, chemicals, pharmaceuticals and rags only) SGS

$5,000.00 CFR SGS

Cambodia $4,000.00 N/S SGS

Cameroon Approximately $2,900.00 N/S SGS

Central African Approximately $1,400.00 FOB SGS

Republic

Democratic Approximately $4,300.00 FOB Bureau Veritas

Rep. of Congo

Congo Approximately $4,300.00 FOB Bureau Veritas

Cote d’lvorie Approximately $2,100.00 FOB Bureau Veritas or Cotecna (Miami Lakes, FL office)

(Ivory Coast)

Ecuador $4,000.00 FOB Bureau Veritas or SGS or Intertek (Miami, FL office)

or Cotecna (Miami Lakes, FL. office)

Ethiopia $2,000.00 FOB SGS

Gambia $1,000.00 FOB Bureau Veritas

Georgia $5,000.00 FOB Intertek (Miami, FL office)

Guinea $3,000.00 FOB SGS

Kenya $5,000.00 N/S (inspection required for all shipments of used cars,

clothing, refrigeration and air conditioning equipment,

regardless of value.) Cotecna (Miami Lakes, FL office)

Liberia $2,000.00 FOB Bureau Veritas

Madagascar $1,000.00 FOB Bureau Veritas

Malawi $2,000.00 FOB SGS

Malawi Approximately $4,300.00 FOB SGS

Mauritania $5,000.00 FOB SGS

Moldova $3,000.00 CIP Check with buyer.

Mozambique random N/S Intertek (Pasadena, TX Office notifies selected

exporters.)

Nigeria all Intertek (Miami, FL Office)

Peru $2,000.00 FOB (used goods except motor vehicles)

$5,000.00 FOB (new goods except motor vehicles)

all (new and used motor vehicles)

SGS, or Cotecna (Miami Lakes, FL. office) or Bureau

Veritas

Rwanda $3,000.00 FOB (pharmaceuticals and fresh food)

$5,000.00 FOB (all other goods)

Saudi Arabia $5,000.00 N/S (all regulated items) Intertek (Pasadena, TX office)

Sierra Leone $2,000.00 CIF Bureau Veritas

Tanzania $5,000.00 FOB Cotecna (Miami Lakes, FL office)

Togo Approximately $4,300.00 N/S Cotecna (Miami Lakes, FL office)

Uganda $10,000.00 FOB Intertek (Miami, FL office)

Uzbekistan $10,000.00 N/S (Several commodities only, check with buyer.) SGS or

Intertek (Miami, FL office)

payment terms. The inspection company may withhold approval, may make atypographical error, or misdirect the document. Any of these may cause prob-lems with documentary credits. Probably the only way to minimize this is tokeep in close touch with the designated inspection agency.

• Be sure the inspection company approves the pricing before putting theorder into production.

• Have someone accompany the inspector during physical examination of thegoods to make sure he or she has no questions and is satisfied that the ship-ment is in order.

• After shipment, follow up constantly until the document is received.

• Double-check the document for accuracy before sending it on. If there areerrors, demand that a replacement be issued on a fast-track basis. (This maymean a trip to the inspection agency’s office, since the incorrect versionmust be exchanged for a new one.)

The World Trade Organization has issued guidelines called the “Agreementon Pre-shipment Inspection,” that provide a mechanism for dispute resolutionbetween sellers and inspection agencies. For details, visit www.mac.doc.gov/tccor contact the Office of Multilateral Affairs at 202-482-0603.

Additional information is available from the International Federation ofInspection Agencies, whose e-mail address is ifia_geneva@ifia.ch.

Government Certification

Some countries require governmental certification that certain imported goodsare free from pests, and/or have been treated or graded to meet the importinggovernment’s regulations. Naturally, these requirements are both product andcountry specific.

U.S. Department of Agriculture The Agriculture Department’s AnimalPlant Health Inspection Service (APHIS) handles certifications for animals andanimal by-products and issues phytosanitary certificates (see Exhibit 11.8) forplants, including wood products. They also license manufacturers of coniferouswood packing materials that treat their product and apply a mark that is recog-nized as compliant by the European Union and most other governments. Infor-mation is available at their website www.aphis.usda.gov.

The Food Safety and Inspection Service (FSIS) provides export inspectionsand certification for meat and poultry. Information on their procedures is avail-able at www.fsis.usda.gov/OFO/export/explib.htm.

Grain exports are quality and weight certified by the Federal Grain Inspec-tion Service (FGIS). For details, visit their website www.usda/gov/gipsa.

Other Country-Specific Documentation 285

286 Documentation

Exhibit 11.8 Phytosanitary Certificate

The Agricultural Marketing Service (AMS) provides additional inspectionand certification services to provide third-party assurance that sales contract orforeign government specifications have been met. They also certify dairy andmeat processing equipment. For details, visit their website at www.ams.usda.gov/index.htm.

Other Government Certifying Bodies The Food and Drug Administra-tion (FDA) provides export certificates required by the European Union forcertain products which, besides the obvious, include cosmetics. For details, visittheir website at www.fda.com.

The Environmental Protection Agency (EPA) provides certifications forpesticide products. For details, visit their website at www.epa.gov and call (703)305-5446.

The National Oceanic and Atmospheric Administration (NOAA) NationalMarine Fisheries Service (NMFS) provides a range of inspection and certifica-tion services to assist U.S. fishing industry exports. Visit their website at http://seafood.nmfs.noaa.gov for details.

LINKAGES

Documentation tends to draw various disciplines together, since at least somerequire input from more than one discipline.

• Compliance: Make sure that whoever reports the company’s exports(SEDs) and certificates of origin (particularly NAFTA) understands what isrequired and has the necessary information.

• Credit: Be sure that Traffic and the Forwarder are aware of any special con-signment instructions that may have a bearing on payment, such as nego-tiable ocean bills of lading.

• Manufacturing: Inform Sales of any unforeseen product availability delays.With Purchasing, inform Sales should the origin of any frequently

exported products change. This can happen when materials vendors arechanged, or change their vendors.

Make sure all packing lists are accurate, and correspond with the markson the shipping pieces.

• Purchasing: Consider changing vendors if nonoriginating materialsadversely affect NAFTA eligibility.

• Sales: Check product availability with Manufacturing, payment termswith Credit, transportation costs and transit time to the point of depar-ture with Traffic, and whether the buyer appears on any restrictive export

Linkages 287

control lists with Compliance before quoting, particularly to newprospects.

Determine the origin of exported products with Manufacturing and Pur-chasing.

Report any requests for under-invoicing, over-invoicing, and productmisrepresentation to Compliance and Credit.

Make sure blanket NAFTA Certificates of Origin are updated on atimely basis and that they include all NAFTA-eligible products each buyeris likely to order. Also, check continued eligibility with Compliance.

• Traffic: Inform Sales of any unforeseen transportation delays.Either examine or make sure that someone examines all documents for

compliance with any letter of credit requirements or any special consign-ment instructions as they are received from the forwarder.

288 Documentation

Chapter 12

Export Credit

Many domestic-oriented credit professionals find their first exposure to foreigntrade somewhat disconcerting. Although the basics are the same, the yardsticksfor making credit decisions and the possible payment-term alternatives are verydifferent. This chapter will consider export credit and collection from the per-spective of a novice, but will also engage the experienced domestic professionalby calling attention to areas that differ significantly from familiar territory.

TYPES OF RISK

By definition, the seller and buyer must be in different countries for foreigntrade to take place. This obvious difference between domestic and export busi-ness is extremely important in evaluating credit.

Export Intermediaries

If the party responsible for payment is located in the United States, the sale isdomestic business as far as credit decisions are concerned. This is true, despitethe fact that it may be considered export for other purposes, such as tax and theexport reporting role of the U.S. Principal Party in Interest (as covered in Chap-ter 11). This odd situation usually arises with sales to export intermediaries forresale abroad, such as export trading companies, export merchants, and con-firming houses covered in Chapter 4.As such, the situation is purely commercialrisk, and normal domestic criteria should apply. Savvy credit managers placespecial emphasis on payment history and years in business. In addition, they alsoinquire about the overseas markets in which such exporting domestic customersare most active.

Many export intermediaries—even the most reliable—have limited capital.Delayed payments from their overseas customers may cause them problems in

289

paying their suppliers promptly. In an extreme case, such as the Iraqi occupationof Kuwait, some export intermediaries, whose primary source of income was cutoff, were forced out of business. On the other hand, experienced intermediariesusually exercise sound judgment in dealing with foreign buyers and the coun-tries in which they are located. As exporters, they have many payment-termoptions at their disposal.These provide enhanced security if used correctly. (Wewill soon see that such security can be stretched to cover the exporter’s domes-tic vendors for exceptionally large purchases.) As for the Kuwait situation, thoseunfortunate exporters were no worse in predicting the problem than the CIA.

The fact that export intermediaries have limited capital causes unfavorablecomparisons when the financial statement analysis ratios commonly used inevaluating domestic credit are applied. However, limited capital is part of thenature of the business. On the plus side, many intermediaries carry only mini-mum inventory—or none at all—and purchase only as they sell. This providesexcellent liquidity.

Direct Exports

When the party responsible for payment is located in a foreign country, we havea direct export in the credit evaluation sense of the term. We also have a situa-tion where the seller must consider the extension of credit not only to the buyerbut also to the buyer’s country. This country risk lends an entirely new dimen-sion to credit evaluation.After all, even the richest and most responsible buyerscan do little to pay if their local government lacks convertible currency, imposesa bank holiday, or is overrun by another country.

Commercial Risk This is akin to domestic credit in that it considers thebuyer’s willingness and ability to pay. To some extent, the same tools exist.Credit reports are available, and most established buyers can furnish a list ofreferences with which they do business. It is sometimes even possible to obtainfinancial statements—in fact, this is required for most big-ticket sales that arecovered by government-sponsored payment guarantees or credit insurance.Theproblem with these analytical tools is that buyers do not exist in a vacuum butoperate within the environment of their own national markets. Accountingpractices may vary significantly from country to country, and those domesticfinancial statement ratios we saw when considering export intermediaries couldagain provide misleading results. An Asian importing company may appearshockingly undercapitalized by U.S. standards, but may work perfectly wellbecause of the way business is conducted in its local economy.

The International Accounting Standards Committee (www.iasc.org.uk) isattempting to establish minimum standards for use in all countries. Meantime,the following sidebar from an article by Pete Mulvey of the Chicago-basedaccounting firm McGladrey & Pullen, provides some obvious points to consider:

290 Export Credit

Revenue Recognition. Cash Basis vs. Accrual Basis

Inventory• LIFO: not used anywhere outside the United States.

• Physical checking: rarely happens.

• Mainly don’t capitalize costs.

Capitalization Requirements• In the United States, lower dollar costs are expensed. An aggressive approach

is taken with this technique in certain countries.

Depreciation Methods• Accelerated depreciation is used in many countries.

• Before analyzing, find out what method is used.

Accounting for Business Combinations• Showing goodwill on statements is not accepted in many other countries. For

example, it must be expressed in the year it is taken in the United Kingdom.

Foreign Currency Translations• Do not expect it to be as well documented as in the United States.

• Be careful of foreign entities dealing with other foreign entities.1

On the other side of the coin, considerations that cannot be reduced to ana-lytical precision are often far more important in many other parts of the worldthan they are here. Many societies trade on relationships, and for them reputa-tion is of paramount importance. This generalization is not to say that therearen’t well-placed crooks overseas. There are, and knowing how much wealth aparty has may not be as important as how it was obtained. However—and againa broad generalization—few societies other than the United States considerbankruptcy to be a “strategic move.” Rather, they consider it to be dishonor andfailure, something to be avoided whenever possible.

Some markets have informal financing arrangements that are not obvious tooutsiders. These are largely reputation-driven and are employed for situationswhere more conventional bank financing doesn’t work well.

A good rule of thumb in export credit evaluation is to get as much informa-tion as possible, especially payment history and identity of the firm’s principals,and place more emphasis on it than would be appropriate for domestic credit.This information must be frequently updated. A company’s situation maychange in response to local conditions of which foreign sellers may be ignorant.Whenever analytical tools are available, they should be interpreted in light ofsuch factors as accounting methods, legal requirements, and normal businesspractices in the buyer’s country.

Types of Risk 291

Country Risk There are two kinds of country risk to consider—political andeconomic.As the name implies, political risk refers to an adverse change in or tothe government of the buyer’s country, or to the relationship between thebuyer’s and seller’s governments. The Iraqi invasion of Kuwait provides exam-ples of both. Besides radically changing Kuwait’s government, it resulted in theUnited States and most other countries imposing sanctions on Iraq and freezingboth Iraqi and Kuwaiti assets. Economic risk is the possibility of a country’s hav-ing severe economic problems that cause payment delay or default. In the 1980s,the currencies of both Venezuela and Mexico dropped in value to the pointwhere their governments enacted regulations pegging the exchange rate forpayment of foreign obligations. This resulted in both delayed payments anddefaults to foreign creditors, despite the fact that buyers paid in local currencyat the government-mandated rate of exchange.

These risks often go hand in hand. Argentina had five presidents within amonth during its 2001–02 economic crisis, during which time the value of thepeso severely depreciated.

At best, country risk evaluation is a pseudo-science; a mixture of economicanalysis, current events, knowing the right people in many countries, and crystal-ball gazing. Then there’s the occasional wild card like the Kuwait invasion thatno one could have predicted, just to make life interesting for credit managers.Still, country-risk analysis works more often than not.Whatever the method, thequestion is always the same Will the buyer’s country be in a position to honor itsprivate sector foreign obligations by the time the bill comes due? The Hand-book of International Credit Management provides excellent coverage of coun-try risk evaluation.2

SOURCES OF INFORMATION

Commercial information may be difficult to obtain. Foreign buyers areextremely reluctant to provide financial statements, and many countries havetough right-to-privacy laws. Still, help is available for those who know where tolook.

Step one is a straightforward request to the buyer for trade references. Thefollowing checklist of items that should appear in a typical credit applicationform are excerpted from IOMA’s Managing International Credit and Collec-tions 2000 Yearbook:3

• Name of company

• Date application is completed

• Company physical address, telephone number, fax number, and website (ifavailable)

• Billing address

292 Export Credit

• Name, title, e-mail address, and phone number of person responsible foraccounts payable

• Type of business

• Type of operation

• Date business founded

• Date of incorporation (if applicable)

• List of primary countries where customer does business

• Number of employees

• Major products

• Plant or warehouse capacity (if applicable)

• Name(s) of any parent, subsidiary, or related company(ies)

• International DUNS number

• Bank references with addresses, phone numbers, and contact names

• Vendor references with addresses, phone numbers, and contact names

• Preprinted “boilerplate” statement about truthfulness and accuracy of theinformation provided

• Signature of officer with title

Be sure to write each reference, but don’t expect much from the bank. In fact,look for what you don’t see. A bank should find something nice to say about aclient, and its omission may be a message in itself.

There are a number of commercial credit agencies that offer credit reports.Most have a niche that may include cost, speed, level of detail, or timeliness ofinformation, so try a few to determine the right mix for your needs.We list themin alphabetical order to avoid favoritism.

• Coface North America, 444 Madison Avenue, 24th Floor, New York, NY10022, phone (877) 626-3223, website www.coface-usa.com.

• Credit Report Latin America and World, PO Box 3972, New York, NY102163; phone (718) 729-4906, website www.crla.com.

• Credit Risk Monitor, 116 John Street, New York, NY 10038, phone (888)472-9366, website www.creditriskmonitor.com.

• Dun & Bradstreet, offices throughout the United States, website www.dnb.com.

• FCIB-NACM, 8840 Columbia 100 Parkway, Columbia, MD 21045-2158,phone (410) 423-1840, website www.fcibglobal.com.

• J.I. International, PO Box 26, 699 Terryville Ave., Bristol, CT 06011-0026,phone (860) 589-1698, website www.jiintl.com.

• Kreller Business Information Group, 817 Main Street, 3rd Floor, Cincinnati,OH 45202, phone (800) 444-6361, website www.kreller.com.

Sources of Information 293

• Owens Online, 6501 North Himes Avenue, Suite 104, Tampa, FL 33614,phone (800) 745-4656, website www.owens.com.

• Status Credit Reports, Ltd., 21 Whitchurch Road, Cardiff, Wales, CF14 3JN,United Kingdom, phone (44) 2920-544-333.

• Veritas Group of Companies, 121 Whitney Avenue, New Haven, CT 06510,phone (203) 781-3800, website www.veritas-usa.com.

The U.S. Department of Commerce also provides an excellent commercialcredit report product, the International Company Profile, available throughCommerce Department U.S. Export Assistance Centers. Since these reportscome from the government, they tend to be more straightforward than reportsissued by parties more concerned by the possibility of lawsuits. They can alsoaccommodate specific questions about the subject company. Sadly, these are notavailable for all countries.

Information on country risk is more difficult to obtain and even more diffi-cult to correctly interpret. However, there are some good sources.

The French credit insurer Coface produces a good annual country-by-country review titled Risk: A Country by Country Guide.4

While an annual snapshot guide is useful, sellers who export to a large num-ber of countries may need more current information.The following listed coun-try risk information sources provide updated information. Services and feesdiffer, so be sure to check all of them:

• Coface North America, New York, NY, USA (Paris based), www.coface-usa.com.

• Economist Intelligence Unit, London, England, www.eiu.com.

• Political Risk Services Group, East Syracuse, NY, www.prsgroup.com.

• Rundt’s World Business Intelligence, New York, NY, www.rundtsintelligence.com.

• World Markets Research Center, London, England, www.wmrc.com.

The FCIB-NACM is a membership-based organization that provides coun-try reports. It also provides international credit and collection surveys, and aquarterly roundtable conference where members can put specific questions onthe agenda for discussion.

Commercial banks can help with specific country-risk decisions through theirworldwide networks of correspondent banks. They also subscribe to analyticaltools showing average days outstanding by country and by payment term. Also,some large accounting firms provide country-specific reports for their clients.

The Commerce Department provides country-specific information, avail-able through its Export Assistance Centers. Even the Central IntelligenceAgency helps exporters with country risk evaluation through its World Fact-book, available online at www.cia.gov/cia.

294 Export Credit

The International Chamber of Commerce offers a book titled ICC WorldPayment Systems Handbook that describes the methods countries use to sendpayments to and from each country. While its coverage of payment mechanics isprobably of more use to bankers than to exporters, it has an excellent glossary ofterms used in international payments that make the book interesting to tradersin general. It is available from ICC Publishing Inc., www.iccbooksusa.com.

Although far less dramatic, the need to comply with country-specific regula-tions may increase the credit risk for the seller. Countries that impose pre-shipment inspection regulations require that importers present a “clean reportof findings” document.Those countries with consularization regulations requirea legalized invoice, certificate of origin, or similar document, obtainable in thecountry where the shipment originates. While presenting these to local customsis ultimately a buyer responsibility, preparing and obtaining them is usually aseller obligation. Failure to do so may result in a breach of the sales contract.Worse, as documentary credits are a preferred way of selling to such countries,incomplete or incorrect documentation may result in nonpayment.

Sellers should keep in mind that requirements to provide documents issuedby anyone over whom they lack control, such as preshipment inspection agen-cies or consulates, increase their transaction risk.While less obvious, the same istrue when the carrier or forwarder work for the buyer, as is usually the case withEx-Works or F Group Incoterms.

Some countries have strict origin regulations because of boycotts. This pre-sents a payment problem when they appear in a letter of credit as a requirednegative origin or flag certification. U.S. law prohibits negative certificationsagainst a country with which the U.S. is friendly. The good news is that mostbanks in boycotting countries are aware of this, and do not include such require-ments in credits opened in favor of U.S. beneficiaries. When this does occasion-ally happen, it is usually because a clerk used a form intended for othercountries that do not have antiboycott regulations. Such prohibited require-ments can usually be removed by amendment, but this should be handled assoon as the credit is received. (There may also be a reporting obligation to theU.S. Commerce or Treasury Departments, so whoever catches this shouldinform Compliance.) Some letters of credit contain informational points such as“Shipment of Israeli goods is prohibited,” without requiring any negative certi-fications. Depending on the wording, it may be possible to use such credits with-out amendment, but there may still be a reporting requirement.

TERMS OF PAYMENT

This section will list the payment terms most commonly used in internationaltrade, with brief descriptions, in order of increasing credit risk for the seller. Wewill then cover three types of payment terms not commonly used domestically—letter of credit, forfaiting, and documentary collections—in sections of their own.

Terms of Payment 295

Payment with Order

In this one-sided payment term, the seller requires payment in advance. Thiscreates a situation where the buyer is extending credit to the seller. Credit-worthy buyers in stable countries will resist this payment term, so its use islargely restricted to the following situations:

• Dominant supplier. The product represents such an excellent value for themoney, or there are so few alternatives, that the seller is in a position to dic-tate payment terms.This can become hubris, and sellers in this position mayfind that their intransigent attitude invites new and more buyer-friendlycompetition.

• Urgent first orders.When the seller lacks time to compile credit informationon the buyer.

• Small, occasional orders without the prospect of larger business to come.Sellers are understandably reluctant to bother running a credit check forwhat appears to be few and small orders, since doing so may cost anywherefrom one to five hundred dollars. It is probably just as easy for all concernedif payment accompanies such orders.

• Generous discount. Some sellers offer very attractive cash discounts. Thismay not work well for two reasons. It may make the buyer suspicious of theseller’s obvious need for cash. It also may cost the seller a large part of theprofit otherwise possible with more liberal payment terms. Note: Whenoffering any discounts, be sure to clearly indicate them on the commercialinvoice, and net down the total selling price. Most countries that assessimport duty on an ad valorem basis use the invoiced value.There is no sensein a customer paying import duty on a needlessly high amount.

• Poor commercial credit. In exercising due diligence, the seller discovers thatthe buyer is so bad that payment in advance is the only prudent way to dobusiness.

• Poor country risk. There are some countries whose political and economicsituation is so bad that payment with order is a must. Ironically, businesspeople in such countries are often the first to see the writing on the wall, andestablish offshore nest eggs while it is still possible to do so. Don’t be sur-prised if a buyer in an impoverished country offers payment in advancefrom a U.S. bank account. Note: while this may remove the credit problem,it does not relieve sellers from due diligence in determining that no exportcontrol violation is likely.

Serious exporters should consider payment with order as a last resort when-ever the possibility exists for significant repeat business with credit-worthy buy-ers in stable countries. When offering this term, never use the Americanism

296 Export Credit

“cash in advance,” as its abbreviation (CIA) conveys frightening overtones toforeign parties.

Standby Letter of Credit

This is a guarantee from a financial institution that permits beneficiaries to drawpayment(s) without the need of providing documentary evidence that certaintasks have been accomplished. We will cover it in detail in the Letter of Creditsection.

Documentary Letter of Credit

This is a guarantee from a financial institution that permits beneficiaries to drawpayment(s), but only when producing documentation conforming to its oftendetailed requirements.We will cover this in detail in the Letter of Credit section.

Forfaiting

This process of selling guaranteed accounts receivable on a nonrecourse basis isreserved for large export transactions made on medium and long terms of pay-ment. We will cover it in its own section.

Sight Draft, Documents against Payment (Also Cash against Documents)

This is the international equivalent of COD, but uses the banking system ratherthan carriers to collect.We will cover this in the Documentary Collection section.

Documentary Time Drafts

Under this term, the buyer accepts (endorses) a formal obligation to pay, calleda draft (similar to a promissory note), at a local bank in exchange for shippingdocuments. The bank presents the draft(s) for payment(s) at maturity(ies). Wewill cover this in the Documentary Collection section.

Clean Drafts

As with sight draft, documents against payment, and documentary time drafts,clean drafts may be drawn for immediate or future payment and are sent to abank in the buyer’s country for payment or acceptance as the case may be. How-ever, they are not accompanied by shipping documents. Since the buyer doesnot have to deal with the bank to obtain the documents, clean drafts provide no

Terms of Payment 297

real protection for the seller unless and until they are paid or accepted. Onceclean time drafts are accepted, they work the same as accepted documentarytime drafts.

Clean drafts are used most often under one of the following circumstances:

• The transit time for the goods is so short that they arrive long before thepaperwork gets to the foreign bank

• The buyer wants its bank to function as its accounts payable department

• The buyer’s government requires that some type of draft be used

• The buyer accepts the draft prior to shipment

Open Account

This works about the same as it does here, but open account receivablesturnover is normally longer for export receivables. In many countries, buyersuse terms like net 30 as a guideline rather than an absolute, and almost alwaysstart the clock from when goods arrive rather than from when they wereshipped. Sellers that bill in their own currencies may encounter additionaldelays while payment is converted from the buyer’s local currency.

Sellers should clearly indicate the currency of payment in their invoices andprovide such other payment instructions as necessary.When payments are to bemade by check (except for Canada), U.S. sellers should specify that checks bedrawn on a U.S. bank. Otherwise, access to the funds may be delayed for weekswhile the checks are placed for collection at the foreign bank against which theywas drawn.

On the plus side, payments made through the SWIFT electronic paymentsystem can get from just about any country to another within a day or two. Manybanks subscribe, and exporters selling on open account terms should make surethat their buyers’ accounts payable departments have their bank’s name andSWIFT routing code. It may be a good idea to print this information right on thecommercial invoice.

LETTERS OF CREDIT

Letters of credit are conditional obligations issued by financial institutions (nor-mally commercial banks) that designated sums will be paid to designated par-ties at designated times under designated conditions. The guarantees areconditional in that absolute (and often literal) compliance with their terms andconditions is a must. Otherwise, their protection may be lost.

There are two basic types of letters of credit: standby and documentary.Standbys pay when a designated event does not happen. Conversely, documen-

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tary credits pay when a designated event or thing does. We will cover these sep-arately because they differ in the mechanisms used to trigger drawings. How-ever, all letters of credit have some common terminology:

• Applicant or account party. The party opening the credit.

• Beneficiary. The party in whose favor the credit is opened.

• Issuing or opening bank. The bank that issues the credit, usually the appli-cant’s bank.

• Confirming bank.An institution that adds its undertaking to that of the issu-ing bank. Note: credits covered by UCP 500 or ISP 98 are considered uncon-firmed unless the confirming bank clearly states otherwise.

• Negotiating bank. A negotiating bank gives value for the presentation ofconforming documents against a letter of credit. It may be any bank exceptthe opening bank.

• Advising bank. Any bank other than the opening bank that transmits a let-ter of credit to a beneficiary.

• Irrevocable credit.A credit that cannot be changed (amended) or cancelledby any party without the consent of all parties (applicant, issuing bank, andbeneficiary). Note: Credits covered by UCP 500 or ISP 98 are consideredirrevocable unless they clearly state otherwise.

• Revocable credit. A credit that may be changed or cancelled without theconsent of the beneficiary. Any such cancellation may happen at any timeuntil conforming documents have been presented. Since revocable creditsmay be cancelled, they provide little or no protection to the beneficiary.

• Amendment. A change to one or more letter of credit conditions. Notes:Amendments to irrevocable credits originate with the applicant and issuingbank, and are not binding unless the beneficiary accepts them. Beneficiaryacceptance may be accomplished by affirmation or by passively submittingcompliant documents to the credit as amended. Banks that confirm creditsare not obligated to add their confirmation to subsequent amendments ifthey choose not to do so.

• Document. As used with letters of credit, a piece of paper (or electronicmessage unit) that proves that an event has taken place (e.g., a dated andsigned transport document indicates that a shipment has been made.)

• Discrepancy. Failure to comply with a term or condition of a credit and, forthose credits covered by UCC 500 or ISP 98, with a condition of the appli-cable rules. Note: Discrepancies that have not been corrected within a letterof credit’s time frame void its protection.

• Expiration date. Every letter of credit must have a final date by which anydrawings must be presented, although this may be years after the credit wasissued.

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Standby Letters of Credit

As mentioned earlier, standby credits pay when a stipulated event does not hap-pen. They are used to guarantee performance for specified obligations, and inthis respect resemble surety bonds issued by insurance companies.Typical appli-cations include:

• Credit inducement. The ability to claim payment against a standby can pro-vide a seller the comfort it needs to extend a buyer a larger amount of unse-cured credit than it would do otherwise.Example: Haberkamp GmbH opens a standby credit in favor of AbrahamsInternational for $50,000, payable against Abrahams’ written claim thatHaberkamp’s account is over 30 days past due. Abrahams can comfortablyextend credit on open account terms up to that amount, knowing that it canclaim reimbursement from the bank should Haberkamp fail to pay.

• Bid-bond. Government agencies employing sealed-bid procurement proce-dures normally accept standby letters of credit in lieu of bid bonds.Example:The government of Corteguay makes its major purchases throughpublic opening of sealed-bid quotations. In order to prevent bidders fromupsetting the process by making frivolously low bids that they subsequentlyrefuse to honor, it requires that all bids be accompanied by a surety bond orstandby credit for at least 10 percent of the bid amount. This would bepayable if the successful bidder refuses to take up the supply contract.Note 1: Savvy bidders open their standbys for amounts greater than theminimum percentage requirement to avoid revealing the amounts of theirbids. There is no risk if they are serious. If they are unsuccessful, the stand-bys are returned unused because they are conditioned on the beneficiarybeing the successful bidder. If they are successful, the standbys are returnedunused when they take up the supply contracts on which they bid.Note 2: Successful bidders are often required to open performance bonds aspart of their contract obligations. Standby credits are often used for this pur-pose, too.

• Performance bond. Sellers involved with large contracts that include pre-shipment progressive payments and/or post delivery obligations can oftenuse standbys in lieu of buyer-payment holdbacks.Example: Osborne Machinery enters into a contract for the supply of alarge machine and its installation and training. It wants to be paid uponshipment, but the buyer wants to be sure that it will be installed once itarrives, and that training will take place thereafter.The parties agree that 10percent of the purchase price is a fair allocation for installation and trainingcosts. The buyer opens a documentary credit in Osborne’s favor for the fullpurchase price payable against presentation of both shipping documentsand a standby credit opened by Osborne in the buyer’s favor for 10 percent

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of the purchase price. The standby would be worded to permit the buyer todraw by presenting a written claim that installation and/or training had nottaken place within the time permitted in the sales contract.

In every case, the beneficiary would draw on the standby in reimbursementfor the non-occurrence of whatever the standby was opened to cover (nonpay-ment, nondelivery, nonperformance). As it is impossible to prove a negative,standbys by their very nature cannot require conclusive documentary evidencethat there really was nonoccurrence. The most they can ask for is the benefi-ciary’s written claim. This makes standby credits vulnerable to misuse, and lim-its their appeal to situations where the applicant has absolute confidence in thebeneficiary’s integrity. A wrongful drawing for a substantial sum is likely tocause the applicant to sue for recovery. Meanwhile, the standby credit allows thebeneficiary to hold the money while the parties battle in court.

Most people enter agreements with the intention of performing as agreed,and have at least some confidence that their opposite number will do likewise.For this reason, most applicants opening standbys believe that they will never beused.

An important consideration for a beneficiary of a standby credit is that thecredit not expire before the obligation it covers becomes due. Should this hap-pen, the beneficiary would be put in the difficult position of either prematurely(and therefore wrongfully) drawing, or watching the security evaporate unused.This obviously presents a problem in reconciling the two facts that all letters ofcredit must have expiration dates, and that some obligations are ongoing. For-tunately, there is a device called an evergreen clause for just this situation. Anevergreen clause says, in effect, that although a credit expires on a certain date,it will be automatically extended for a specified length of time unless the issuingbank chooses not to extend the credit, in which case it must provide a predeter-mined advance notice to the beneficiary.The beneficiary keeps track of the timeperiod for any nonrenewal notice. If none is received, the credit is automaticallyextended. If a non-renewal notice is received, the beneficiary would call on theapplicant to either settle the obligation or provide a replacement standby.Should neither happen, the beneficiary would still have time to draw on thestandby. If subsequently sued for wrongfully drawing, it would claim that theapplicant had broken faith by not providing continuous-standby protection.Savvy beneficiaries incorporate such language in sales contracts involvingstandby credits.

Until January 1, 1999, most standby credits and documentary credits werecovered by the same rules, the International Chamber of Commerce (ICC) Uni-form Customs and Practice for Documentary Credits (UCP 500). On that date,a new set of ICC rules specifically created for standbys came into force—Inter-national Standby Practices (ISP98).As UCP 500 is still in force, it is possible fora given standby to be covered by either set of rules. It is also possible for it to be

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covered by neither. Since neither are law, they must be expressly stated in orderto apply. Both are so commonly used that a reference to one or the other is oftenfound in the “boilerplate” language preprinted on the forms on which the cred-its are prepared.

ISP 98 consists of 89 neutral rules that cover most situations found instandby credits. However, any credit may be written to override one or moreISP 98 provisions, and when this happens, the provision(s) found in the credittake precedence. These rules are new, but it is likely that they will be revisedwhenever commercial practices change enough to warrant doing so. This hasbeen true of the Uniform Customs and Practice, which has been revised aboutevery 10 to 12 years.

Documentary Letters of Credit

Documentary credits differ from standbys in five important respects:

1. They pay against documentary evidence that an indicated event or eventshave happened. Conversely, they do not pay should an event fail to happen.

2. They may and usually do call for definitive documentation.

3. They are primary payment mechanisms, and both their applicants and ben-eficiaries fully intend that they be used.

4. They are usually governed by the current version of the ICC Uniform Cus-toms and Practice for Documentary Credits (UCP 500) and cannot be gov-erned by ISP 98.

5. They may also be subject to eUCP, the supplement to UCP 500 coveringelectronic letters of credit and electronic documentation.

Overview Documentary credits normally address single or related transac-tions. This is true because of the definitive documentation that they oftenrequire. For instance, many documentary credits require evidence that the mer-chandise for which they are opened has been shipped. In addition, they mayrequire some or all of the following, which we described in Chapter 11:

• Commercial invoice

• Packing list

• Certificate of origin

• Insurance certificate (if the seller is to insure)

• Country-specific documentation (consular documentation, clean report offindings)

• Product-specific documents (phytosanitary certificate)

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• Draft or drafts (as we will soon see, a draft is a financial instrument demand-ing payment)

In addition to these commonly used documents, the buyer will be sure torequire any additional documents that its customs authorities require the sellerto provide.

There are also time frames to consider.As mentioned earlier, every letter ofcredit must have an expiration date. Since documentary credits are normallyused for specific transactions, their validity period should be long enough to cor-respond to any promised shipment times. In fact, some credits specify both lat-est shipment and expiration dates. Further, for shipments with relatively shorttransit times, buyers may include a stipulation that documents be presentedwithin a given number of days from the date of the shipping document. Thisforces beneficiaries to process documents promptly, and avoids problems asso-ciated with shipments arriving long before the documents do.

Exhibit 12.1 is a “typical” irrevocable unconfirmed documentary letter ofcredit payable at site.

Typically, documentary credits are opened by the buyer at the buyer’s bank.While banks have their own application forms in their own languages, they allrequire the same core information. The application in Exhibit 12.2 is more orless typical.

The buyer’s banker will look to the instructions found in the applicationform for instructions on how to draft the documentary credit.A communicationproblem may happen at this point, as in many large companies the person whonegotiated the purchase does not also instruct the bank to open the credit.Rather, this is done by someone in the accounting department, who often lacksfirst-hand knowledge of how the deal is structured (i.e., which documents torequire and what time frames to stipulate). Savvy sellers anticipate this bypreparing detailed proforma invoices to provide a “map” for the buyer andbuyer’s banker in determining which documents and time frames to include inthe credit. (See Chapter 9 for a sample proforma invoice.) Remember, in lettersof credit, what you get is the applicant’s banker’s understanding of the deal.Anything you can do to make the deal crystal clear will pay dividends in avoid-ing costly amendments and reducing the chances of risky discrepancies.

Sending buyers instructions for opening credits along with proformas isanother way of getting acceptable credits the first time. Typical instructionsinclude:

• That the credit is to be irrevocable and subject to the current version of UCP.

• Whether the credit is to be confirmed.

• Whether sight or usance. (We will cover the difference soon.) If the latter,state the time and that the draft must create a U.S. banker’s acceptance.

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The South Bank of the MaumeeInternational DivisionJakeway BuildingToledo, Ohio 00397 USAPHONE: + 419 736-7000 FAX: + 419 736-7024 SWIFT: SBM US 397

Advice of Irrevocable Letter of Credit No: 3120 Date: February 4, 2002

Issuing Bank, Credit Number, and issue date DTI Bank, Stuttgart Office, No. 18973 issued Feb. 1, 2002.

Beneficiary: Abrahams Sporting Goods 1492 Columbus Blvd. Toledo, OH 00397

Amount: US 12,725.00 (TWELVE THOUSAND SEVEN HUNDRED TWENTY FIVE DOLLARS)

We have been instructed by the above named bank that they have opened the above referenced irrevocable letter of credit inyour favor, for account of : Weissbach Sports Imports GmbH, 2 Lutz Hoffmanstrasse, D1066 Weissbach,Germanyavailable by your draft(s) drawn on: DTI Bank at sight accompaniedby the following documents:

Commercial invoice, manually signed in original and four copies, evidencing shipment of “200 JimThome warmup jackets, HS number 640023, per buyer’s order AZ12, CIF Hamburg.”.Packing List in triplicate.Certificate of U.S.A. originFull set of clean “on board” ocean bills of lading marked “freight prepaid” and consigned to the “orderof DTI Bank”Marine insurance policy or certificate covering “all risks” and “war risks” and “strike, riot, and civilcommotion risks” showing DTI bank as assured.

Term of Sale: CIF Hamburg

Partial shipments: prohibited Transshipments: permitted

Latest shipment: April 15, 2002

Latest Presentation: At our counters on or before April 24, 2002.Documents must be presented within 15 days of the transport document date, but within the validity of this credit.

Banking charges: All banking charges outside Germany are for the beneficiary’s account.

This documentary letter of credit is being forwarded to you at the request of the issuing bank, and conveys no engagement byus.

NOTE: Except so far as otherwise expressly stated, this credit is subject to the Uniform Customs and Practice forDocumentary Credits, 1993 Revision, ICC publication UCP 500.

Exhibit 12.1 A “Typical” Irrevocable Documentary Credit

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The South Bank of the MaumeeTrade Services DepartmentToledo, Ohio

Application for Commercial Letter of Credit – page 1 of __ pages

Applicant Reference: _______________________ Credit Number: _____________________________

Advising Bank: Applicant:_________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ ___________________________________________(or your correspondent)

Beneficiary: Amount:_________________________________________ $_____________words__________________________________________________________________ ____________________________________________________________________________________ ___________________________________________

Presentation: __for negotiation on or before ______________ OR __ at your counters on or before _______________

Please issue an irrevocable letter of credit as set forth and forward same to your correspondent by:___air mail only OR ___air mail with telecommunication pre-advice OR ___SWIFT

Available by beneficiary’s drafts at:___Sight on The South Bank of the Maumee for : _______% of invoice value___ ________________________________________________________________________ for _______% of invoice value

Covering – goods must be described in commercial invoice as: ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Terms (Incoterms 2000 unless otherwise specified):__FCA____________ __FOB____________ __CPT____________ __CIP____________ __CFR______________CIF_____________ __DDU____________ __other____________________________________________________

Documents: Drafts must be accompanied by the following:__Commercial invoice, original plus ___copies__ Packing list, original plus ___copies__ Marine insurance policy or certificate covering _____________________________________________________________ Air waybill consigned to: ________________________________________________________________________________ Full set of ocean bills of lading issued to the order of The South Bank of the Maumee and marked: __on board OR __received for shipment and __freight prepaid OR __freight collect

Shipment / Dispatch / Taking Charge / at: ________________________________ to ________________________________Latest shipment ______________________. Partial shipments: __permitted OR __prohibited

Presentation: within ____days of the transport document date, but within the validity of the credit.

Unless otherwise instructed, documents may be forwarded in one airmail by negotiating or paying bank.

The undersigned authorizes you, without reference to or approval by the undersigned, to express the terms set forth in thisapplication in the letter of credit in such language as you deem appropriate and with such variations from such terms as youdetermine are necessary and are not materially inconsistent with this application.

All rights under this agreement are to be determined by the current version of the International Chamber of CommerceUniform Customs and Practice for Documentary Credits, ICC Publication ________________.

This application is subject to the terms of the attached security agreement.

________________________________________________________________ _______________________________________Applicant name Date

_________________________________________________________________________________________________________Authorized signature(s)

Exhibit 12.2 A Documentary Credit Application Form

• Name, address, phone and fax numbers, and SWIFT code of the seller’sbank.

• The seller should request that the credit be freely negotiable. (This enablesseller to make presentation at its own bank, regardless of which bankadvises the credit.)

• Amount and currency for which the credit is to be opened.

• Documents.The seller indicates which documents it is willing to provide, forinstance:

Signed commercial invoice

Packing list

Transport document (specify kind, e.g., marine bill of lading, multimodaltransport document, air waybill, truck bill of lading)

Insurance certificate

Certificate of origin

Other (specify)

Notes: Many sellers add a statement to the effect that no documents otherthan those listed in the instructions may be specified without the seller’sprior consent. Probably the most important single documentary instructionfor vessel shipments is that they be consigned either to order of shipper orto the order of issuing bank rather than directly to anyone else (especiallythe applicant).

• Whether partial shipments are to be permitted.

• The term of sale (from the current version of Incoterms).

• The latest shipment date (if multiple shipments, the date of the last one).

• The expiration date (which should be at least 15 days after the latest ship-ping date).

• Whether the banking charges are for the account of the applicant or benefi-ciary.

• Any other transaction-specific conditions to appear in the credit.

While sending such instructions by no means guarantees that they will alwaysbe followed, you’ll never get what you want without asking for it.

Uniform Customs and Practice for Documentary Credits As men-tioned earlier, almost all documentary credits are covered by the current ver-sion of the International Chamber of Commerce’s Uniform Customs andPractice for Documentary Credits (UCP). The UCP is not law, and must beexpressly stated in order to apply. It is so commonly used that a reference to itis often found in the “boilerplate” language preprinted on the forms on which

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the credits are prepared. Further, all credits issued by SWIFT automatically ref-erence the UCP.

The version presently in force, UCP 500, consists of 49 neutral rules thatcover most situations encountered in documentary credits. However, any creditcan be written to override one or more UCP 500 provisions, and whenever thishappens the provisions found in the credit take precedence.

It is extremely important that whoever in the seller’s company handles let-ters of credit be familiar with the UCP. This includes Credit, and whoever isresponsible for preparation of shipping documents, such as Traffic and the for-warder. The following excerpts of some of the points covered in UCP 500 willillustrate how important this is.These are only excerpts and should be treated assuch (the number of the complete article is provided in parentheses). Keep inmind that these are default positions, and a given credit may override one ormore of them:

• Credits are separate transactions from sales or other contracts. (3)

• All parties are concerned in documents. (4)

• Liability of issuing and confirming banks. (9)

• Documents must comply with the terms and conditions of the credit. (13a)

• Documents that are inconsistent with each other are discrepant. (13a)

• The maximum examination time for presentations is seven banking days.(13b)

• Marine transport documents indicating that the goods were shipped ondeck are discrepant. (31.i)

• The notations “shipper’s load and count,” “said by shipper to contain,” orsimilar effects do not render a transport document discrepant. (31.ii)

• The fact that a transport document indicates that the consignor is a partyother than the beneficiary does not render it discrepant. (31iii)

• Transport documents bearing no clause or notation that expressly declaresa defective condition to the goods and/or their packaging are consideredclean. (32a)

• The phrases “freight prepayable,” “freight to be prepaid,” or words to simi-lar effect are not acceptable substitutes for the phrase “freight prepaid.”(33c)

• Insurance documents must appear to be issued by insurance companies orunderwriters or their agents. (34a)

• All original insurance documents must be presented. (34b)

• Insurance coverage must take effect at the latest from the date of loading onboard or dispatch or taking in charge of the goods as shown on the transportdocument. (34e)

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• Insurance documents must be expressed in the currency of the credit. (34fi)

• Insurance cover must be for a minimum of 110 percent of the CIF or CIPvalue when this value can be determined from the face of the documents.Otherwise, banks will accept coverage for a minimum of either 110 percentof the drawing or of the gross invoice amount, whichever is greater. (34fii)

• The commercial invoice description of the goods must correspond with thedescription in the credit. The goods may be described in general terms notinconsistent with the credit description in all other documents. (37a)

• “About,”“approximately,” or “circa” used in connection with the amount ofthe credit or the quantity or unit price stated in the credit provide a plus-or-minus ten percent tolerance to the amount or the quantity or the unit priceto which they refer. (39a)

• Partial shipments are allowed unless expressly prohibited. (40a)

• Transport documents presented more than 21 days after the date of ship-ment are discrepant. (43a)

• Latest presentation dates falling on a day on which the bank at which pre-sentation is to be made is closed are automatically extended to the nextbanking day. (44a) This does not apply to bank closures caused by forcemajeure. (17)

Hopefully, this should convince any doubters that the UCP contains essen-tial information. If so, here’s a trick for mastering it. First, read it through in itsentirety, but don’t expect to get much out of it. Next, read one and only one arti-cle a day.Then, once you’ve read them all, re-read it from start to finish, and thepieces should fit together nicely.

Effective April 1, 2002, electronic presentations against documentary cred-its became possible under eUCP version 1.0, the ICC’s supplement to UCP 500.The documentary requirements of credits opened under these rules may be sat-isfied with paper documents, electronic documents, or a combination of the two.Both electronic documentation and electronic documentary presentations arestill a work in process. Interested readers are urged to obtain a copy of eUCPVersion 1.0, and closely follow its progress using one of the methods cited inChapter 13.

Varieties of Documentary Credits Documentary credits are quite versa-tile and can be structured to reflect many different kinds of transaction that maybe expressed in terms of documents. We have already seen that they can beissued for approximate amounts and quantities. Some examples of other varia-tions are:

• Usance credits. Letters of credit may be structured for immediate payment(sight) or for payment at a predetermined future time (usance). Usance

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credits come in two varieties, those calling for drafts to be drawn andaccepted, and those that do not. Either way, compliant drawings againstusance credits become obligations of the issuing bank as well as any con-firming banks. In this respect, they involve little more risk than thosepayable at sight.

Usance credits calling for drafts offer some interesting financing possi-bilities for U.S. exporters. Drafts accepted by U.S. banks become bankers’acceptances, which can usually be discounted without recourse at rates ofinterest somewhat below the prime rate. This can be an attractive alterna-tive to opening credits payable at sight and locally borrowing to financeinventory for buyers in high interest rate countries. When they agree to paythe acceptance and discount charges, the transaction becomes virtually thesame as if the credit were payable at sight as far as the seller is concerned.

There are some limitations for this to work.The maximum tenor (lengthof time) for a U.S. banker’s acceptance is 180 days. The credit must call foracceptance by a U.S. bank. Naturally, for maximum advantage, the interestrate should be substantially lower in the seller’s country than in the buyer’s.

• Mixed credits. A credit may call for several payments against a single ship-ment—for instance, 20 percent payable at sight and 80 percent payable 180days from sight. This may result from a situation where the seller is willingto provide time for the price of the goods, but not for the out-of-pocketfreight and related shipping costs.

• Red clause credits. These credits permit partial drawings before shipment.These partial payments are deducted when the final drawing is made aftershipment. They work well with sales contracts that require a deposit withorder and/or partial payments—for instance, as a large machine is built.Theyalso work well when the beneficiary purchases items from outside vendorsfor shipment together to the applicant, by enabling the beneficiary to pay forearly deliveries while awaiting later ones.There is some risk to the applicant,as the beneficiary may make partial drawings and never ship at all.

• Green clause credits. These work much the same as red clause credits, butoffer the applicant more protection.Warehouse receipts, evidencing that thegoods for which payment is requested are stored under the control of thebank advancing payment, usually must accompany the drawings.

• Revolving credits. These are opened for a fixed amount, but come to lifeagain for repeated drawings once used. Revolving credits work well forlarge sales contracts calling for many shipments, preferably according to apredetermined calendar schedule. Rather than opening a huge letter ofcredit covering twelve monthly shipments, a revolving credit in the amountof one shipment and permitting eleven reinstatements may accomplish thesame purpose. Since many buyers use the goods they import as collateral,there is always an inflow of goods to support the next drawings. This avoids

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the buyer’s tying up its line of credit to open a letter of credit calling forshipments that will not be made for months to come.

There are two points to watch. First, true revolving credits call for auto-matic reinstatement rather than reinstatement by amendment only. Second,what if a shipment is not made within a shipping schedule that has beenimbedded in the credit? Cumulative credits permit the amount to be carriedover into the next shipping period, but noncumulative credits do not—use itor lose it.

• Transferable credits. These credits permit the original (first) beneficiary totransfer all or part of the credit to one or more other parties (secondarybeneficiaries). This may be useful in putting together deals that are largerthan the seller’s capacity to finance. However, credits cannot be transferredunless they specifically permit it.This means that the applicants are aware ofthe situations, a fact that may make them shy away them from the deal. Notonly that, but the second beneficiaries will invariably become aware of theapplicants’ identities.

Since each secondary beneficiary gets to draw against its portion of thecredit, its probability of payment is as good as the credit and its ability tocomply with the terms and conditions.

• Assignment of proceeds. While strictly speaking not a letter of credit type,this procedure may accomplish many of the same results as a transferablecredit with fewer objectionable conditions.The way it works is that the ben-eficiary surrenders the original credit to a bank and provides irrevocableinstructions that once the credit pays, a stipulated amount of the proceeds isto be paid directly by that bank to a designated third party. The bank noti-fies the third party in writing that it will directly pay the stipulated amountas soon as the credit pays. Often, this is sufficient for the third party torelease the goods to the beneficiary who can then ship, present conformingdocuments, and thereby get itself and the third-party paid.

The beneficiary prefers this to a transferable credit for two reasons.First, no special permission is needed to assign proceeds, so the applicantdoes not know (and may never know) that this is happening. Second, as thebeneficiary ships and presents documents, the third party recipient of theassignment need never know the applicant’s identity.

The third party has two more areas of risk than would be found in atransferable credit situation, since under an assignment of proceeds it is thebeneficiary who prepares and banks the required documents. First, the ben-eficiary may simply steal the goods and not ship them at all, leaving thecredit and the third party unpaid. Second, if the beneficiary’s presentationcontains an incurable discrepancy, payment to everyone under the credit isput at risk. For these reasons, third parties should accept assignments of pro-ceeds only from beneficiaries they know to be both honest and competentin handling documentary credits.

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Discrepancies By their very nature documentary credits require presenta-tion of supporting documentation that is usually prepared independently byseveral unrelated parties.This creates a huge potential for discrepancies. In fact,estimates range that from fifty to seventy percent of documentary submissionsfail on first presentation. While most are eventually paid, there are delays, fees,and occasionally the embarrassment of having to approach the buyer for per-mission to pay against discrepant documents.

Common causes of discrepancies include:

• Late shipment

• Late presentation of documents (Note: Even timely presentation of dis-crepant documents does not count as presentation at all)

• Inconsistent documents (differing with the credit, with each other, or both)

• Missing required documents (Note: This doesn’t count as presentationeither)

• Draft(s) drawn on the wrong party (amazing, but true)

• Foul (not clean) or on deck transport document

• Arithmetic errors

• Prohibited partial shipment

• Overdrawing the credit

Discrepancies are a fact of life for even experienced exporters, but there areways to avoid or at least minimize them:

• Use a competent international banker.

• Try to use your own forwarder whenever possible.

• Ask your banker and forwarder to review the credit for any obvious pitfallsas soon as it is received.

• Make sure that all parties concerned are aware of the required documentsand time frames.

• Time permitting, launder your presentations through your own bank beforesending them to distant advising or confirming banks. Since bankers use thesame rules in determining compliance, yours can probably find any errors.Many errors can be repaired by the party that issued the document, and thisis best done while the paperwork is within reach. Keep in mind, however,that unless your bank is a party to the credit, its opinion will not prevail overa legitimate discrepancy claim from a bank that is involved.

Regardless of how carefully these precautions are followed, the potentialfor discrepancies cannot be eliminated. Sailings get delayed, trucks break down,cargo gets misrouted, shipments get bumped in favor of larger shippers (despitefirm bookings), and there’s always the human error factor. Some discrepancies

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can be repaired, provided that corrected documents can be presented within thecredit’s time lines. Whenever an irreparable discrepancy occurs, follow thesesteps:

• Notify the buyer immediately. No exception will be made without the appli-cant’s approval.

• Plan A—Permission to Pay. Request the bank that caught the discrepancyto wire for permission to pay. The bank will contact the issuing bank,explaining the discrepancy. The issuing bank will then contact the applicantfor instructions. With any luck, your request will be approved and you willbe paid, less a hefty fee.

• Plan B—Approval. If the issuing bank or the applicant refuse to grant per-mission, ask the bank that caught the discrepancy to send the original docu-ments to the issuing bank on approval. The applicant will then be invited toview them, and decide whether to authorize payment. Exceptions to thisplan are if there is a major problem with the buyer’s country (e.g.,Kuwait–Iraq), or if the buyer is known to have serious financial problems(e.g., bankruptcy).

• Plan C—Alternate Disposal. If the problem is with the applicant’s country,or finances, or permission requested under plans A and B is refused, deter-mine the actual whereabouts of the goods from the carrier. Explore alter-natives such as providing a one-time-only substantial price reduction inreturn for payment, sale to another party, or having the goods returned. (Itis important that the beneficiary retain control of the shipped goods. Referto the note on consignment that accompanied the instruction form earlier inthis chapter.)

FORFAITING

The following definition of forfaiting comes from Documentary Credits Insight,a quarterly publication of the International Chamber of Commerce.

Forfaiting in BriefForfaiting provides a means whereby banks and specialized financial institutionscan provide non-recourse finance for international trade deals. Traditionally, thetechnique has been most used in cases where officially-backed export credits arenot available, and for medium-size exports, such as capital goods. More recently,there has been some diversification into other uses such as providing working cap-ital for businesses.

Each forfaiting transaction is different, and typically each one involves spe-cially negotiated documentation. In outline, the basic procedure works as follows:seller and buyer agree to the terms of their sale including the granting of credit to

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the buyer—say over a period of two years with quarterly repayments. At the sametime, the exporter checks with the forfaiter—a bank or specialist institution in itsown country—that finance will be available.

The buyer accepts a series of bills of exchange (drafts) or signs a set of promis-sory notes corresponding to the installment dates for repayment of the agreedcredit. These bills or notes are guaranteed or avalized by the importer’s bank.Rights to payment under letters of credit are also sometimes accepted as securityfor forfaiting deals. The exporter presents these documents to the forfaiter. Theforfaiter buys them from the exporter for immediate discounted cash payment.The discounted sum received by the seller corresponds to the sales price agreedwith the buyer. The forfaiter can either keep the forfaited paper until maturity orresell it in the secondary forfaiting markets.5

Interested readers should visit the Association of Forfaiters in the Americaswebsite at www.afia-forfaiting.org for a list of 50 member forfaiting organiza-tions, including some very large banks.

DOCUMENTARY COLLECTIONS

Using documentary collections, sellers can make use of the banking system tocollect payments from overseas buyers. There are two kinds, sight (immediatepayment) and time (deferred payment). Both rely on the fact that the buyerrequires certain documents in order to obtain the shipped goods. These docu-ments are sent to a bank in the buyer’s country (usually the buyer’s bank) withinstructions that they not be released until the buyer complies with the paymentconditions.

For maximum seller security with documentary collections, shipments mustbe structured in such a way that buyers cannot obtain the goods without firstobtaining the documents. For shipments by vessel, this means that the transportdocument must be negotiable (i.e., consigned to order, see Chapter 10 fordetails). Negotiable transport documents are not available for shipments by airor ground. For these modes, special arrangements must be made with thebuyer’s bank prior to shipment; permitting consignment to that institution sothat the goods are not released from the carrier until the buyer complies withthe payment term. Be sure the buyer’s bank agrees to this before shipping.

Most collections are handled under the current version of the InternationalChamber of Commerce (ICC) Uniform Rules for Collections (URC). How-ever, like all ICC rules, these are not law and must be specified in order to apply.Their application is so widespread that reference is often preprinted on theforms banks use (called collection letters).

The following definitions apply to both sight and time drafts. For official ter-minology, readers are urged to consult the current URC, which as of this writingis 522.

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• Acknowledgment. Notice from the presenting bank to the remitting bankthat a given collection has been received for handling.

• Case of need. A party in the buyer’s country to whom the presenting bankmay turn for assistance in collecting.This is often a seller’s representative oremployee. Whenever this is used, the scope of the designated party shouldbe specified.

• Cash against documents. A documentary collection that is payable at sightbut does not include a sight draft.

• Collection letter. A form used to provide instructions and accompany thedocuments from the remitting bank to the presenting bank.

• Date. the date shown on the draft should always be the date of main car-riage transport unless seller and buyer agree otherwise.

• Direct collection letter. a prenumbered collection letter that appears tooriginate from the remitting bank but is actually completed and sent to thepresenting bank with the documents by the principal. A copy is sent to theremitting bank, which then establishes its collection file and handles all sub-sequent correspondence using the prenumbered reference.

• Documentary collection. A collective term for a letter of instructions (col-lection letter), accompanying documents, and accompanying draft (if any).

• Draft. A financial instrument that demands payment of a specified sum at aspecified time.

• Drawee. The party on whom the draft is drawn (i.e., the party responsiblefor payment). In collections, this is usually the buyer.

• Drawer. The party drawing the draft. In collections, this is usually the seller.

• Hypothecation letter. A notice attached to drafts authorizing a designatedoverseas bank to sell the goods if the draft is not honored. Banks that dis-count collections for sellers do this to protect their collateral in case thedrafts are not paid.

• Inconvertible currency.A lack of the currency in which payment is due.Thishappens when the seller invoices in its own currency rather than in the buy-ers, as is normally the case when the buyer’s currency is not readily convert-ible. Unless instructed otherwise, presenting banks will accept payments inlocal currency if it is accompanied by the drawee’s undertaking to pay anyadditional funds needed to obtain the required amount of the owed cur-rency. Everyone then awaits the availability of the owed currency.

• Presenting bank. The bank presenting the collection to the drawee.

• Principal. The party entrusting a collection to a bank (usually the seller).

• Remitting bank. The bank to which a principal has entrusted a collection.

• Tenor. The field on the draft indicating when payment is due.

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Sight Draft, Documents Against Payment (Also Cash Against Documents)

This is the international equivalent of COD—the buyer must pay in order toobtain delivery. However, payment is collected for the seller by the banking sys-tem rather than by the delivering carrier.The seller ships in such a manner as toprevent the buyer from obtaining the goods without the covering documents.(See Chapter 10 for details.) The documents and the completed collection letterare sent to a bank in the buyer’s country—often the buyer’s bank. This may bedone either directly by the seller using a direct collection letter, or by the seller’sbank. Either way, the seller is the principal, the seller’s bank is the remittingbank, and the foreign bank is the presenting bank. If a draft drawn at sight isincluded, the payment term is sight draft, documents against payment; if not, itis “cash against documents.”

Upon receipt, the presenting bank sends the remitting bank an acknowledg-ment. Since the payment term is sight, it informs the drawee (buyer) that thedocuments are available but only against payment. Depending on the drawee’sresponse, it then sends either payment or notice of nonpayment to the remittingbank.

Sight drafts are payable as soon as they are presented to the drawee by thepresenting bank. However, drawees usually defer payment until the goodsarrive, since they do not need the documents until then.

Despite the fact that the buyer cannot get the shipment without dealing withpaying at the bank, there are three obvious risks for the seller. To some extent,they represent a lack of due diligence on the seller’s part.

First, the buyer may simply cancel the order, leaving the seller with goods inthe buyer’s country. Remedies include returning the goods, finding an alternatebuyer (often at substantial discount), or offering the original buyer a muchlower price. Whatever is decided must be done quickly. Uncleared goodsquickly become subject to storage charges, which can quickly increase the costof the goods. Goods remaining uncleared for a certain length of time deter-mined by the country and/or the port or airport are sold at auction. The pro-ceeds first pay duty and taxes, then storage charges, with any remainingproceeds for the seller’s account (which almost never happens). Care to guesswho buys the goods at auction for a fraction of their original price?

Second, the buyer pays, but there is a shortage of the invoiced currency. Theonly remedy for the seller is to wait in line until it becomes available.

Third, the sale was made on EXW, FCA, FAS, or FOB terms, and the buyer-appointed carrier or forwarder consigned the shipment directly to the buyer.The buyer can therefore claim the goods without the documents, and decidesnot to pay. Unless the amount is huge and the negligence obvious, the seller willprobably get nowhere with the forwarder or carrier. However, the buyer’s rep-utation will suffer, as the presenting bank will become aware of the situation.

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Time Drafts

Time drafts follow the same procedures as sight drafts, except that rather thanmake immediate payment drawees accept (sign) drafts with future maturities.The fact that the drawees need the documents forces acceptance, but ultimatelypayment depends on whether they honor the drafts at maturity.

Here are several new terms that have not yet been defined, as they applyprimarily to time drafts.

• Acceptance. The drawee’s act of agreeing to honor a time draft at its matu-rity by signing it.

• Aval.The guarantee of a party other than the drawee to honor a draft if it isnot paid at maturity.

• Date draft. A draft with a fixed maturity determined by its tenor and thedate on its face. Regardless of when it is accepted, a draft drawn at 30 daysdate is due and payable 30 days from its date. Since the date on a draft isusually the date of main carriage, date drafts extend credit from time ofshipment.

• Protest. a procedure used in some countries to formalize the dishonor of adraft.

• Split drafts. A situation where several drafts are drawn against a single col-lection (e.g., 50 percent at 30 days and 50 percent at 60 days).

• Time-sight draft. A draft for which maturity is determined by calculating itstenor from the date it is accepted. Regardless of the date appearing on it, a30-day sight draft matures 30 days after acceptance. Since most draweesaccept drafts only after the goods have arrived, time-sight drafts extendcredit from time of arrival.

When a time-draft collection is received, the presenting bank will advise theremitting bank of either the acceptance date with maturity(ies) or nonaccep-tance. It will hold the accepted draft(s) and present it (them) to the drawee forpayment at maturity. It should be noted that while the presenting bank promisesto follow the collection instructions and the URC, it does not guarantee that thedrawee will ever accept or pay.

There is obviously more risk involved here than with sight drafts.A drawee’srefusal to accept puts the seller in the same position as with unpaid sight drafts.Drafts paid in local currency awaiting availability of the invoiced currency, andshipments made by buyer-appointed carriers and forwarders contrary to sellerinstructions are also the same.The added possibility of nonpayment of accepteddrafts makes careful attention to commercial and country risk more critical.

However, there are some precautions available.

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Some countries have protest procedures, whereby if a draft matures andremains unpaid, the presenting bank formally presents it for payment, often inthe presence of a notary. The results may be placed in the legal gazette, whichcan affect the drawee’s credit much the same as notice of a judgment entrywould do here. Further, protested drafts often enjoy preferred status over non-protested drafts in case of liquidation. There are two problems with protest.First, protest instructions must usually be given before a draft matures. Second,the results of protest can be devastating to the drawee and worsen an alreadybad situation. For these reasons, it should be used sparingly.

An aval is a third-party payment guarantee for a draft. Typically, the guar-antor signs the draft along with the drawee. This may be useful when selling tosmall or new companies that have a well-capitalized owner or sponsor. Bankscan also aval drafts as we saw under forfaiting. One important point: The partythat placed an aval is entitled to prompt notice of any default. In some countries,this means that such drafts must be protested for non-payment at maturity, orthe guarantee may be lost.

Split drafts provide a way for sellers presently using sight terms to ease intotime drafts. Let’s suppose a creditworthy buyer—perhaps an importing distribu-tor—in a stable country has been purchasing on a sight draft basis. A convincingargument is made that switching to 30-day time drafts would increase sales andpermit larger shipments, reducing both freight and handling costs. Since this is abig step, the seller might propose split drafts: 1⁄3 at sight, 1⁄3 at 30 days date, and 1⁄3at 60 days date, for an average outstanding of 30 days. This could even be sweet-ened by switching the 30 and 60 day drafts from date to sight. There are severaladvantages to split drafts for the seller. From previous experience, the seller issure that at least the sight portion will be paid promptly, and protest may beemployed for any subsequent problems. Protest instructions should not beplaced on the collection at first because the consequences are so severe. If the 30-day draft is paid at maturity, the likelihood of any problem with the 60-day draftis diminished. However, if the 30-day draft is not paid promptly, protest instruc-tions should quickly be given for the 60-day draft before it matures, and thebuyer should be informed accordingly. Given the consequences of protest, thebuyer will do its utmost to head it off by paying the 60-day draft. Since this leavesthe 30-day draft unpaid and unprotested, the seller should then offer to renego-tiate payment by means of a new draft or drafts with mutually agreed maturity.Needless to say, once notice of acceptance has been received for the replacementdraft or drafts, the seller should issue protest instructions.

By using split drafts to avoid putting all its eggs in one basket, the seller isable to accommodate the buyer’s request. Meanwhile, the total outstanding isreduced by 1⁄3 as soon as the buyer gets the goods, and the remaining 1⁄3 and 1⁄3 canbe handled independently of each other—if necessary invoking the threat ofprotest.

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ALTERNATE PAYMENT METHODS

There are alternate ways of arranging payments that sellers may use both toenhance their security and attract buyers.

Export Credit Insurance

Some insurance companies offer both commercial and country risk insuranceon export receivables. This enables sellers to extend less restrictive paymentterms than they may otherwise do. It also enhances the collateral. This isimportant as many U.S. banks do not lend against uninsured export receiv-ables, and some go to the extent of reducing their normal operating lines ofcredit accordingly.

A list of prominent insurers can be found in Chapter 8.

Government Support

The federal government provides some financing support for U.S. exports. Thetwo lead agencies are the Export Import Bank of the United States (EXIMBank) and the Small Business Administration (SBA). Since these programs fre-quently evolve to fit changing needs, readers are advised to visit their websitesfor current information.

Export-Import Bank of the United States The Export-Import Bank ofthe United States provides the following programs to support exports:

• Working Capital Guarantee Program (provides funds to producers for pro-duction for export)

• Medium- and Long-term Guarantee Program (for contracts valued atUS$80,000 and up)

• Credit Guarantee Facilities (permits financial institutions to bundle trans-actions for EXIM underwriting and approval)

• Export Credit Insurance Program (provides three types of credit insurancepolicies)

• Special programs for nuclear, environmental, aircraft, and large projects ininternational growth industries

There are fee schedules and requirements for at least a certain minimumamount of U.S. origin. For details and new developments, start with theoverview page at www.exim.gov. Help is also available by phone from the fol-lowing EXIM regional offices:

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Chicago, Illinois—phone (312) 353-8081, fax (312) 353-8098

Houston, Texas—phone (281) 721-0465, fax (281) 679-0156

Long Beach, California—phone (562) 980-4580, fax (562) 980-4590

Miami, Florida—phone (305) 526-7436, fax (305) 526-7435

New York, New York—phone (212) 809-2649, fax (212) 809-2646

Washington, DC—phone (202) 565-3940, fax (202) 565-3932

Small Business Administration The SBA offers three programs to sup-port U.S. exports:

• Export Working Capital Program provides loan guarantees up to 90 percentof loans or $1 million (whichever is less) for use in export by small businesses.

• International Trade Loan Program provides loan guarantees up to $1.25million to small businesses engaged or preparing to engage in foreign trade,as well as businesses adversely affected by imports.

• SBA Export Express provides expedited review for loan guarantees up to$250,000.

For details, visit www.sba.gov/oit/finance/programs.html.

U.S. Department of Agriculture The Agriculture Department has threeguarantee programs that support U.S. exports by providing greater access tocredit and credit risk protection.

1. Export Credit Guarantee Program. Underwrites credit extended by theprivate banking sector.

2. Supplier Credit Guarantee Program. Provides short-term guarantees on aportion of credit exporters have directly extended to importers for the pur-chase of U.S. agricultural commodities and products.

3. Facility Guarantee Program. Provides payment guarantees to improve orestablish agriculture-related facilities in emerging markets.

For further information, visit the Agriculture Department’s website atwww.fas.usda.gov/agexport/financing.html.

State and Local Governments A number of states and even some largerlocal governments have established export financing programs. Even those thatmerely repackage federal programs are helpful because their staffs are morefamiliar with local banks. Contact whichever government agency handles exportpromotion in your state or your local elected state representative for details.

Alternate Payment Methods 319

Electronic Transactions

Several companies have established letter-of-credit-like products for matchingseller performance to buyer payment in export transactions.

• TradeCard automates the entire trade documentation process over theInternet among registered members. Buyers enter initial purchase orders,which sellers may accept or counteroffer until both parties agree, at whichtime a sales contract is electronically signed. Once TradeCard determinesthrough electronic documentation that the seller has delivered, the buyer’saccount is debited and the seller’s account is credited. All transactions areguaranteed by credit insurance from the huge French credit insurer, Coface.TradeCard partners with banks, Fritz Logistics (forwarder—customs bro-ker), Thomas Cook, and MasterCard. For further information, contactTradeCard Inc., 75 Maiden Lane, 12th Floor, New York, NY 10038, or emailinfo@tradecard.com.

• CCEWeb issues Visa card–backed electronic letters of credit that arepayable through its “Independent Documentary Clearance Center.” Sellersand buyers negotiate deals, confirm orders, and exchange electronic docu-mentation, while transaction process can be tracked in real time. CCEWebpartners with Quality Letters of Credit, Wachovia Corp, Adobe Systems,and Visa. It also offers a letter of credit newsletter titled L/C Monitor. Forinformation, contact CCEWeb Corp., Global Trade Building 2, 727 SteelesAve. West, 3rd Floor, Toronto, Ontario, M3J3G9, Canada, or visit their web-site www.cceweb.com.

• Bolero provides a platform where sellers and buyers can negotiate theirinternational settlements, and their performance may be established byelectronic documentation. It maintains a title registry, so electronic bills oflading can serve as title-bearing (negotiable) instruments, just like theirpaper counterparts. Bolero is a very secure system—its electronic messag-ing system is operated by SWIFT (the organization that handles bank-to-bank electronic funds transfers worldwide). Its partners include fivevery large banks, five major ship lines, and large forwarders. For furtherinformation, contact Bolero International Ltd., Centrepoint Tower, 103New Oxford St., London WC1A 1DD, England, or visit their websitewww.bolero.net.

• LCConnect provides an online letter of credit execution platform and a sortof matchmaking service for banks and companies seeking to open, confirm,and/or process both standby and documentary credits with each other. Forfurther information, contact LCConnect Inc., 95 Wall Street, 20th Floor,New York, NY 10005, info@Lcconnect.com, www.Lcconnect.com.

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Factoring

Factoring is the selling of accounts receivable at a net-discounted value. Thismay provide the following advantages to the seller:

• Facilitating open account sales to creditworthy buyers

• Savings in administering receivables

• Factors can quickly obtain accurate credit reports

• Nonrecourse discounting is often available

Interested readers will find the International Factoring Association websitewww.factoring.org a good place to start.

Carriers

Carriers lead by UPS (Fritz) and Deutsche Post (Danzas, AEI), and third-partylogistics providers are starting to offer trade-financing products along withtransportation. Presumably, their financing would involve some level of com-mitment to their core services, so the decision to use it has many implications.This is still very much a work in process, but could lead to interesting paymentalternatives.

Countertrade

This was covered in detail in Chapter 6.Two forms, barter and counterpurchase,are used when other means of trade finance are unavailable. Buyback and off-sets are attempts to make the deal at least partially self-financing.

• Barter is the direct exchange of one commodity or service for another, with-out the use of money or the intervention of a third party.

• Buyback is an arrangement used in sales of production facilities wherebythe seller agrees to purchase part or all of the goods produced by thatfacility.

• Counterpurchase is an arrangement whereby a seller receives payment oragrees to locate a buyer for goods or services that are unrelated to the orig-inal sale.

• Offset is a reciprocal-trade agreement whereby the buyer receives technicalassistance to locally produce part of the finished product.

• Switching is the sale of unused purchasing rights to unwanted goodsreceived in countertrade to third parties at discounted prices.

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Buyback should not be particularly burdensome to the seller. Presumably, acompany supplying a boat factory could easily sell boats. It provides the buyerwith some assurance, as the seller would have a vested interest in helping thenew plant produce acceptable quality boats. Counterpurchase is often an ineffi-cient way to do business for both sellers and buyers. Sellers are likely to increasetheir prices by the cost and bother they would incur in disposing of unwantedgoods, or the discount involved in switching them. However, it does address sit-uations where money, or at least convertible currency, is not available but asaleable quality product is. Offset is really a means of increasing the buyingcountry’s manufacturing capability, and opens the door for future exports of thelocally produced component, possibly to the original seller. Switching is theescape mechanism for unwanted goods, and makes the idea of countertrade fea-sible to a larger number of sellers.

Parties engaged in countertrade should carefully investigate the valuationformulas that their governments apply to imported and exported goods. Forexample, assists (buyer-provided assistance to sellers to facilitate production ofgoods) may increase the dutiable value of imported goods.

Readers interested in countertrade should visit the American CountertradeAssociation’s website at www.countertrade.org.

LINKAGES

Getting paid for exports requires close attention to the viability of both thebuyer and the buyer’s country. Many commonly used terms also involve suc-cessful execution of key documents that may trigger payment or at least main-tain control over the shipped goods.

• Sales: Warn Credit about likely new buyers or substantial increase in activ-ity with existing ones.

Send credit application to new prospective buyers.Keep Credit advised of likely future exposure with buyers that have

opened standby credits.Advise Credit if required to open bid and performance standby credits.Assist Credit in dealing with buyers in case of letter of credit discrep-

ancies.Assist Credit in finding alternate buyers in case of unresolved letter of

credit discrepancy, unpaid sight draft, or unaccepted time draft.Inform Buyers if and when incoming credits require amendment.Attempt to convince buyers to order on C or D Group Incoterms.

• Credit: Inform Compliance of any boycott language in letters of credit.After checking background, inform Sales whether new prospects are

creditworthy.

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Inform Sales whether a given unconfirmed credit requires confirmation.Inform Sales and Traffic of any unresolved letter of credit discrepancies,

unpaid sight drafts, or unaccepted time drafts.Send copies of all incoming credits to Sales, Traffic, Forwarder, and the

company’s bank for opinions.Inform Sales about all substantial past due balances by customer.Request opinion on country or commercial risk from the company’s

bank.With Traffic, get details on any available carrier-driven export receivable

collection programs.

• Traffic: Inform Credit and Sales of shipping situations likely to cause letterof credit discrepancies.

Extend insurance cover on any unclaimed goods shipped under sightdraft, cash against documents, and discrepant letters of credit.

Trace with carrier for location of goods in case of unresolved letter ofcredit discrepancy or unpaid sight draft or unaccepted time draft.

• Manufacturing: Inform Credit and Sales of any production delay likely tocause a letter of credit discrepancy.

ENDNOTES

1. Revenue Recognition, Cash Basis vs. Accrual Basis Chart from “IASC Sets Mini-mum Standards for International Financial Statements,” IOMA’s Managing Interna-tional Credit and Collections 2000 Yearbook, pages 6–4.

2. Available from Ashgate Publishing. 802-276-3837.3. Tables 1 and 2 from “Have You Included these Items on Your International Credit

Application?” IOMA’s Managing International Credit and Collections 2000 Year-book, pages 3–26.

4. It is available from Coface North America, phone (212) 389-6500, websitewww.coface-usa.com.

5. Rowe, Michael “Forfaiting in Brief,” Documentary Credits Insight, Paris, Volume 7,no 4, December 2001, page 23. Reprinted with permission © ICC. DocumentaryCredit Insights is published quarterly by ICC (International Chamber of Commerce).Subscriptions are available from ICC Publishing, 38 Cours Albert ler, 75008 Paris,France or www.iccbooks.com.

Endnotes 323

Chapter 13

Keeping Current

Constant change is a distinctive feature of exporting. Every country has thesovereign right to change its rules, and given the number of countries in theworld, this happens frequently. The same goes for trading blocs like customsunions, free trade areas, and even the World Trade Organization itself.There isalso the continuous consolidation of transportation service providers men-tioned in Chapter 10. Like all business, foreign trade is profoundly affected bye-commerce. Then we have the changes in shipping and cargo security resultingfrom the September 11th attacks, which will continue for years to come.

The way to cope with change is information.This, too, becomes a problem asit comes in unmanageable amounts from a huge number of not equally reliablesources.

In an attempt to give order and structure to what’s needed and what’s avail-able, we’ve grouped what we consider reasonably reliable information sourcesas follows:

• The U.S. government

• Your own particular industry

• Foreign trade organizations

• Basic export knowledge sources:

a. Seminars

b. Basic texts

• Supplemental knowledge sources:

a. “Plug-in” services

b. Newsletters and magazines

• Reference points:

a. Websites

b. Books

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These groupings are not set in stone.What may be a basic source for one readermay serve as a refresher or supplemental source for another.

Now for the caveats. Although this writer has used many of these, and hasparticipated in a number of them, one cannot be recommended over another,nor can their quality be guaranteed. Like everything else, the informationsources themselves change for better or worse as time goes on.

We have undoubtedly overlooked some truly worthwhile informationsources, for which we are sorry. If you have or know of one that should beincluded in future editions, kindly inform the writer by email at fjr424@aol.com.

In order to maximize the amount of content in the space allowed, we haveentered only the availability point and website for each item, rather than thecomplete publisher address. For a few publications printed outside the UnitedStates, the availability point may be the U.S. point of purchase rather than theactual publisher. Further, webmasters rearrange their websites far more oftenthan they change their Uniform Resource Locators (URLs). For this reason, thegeneral URL rather than an individual page address is provided for mostentries. While this may cost the reader a few minutes time in locating the rightpage at the website, it is often time well spent, as those having a title of particu-lar interest may have others that escaped our attention.

GOVERNMENT

The local offices of the U.S. Department of Agriculture (agricultural-relatedproducts) and the U.S. Department of Commerce (everything else) are excel-lent sources of up-to-date information on just about any export-related topicimaginable. Visit their websites (www.fas.usda.gov and www.ita.doc.gov, respec-tively) for the locations of their nearest offices.

The Small Business Administration provides export-related informationthrough its Small Business Development Centers (SBDCs). Visit its websitewww.sba.gov/SBDC for the nearest location. The SBDCs also provide counsel-ing through their Service Corps of Retired Executives (SCORE). Visit theSCORE website www.sba.gov/score for further information.

The 57 District Export Councils (DECs) provide volunteer advisory serviceto the Commerce Department. This includes export counseling, instruction,promotion, and preaching the virtues of exporting to anyone who will listen(including elected officials). Their members are successful exporters and knowhow to get the most out of the system. Many DECs provide very informativee-newsletters and websites (in fact, the Minnesota DEC’s website www.exportassistance.com is the best of its kind anywhere).

Each DEC is individually composed to reflect its particular constituency.For the location of any of the following DECs, contact your nearest U.S. Depart-ment of Commercial Export Assistance Center.

Government 325

YOUR OWN INDUSTRY

Don’t overlook your industry as an export knowledge resource. Some tradeassociations have powerful well-connected Washington representation that maybe able to invoke government help with specific export-related situations. Manyhave active export lead-gathering programs, particularly at major U.S. tradeshows that attract international visitors. Most have at least some linkages tooverseas counterparts, and should be able to provide membership rosters fromthese organizations. If nothing else, domestic industry association members cannetwork with each other to discuss common export-related issues.

Your company or industry association may belong to or be affiliated withthe National Association of Manufacturers (NAM), as its 14,000 membershipincludes both individual companies and member associations. As an advocacygroup for American manufacturers, NAM pursues pro-active export trade poli-cies in Washington and with the World Trade Organization. It also offers practi-cal help to its members in exporting their U.S.-made products. For furtherinformation, visit their website www.nam.org.

FOREIGN TRADE ORGANIZATIONS

Foreign trade organizations are tremendous multipliers. They combine expertassistance with the possibility of networking with large groups of people whoare all involved in some facet of foreign trade. Since many organizations aremultidisciplinary, they provide a forum where exporters can physically or virtu-ally meet providers of such services as banking, consulting, export managementor trading, forwarding, insurance, and transportation.

Local Organizations

The obvious place to start is a local chamber of commerce or one in the nearestlarge metropolitan area. Many larger cities have some sort of world trade asso-ciation or club. The big advantage is that members are available locally for net-working. Your local group may belong to the Federation of International TradeAssociations (FITA), whose website www.fita.org offers a cornucopia of export-related information.

Many large local chambers of commerce or world trade organizations haveambitious programs to secure international business for their members. Theymay link one-on-one with overseas counterpart organizations, providing prefer-ential treatment for each others’ members. Some even have attractive websitesthat may attract export leads.

Almost every state government provides some type of export assistance,usually through a dedicated staff which, in many cases, operates offices over-

326 Keeping Current

seas. Contact your state government or your elected state representative fordetails.

As your taxes support the U.S. government’s extensive export promotionprograms, you should make sure to use them to full advantage. The best way todo so is through a Commerce Department Export Assistance Center.With over100 offices in 47 states and Puerto Rico, the Export Assistance Centers maytruly be considered “local.” However, they are plugged into the worldwideCommerce Department network and are a reliable source of export-relatedinformation. They can be found in the “Government” section of your localphone directory or by clicking “export assistance officers” at www.export.govwebsite.

National Associations

The American Association of Exporters and Importers (AAEI) is an 80-year-old Washington-based organization supporting free trade between the U.S. andforeign governments and with international organizations. It maintains anactive website with news bulletins at www.aaei.org.

The National Council on International Trade Development (NCITD) pro-vides a forum where concerned U.S. traders can provide input to those federalgovernment agencies that regulate international commerce and transportation.It conducts monthly meetings with high-ranking government regulatory offi-cials at its Washington offices, and prepares position papers on important trade-related issues. Most important, the government takes NCITD seriously. If yourproduct is subject to more than cursory export regulations, this organizationmay be well worth joining. For details, visit their website at www.ncitd.org.

While most exporters will probably not be joining the National CustomsBrokers and Forwarders Association of America (NCBFAA), this organizationprovides an excellent means of locating forwarders and carriers. Its website,www.ncbfaa.org, also produces a weekly bulletin of significant trade news(detailed coverage is available on a members-only website).

The United States Chamber of Commerce’s membership includes both localchambers and individual members. This huge national organization advocatesfor business interests both here and worldwide, and keeps its membersinformed through its powerful website www.uschamber.com. Its overseas affili-ates, called AMCHAMS, may provide country-specific information as well asvaluable commercial introductions in about 80 countries.

Worldwide Trade Organizations

The Association for International Business (AIB) began in 1997 as a sort of chatroom where interested parties may pose questions or ask for assistance. It hassince developed into a 10,000-member organization with an excellent multipur-

Foreign Trade Organizations 327

pose website www.aibcenter.com. Best of all, it has never lost its purpose. Mem-bers still ask questions and receive prompt help from other members in nearly200 countries. Since AIB members have all levels of experience from novice toexpert, there’s no such thing as a dumb question, nor one too difficult for well-reasoned answers. There’s also a camaraderie that one doesn’t often find in vir-tual organizations.

The International Chamber of Commerce is truly the world business orga-nization, since it writes many of the rules used on a daily basis in foreign trade.Incoterms, the Uniform Customs and Practice for Documentary Credits, theUniform Rules of Collections and a host of other trade codes are ICC products.It produces a large number of trade-related publications, as may be seenthroughout this chapter.The ICC also provides trade arbitration and mediation,serves as an advisor to various United Nations organizations, and has nationalcommittees and representation in over 130 countries. For further information,visit its website www.iccwbo.org. Membership is handled through national com-mittees, and the U.S. affiliate is the United States Council for InternationalBusiness (USCIB), website www.uscib.org.

Although the September 11th attacks devastated its New York headquar-ters, the World Trade Center Association (WTCA) is still alive and functioning.In fact, its computer network was back on line in a matter of days after thetragedy. With nearly 300 centers, the World Trade Center Association networkprovides its members with communications capability in nearly 100 countries. Itprovides news and facilities for sellers electronically to introduce new productsand for buyers to post their product requirements. Since many centers haveactual brick-and-mortar facilities, they also provide meeting rooms for visitingmembers, seminars, and other trade-related events.

For locations of the centers, visit the WTCA website at http://iserve.wtca.org.

BASIC KNOWLEDGE SOURCES

Here’s where you go to acquire the basics, or to keep up to date on frequentlychanging topics like export control and hazardous materials.

Public Seminars

A number of worthwhile locally produced seminars are available from univer-sities, state and local governments, and local chambers of commerce. Becausethere are so many, our coverage is limited to providers that offer public semi-nars in different parts of the country on a scheduled basis.

• Export Compliance

Bureau of Industry and Security (BIS) www.bis.doc.gov

Expeditors Tradewin LLC www.tradewin.net

328 Keeping Current

Export Strategies LLC www.exportstrategies.com

M K Technology www.mktechnology.com

Unz & Company www.unzco.com

Vastera, Inc. www.vastera.com/solutions/global_trade_education.htm

World Trade Institute of Pace University www.wti.pace.edu

• Export Credit

Ex-Im Bank www.exim.gov

Export Sourcebook www.exportsourcebook.com

Global Training Center, Inc. www.globaltrainingcenter.com

Unz & Company www.unzco.com

World Trade Institute of Pace University www.wti.pace.edu

• Export Procedures and Documentation

American Management Association www.amanet.org

Global Training Center, Inc. www.globaltrainingcenter.com

Unz & Company www.unzco.com

World Trade Institute of Pace University www.wti.pace.edu

• Freight Forwarding & NVOCC Management

World Trade Institute of Pace University www.wti.pace.edu

• Harmonized System Classification

Global Training Center, Inc. www.globaltrainingcenter.com

Unz & Company www.unzco.com

Vastera, Inc. www.vastera.com/solutions/global_trade_education.htm

• Hazardous Materials

Cargopak Corp. www.cargopak.com

Hazmat School www.hazmatschool.com

Office of Hazardous Materials Safety, Department of Transportationhttp://hazmat.dot.gov/training.htm

Regulations Training, Inc. www.hazardousmaterials.com

Unz & Company www.unzco.com

• Incoterms 2000

International Projects Inc. www.incoterms-4-americans.com

Vastera, Inc. www.vastera.com/solutions/global_trade_education.htm

• International Logistics

Global Training Center, Inc. www.globaltrainingcenter.com

World Trade Institute of Pace University www.wti.pace.edu

• Law (International and Maritime)

World Trade Institute of Pace University www.wti.pace.edu

Basic Knowledge Sources 329

• Marketing

Global Training Center, Inc. www.globaltrainingcenter.com

• Marine Cargo Insurance

World Trade Institute of Pace University www.wti.pace.edu

• NAFTA

Global Training Center, Inc. www.globaltrainingcenter.com

Sandler, Travis & Rosenberg, P.A. www.strtrade.com

Unz & Company www.unzco.com

World Trade Institute of Pace University www.wti.pace.edu

• Warehousing and 3PL

World Trade Institute of Pace University www.wti.pace.edu

Basic Texts

The following are excellent sources of basic export knowledge:

• A to Z of International Trade, ICC Publishing S.A. www.iccbooksusa.com

• A Banker’s Insight on International Trade, Roy Becker Seminars www.RoyBeckerSeminars.com.

• A Basic Guide to Exporting, U.S. Department of Commerce www.trade.gov/td/tic

• Exporting: Regulations, Documentation, Procedures, Global Training Cen-ter, Inc. www.globaltrainingcenter.com

• ICC Guide to Export-Import Basics, ICC Publishing S.A. www.iccbooksusa.com

• Incoterms 2000, ICC Publishing S.A. www.iccbooksusa.com

• Incoterms for Americans, International Projects Inc. www.incoterms-4-americans.com

• International Ocean and Air Transportation, Global Training Center, Inc.www.globaltrainingcenter.com

• Ocean Cargo Handbook, Chubb Group of Insurance Companies www.chubb.com

• Ocean Cargo Claims Handbook, Chubb Group of Insurance Companieswww.chubb.com

SUPPLEMENTARY KNOWLEDGE SOURCES

Once you’ve mastered the basics, it is necessary to keep abreast of currentdevelopments. The following publications will help.

330 Keeping Current

Plug-in Information Sources

These handy information sources come to you daily, periodically, or as needed.One, Export Alert, deserves special mention. This free service of the

National Institute of Standards and Technology (NIST) provides early warningof upcoming foreign mandatory standards. For this invaluable information, reg-ister your product on their website https://alert.scc.ca/exportalert/us/index.cgi.

The following are delivered to subscribers in the form of self-containedemails, e-mail attachments, or website links. Some are complementary whileothers are on a paid-subscription basis. All are worthwhile.

• Association for International Business www.aibcenter.com/subscribe.php

• B&R International Trade Law Update www.exportimportlaw.com

• Expeditors Newsflash www.expeditors.com

• ExporterNews exporternews@exim.gov

• Gatti & Associates www.gattiassociates.com

• JoC Online www.joc.com

• Really Useful Sites for International Trade Professionals www.fita.org/useful

• Shipping Solutions Newsletter www.intermart-inc.com/news.html

• TamTam’s Weekly International Business News www.tamtam.com

• Trade Compass www.tradecompass.com

Newsletters and Magazines

Unlike the plug-ins, these do not automatically pop up on the Internet. Theycome to you in the mail, although some have electronic delivery capability.Everyone has a stack of unread publications somewhere in a little noticed placein the office (to avoid the guilt-trip one gets when looking at them). Everyonewho has been exporting for a while has also discovered to his or her regret thatan unread article right in the office could have boosted profits or avoided pit-falls. There’s no sure defense, but taking a moment to scan the table of contentsof all incoming media to which you’ve subscribed may help. A few well placedsticky notes can do wonders when you do have a little spare time for nonessen-tial reading.

We attempted to classify these by content, but there is some overlap. Forinstance, the Journal of Commerce covers foreign trade in general but is partic-ularly rich in transportation-related information.

• Export

Central and Eastern Europe Commercial Update, U.S. Department of Com-merce www.export.gov/ceebic

Supplementary Knowledge Sources 331

Export America, U.S. Department of Commerce http://exportamerica.doc.gov

IOMA’s Report on Managing Exports, IOMA www.ioma.com

The Exporter, Trade Data Reports, Inc. www.exporter.com

World Trade, World Trade www.worldtrademag.com

• Export Credit

Credit Today, Credit Today www.CreditToday.Net

Documentary Credit World, Documentary Credit World www.doccreditworld.com

D C Insight, ICC Publishing S.A. www.iccbooksusa.com

LC Monitor, Continental Publishing www.lcmonitor.com

IOMA’s Report on Managing Credit, Collections and Receivables, IOMAwww.ioma.com

• General Foreign Trade

International Trade Forum, International Trade Centre UNCTAD/WTOwww.intracen.org

Journal of Commerce, Commonwealth Business Media Inc. www.joc.com

World Trade, Business News Publishing Co. II, LLC www.worldtrademag.com

• Transportation

Air Cargo World, Commonwealth Business Media www.aircargoworld.com

American Shipper, Howard Publications Inc. www.americanshipper.com

Inbound Logistics, Inbound Logistics www.inboundlogistics.com

Logistics, Reed Business Information www.logisticsmgmt.com

Journal of Commerce, Commonwealth Business Media Inc. www.joc.com

Pacific Shipper, Commonwealth Business Media Inc. www.pacificshipper.com

Shipping Digest, Commonwealth Business Media Inc. www.cbizmedia.com

World Wide Shipping, World Wide Shipping Guide, Inc. www.wwship.com

REFERENCE POINTS

This is where one goes for answers to specific questions or in-depth informa-tion. We’ve divided them into websites and books, but don’t let this distinctionfool you; many of the websites contain enough information to be consideredsmall books.

Websites

We tried to group these by topic, but there is even more overlap here than withmagazines. Further, many websites link to others, and a reader can go from site

332 Keeping Current

to site acquiring a huge amount of information. (It’s also possible to go aroundin circles unless you keep track of where you’ve already been.)

Having taken the time to read this book, you owe it to yourself to tour thosewebsites that are of obvious interest, plus all of the general interest sites. Bybookmarking favorite sites as you go along, you will create a customized direc-tory. You may also find some sites that would be of interest to others in yourorganization. This can be the start of information sharing, which is exactly whatwe hope to accomplish with the Linkages section of each chapter.

The following websites are of general interest, and are worth a visit fromreaders of all disciplines. Some provide really useful tools:

• Dictionary.com is a search engine for dictionaries. www.dictionary.com

• Export Assistance and Export Information has a little bit of everything forthe exporter. www.exportassistance.com

• Exportsource provides a good primer written primarily for Canadians. (Dothey know something we don’t?) http://exportsource.ca

• FinderSeeker is a search engine for search engines. www.finderseeker.com

• Federation of International Trade Associations is another one of those good“a little bit of everything” sites with trade leads to boot. www.fita.org

• Google is the best all-purpose search engine this writer ever used. www.google.com

• Sitpro is an extremely informative website from the United Kingdom (Dothey know something we don’t?) www.sitpro.org.uk

• The Exporter website is a newspaper featuring trade-related headlines.There’s no email outreach, so you must go to it at www.exporter.com

• The Internationalist Center for International Business and Travel is yetanother “little bit of everything” site with a good bookstore and newspapersection. www.internationalist.com

• The International Chamber of Commerce (ICC) website provides up-to-date information on the world business organization’s activities—impor-tant, as it drafts many of the rules used in international trade. www.iccwbo.org

• The National Archives and Records Administration provides daily cover-age of the Federal Register, the source of all federal government rules.www.archives.gov

• The Universal Currency Converter does what its name implies.www.xe.com/ucc

• The U.S. Department of State’s Travel Warnings & Consular InformationSheets will help keep you out of harm’s way. http://travel.state.gov/travel_warnings.html

• World Time Server provides the time of day in all world time zones.www.worldtimeserver.com

Reference Points 333

The following websites are loosely grouped by topic. As mentioned previ-ously, there is some overlap, which can be helpful. Most foreign trade topicsshould not be considered in isolation. Further, there may be some duplication assome websites have obvious ramifications for more than one topic. (Forinstance, the State Department’s Travel Warnings website will be found aboveas general interest and again under Country Information.)

• Cargo Security

Transportation Security Administration (U.S. Department of Transporta-tion) www.tsa.dot.gov

• Country Information

Emerging Markets Directory www.emdirectory.com

Euroguide www.euroguide.org/euroguide/subject-listing

Europa is the website of the European Union. http://europa.eu.int. TheirTrade page may be of particular interest http://trade-info.cec.eu.int/europaand select Parent Directory

Mercosur www.idrc.ca/lacro/investigacion/mercosur.html

SICE is the website of the Organization of American States. www.sice.oas.org

The World Fact Book is produced by the CIA. (Bet they know some thingswe don’t.) www.odci.gov/cia/publications/factbook

U.S. Department of State’s website has country specific and U.S. foreign pol-icy information at www.state.gov.Their Travel Warnings and Consular Infor-mation Sheets provide warnings of potential hotspots. http://travel.state.gov/travel_warnings.html

• Etiquette

Business Etiquette www.hbcollege.com/management/students/bus_etiquette.htm

Executive Planet www.executiveplanet.com

• Export Control

Bureau of the Census, Foreign Trade Division www.census.gov/foreign-trade

National Council on International Trade Development (NCITD) www.ncitd.org

U.S. Customs Service www.customs.ustreas.gov

U.S. Department of Commerce, Bureau of Industry and Security (formerlyBureau of Export Administration) www.bis.doc.gov

U.S. Department of State (military and related items—search for ITAR andUSML) www.state.gov and www.pmdtc.org

U.S. Department of the Treasury, Office of Foreign Assets Control www.treasury.gov/ofac

334 Keeping Current

• Export Credit

Export-Import Bank of the United States www.exim.com

Overseas Private Investment Corporation www.opic.gov

Small Business Administration www.sba.gov/oit

U.S. Department of Agriculture www.fas.usda.gov/ustrade.html

World Bank Group www.worldbank.com

• Export Promotion & Marketing

Business Information Service for the Newly Independent States (BISNIS)www.bisnis.doc.gov

Central and Eastern Europe Business Information Center (CEEBIC) www.export.gov/ceebic

Enterprise Development Website www.enterweb.org

Executive Planet www.executiveplanet.com

Global Trade Negotiations www.cid.harvard.edu/cidtrade

Official Government Statistics on the Web www2.auckland.ac.nz/lbr//stats

Small Business Administration www.sba.gov/oit

Stat. USA Internet www.stat-usa.gov

The World Fact Book (CIA) www.odci.gov/cia/publications/factbook

United Nations Conference on Trade and Development (UNCTAD) Inter-national Trade Center www.intracen.org

U.S. Agency for International Development www.usaid.gov

U.S. Department of Agriculture www.fas.usda.gov/ustrade.html

U.S. Department of Commerce, Census Bureau Foreign Trade Statisticswww.census.gov/foreign-trade

U.S. Department of Commerce homepage www.home.usdc.gov and BuyUSA www.buyusa.com

U.S. Trade Representative www.ustr.gov

World Bank www.worldbank.com

World Business Media www.worldbizmedia.com

World Newspapers.com www.world-newspapers.com

• Insurance

T T Club www.ttclub.com

• Law

Braumiller & Rodriguez. www.exportimportlaw.com

Gatti & Associates www.gattiassociates.com

Global Trade Negotiations www.cid.harvard.edu/cidtrade

Riggle and Craven www.tradelaw.com

Reference Points 335

United Nations Commission on International Trade Law (UNCITRAL)www.uncitral.org

• North American Free Trade Agreement (NAFTA)

NAFTA Customs Website www.nafta-customs.org

NAFTA Works (Embassy of Mexico) www.naftaworks.org

United States—Mexico Chamber of Commerce www.usmcoc.org/nafta.html

U.S. Customs Service NAFTA Information www.customs.ustreas.gov/nafta/center.htm

Also try their NAFTA-FAX service by dialing 972-574-1582 from a faxmachine and following the voice instructions. Request document 0005 firstas it is the main menu.

• Small Business

SCORE (SBA consulting) www.score.org

Small Business Administration www.sba.gov/oit

• Technology Transfer

Society for International Affairs www.siaed.org

• Transportation

Intermodal Association of North America www.intermodal.org

National Industrial Transportation League www.nitl.org

U.S. Department of Transportation www.dot.gov and Transportation Secu-rity Administration www.tsa.dot.gov

• United Nations

United Nations homepage www.un.org

• World Trade Organization

World Trade Organization (WTO) homepage www.wto.org

Books

The following books are heavy-duty reference sources.They tend to be specific,and may not be of general interest outside of one’s own department. Some arerather expensive.These two factors combine to limit their availability at smallerpublic libraries. However, service providers like forwarders and lawyers mayhave some of these titles or comparable books available. Most U.S. ExportAssistance Centers have libraries, including an up-to-date copy of one of thefour country-specific guides as well as the Export Administration Regulations.

• Country-specific Information

Export Reference Manual, Bureau of National Affairs www.bna.com

International Trade Reporter, Bureau of National Affairs www.bna.com

336 Keeping Current

Official Export Guide, Commonwealth Business Media www.cbizmedia.com

The Exporters’ Encyclopaedia, Dun & Bradstreet www.dnb.com

• Culture

Do’s and Taboos Around the World, John Wiley & Sons, Inc. www.wiley.com

Do’s and Taboos Around the World for Women in Business, John Wiley &Sons, Inc. www.wiley.com

Do’s and Taboos of Hosting International Visitors, John Wiley & Sons, Inc.www.wiley.com

Do’s and Taboos of Humor Around the World, John Wiley & Sons, Inc.www.wiley.com

Do’s and Taboos of Using English Around the World, John Wiley & Sons,Inc. www.wiley.com

Handbook of Cross-Cultural Marketing, Haworth Press www.haworthpressinc.com

International Management: Managing Across Borders and Cultures, PrenticeHall www.prenhall.com

• Dictionaries

A to Z of International Trade, ICC Publishing SA www.iccbooksusa.com

Dictionary of International Trade, John Wiley & Sons www.wiley.com

Geographical Dictionary, Merriam-Webster Inc. www.m-w.com

Glossary of Packing Terms for Developing Countries, U.N. InternationalTrade Center (UNCTAD) www.intracen.org

Key Words in International Trade, ICC Publishing SA, www.iccbooksusa.com

NCBFAA Study Manual Series Glossary, National Customs Brokers andForwarders Association of America, Inc. www.ncbfaa.org

The Language of Trade, U.S. Department of State www.usinfo.state.gov/products/pubs/trade/glossac.htm

• Export Control

Export Administration Regulations, U.S. Department of Commerce www.gpo.gov/bis//index.html

• Export Credit

Bank Guarantees in International Trade, 2nd Edition, ICC Publishing SAwww.iccbooksusa.com

Bills of Exchange, ICC Publishing SA www.iccbooksusa.com

Documentary Credits: UCP 500 & 400 Compared, ICC Publishing SAwww.iccbooksusa.com

Documentary Credit Law Throughout the World, ICC Publishing SAwww.iccbooksusa.com

Reference Points 337

Export Credit Agencies, the Unsung Giants of International Trade andFinance, Quorum Books www.greenwood.com

Forfaiting for Exporters: Practical Solutions for Global Trade Finance, Inter-national Thomson Business Press http://b2bcatalogue.thomsonlearning.com

Global Trade Financing, John Wiley & Sons, Inc. www.wiley.com

International Credit and Collections: A Guide to Extending Credit World-wide, John Wiley & Sons, Inc. www.wiley.com

Letters of Credit: Commercial and Standby Letters of Credit—Bankers andTrade Acceptances, Matthew Bender, Division of Lexus Nexus http://bookstore.lexis.com

Opinions of the ICC Banking Commission, ICC Publishing SA www.iccbooksusa.com

The Changing Role of Export Credit Agencies, International MonetaryFund www.imf.org

The Handbook of Country Risk, Coface www.coface-usa.com

The Handbook of International Credit Management, Ashgate www.ashgate.com

• Exporting

Building an Import/Export Business, 2nd Edition, John Wiley & Sons, Inc.www.wiley.com

Export/Import Procedures and Documentation, American ManagementAssociation www.amacombooks.org

Exporting: A Managers Guide to the World Market, International ThomsonBusiness Press http://c-catalogue.thomsonlearning.com

Exporting: From Start to Finance, McGraw-Hill www.mcgraw-hill.com

How to Succeed in Exporting and Doing Business Internationally, JohnWiley & Sons, Inc. www.wiley.com

Import/Export: How to Get Started in International Trade, McGraw-Hill Inc.www.mcgraw-hill.com

International Marketing Resource Guide, Braddock Communicationswww.bradcom.com

Rules of Origin of Goods, World Customs Organization www.wcoomd.org

The CIM Handbook of Export Marketing: A Practical Guide to Openingand Expanding Markets Overseas, Butterworth-Heinemann www.bh.com

Trade Secrets, The Export Answer Book for Small and Medium SizedExporters, Michigan Small Business Development Center at Wayne StateUniversity stateoffice@misbdc.wayne.edu

World Directory of Trade Promotion Organizations and Other Trade SupportInstitutions, U.N. International Trade Center (UNCTAD) www.intracen.org

338 Keeping Current

• General Reference

Alphabetical Index to the Harmonized Commodity Description and CodingSystem, World Customs Organization www.wcoomd.org

Business Guide to the World Trading System, U.N. International Trade Cen-ter (UNCTAD) www.intracen.org

Explanatory Notes to the Harmonized Commodity Description and CodingSystem, World Customs Organization www.wccomd.org

Going Global: Getting Started in International Trade, American Manage-ment Association www.amacombooks.com

Handbook of World Trade, ICC Publishing SA www.iccbooksusa.com

Harmonized Commodity Description and Coding System, World CustomsOrganization www.wccomd.org

The Business Travel Survival Guide, John Wiley & Sons, Inc. www.wiley.com

The Economist Desk Companion, John Wiley & Sons, Inc. www.wiley.com

The Only Math Book You’ll Ever Need, Facts On File, Inc. www.factsonfile.com

• Insurance

Marine Insurance Compendium—A Complete Reference Guide, MS Publi-cations www.centretrade.com

The Law and Practice of Marine Insurance and Average, Cornell MaritimePress. Purchase through Amazon www.amazon.com

• Legal

Complying with the Foreign Corrupt Practices Act: A Guide for U.S. FirmsDoing Business in the International Marketplace, American Bar Associationwww.abanet.org

Fighting Bribery, ICC Publishing SA www.iccbooksusa.com

ICC Model Commercial Agency Contract, ICC Publishing SA www.iccbooksusa.com

ICC Model Distributorship (Sole Importer-Distributor) Contract, ICC Pub-lishing SA www.iccbooksusa.com

ICC Model International Agency & Distributorship Contracts (short forms),ICC Publishing SA www.iccbooksusa.com

ICC Model International Franchising Contract, ICC Publishing SA www.iccbooksusa.com

ICC Model International Sale Contract, ICC Publishing SA www.iccbooksusa.com

ICC Model Occasional Intermediary Contract, ICC Publishing SA www.iccbooksusa.com

Reference Points 339

International Commercial Transactions, ICC Publishing SA www.iccbooksusa.com

International Contracts, World Trade Press www.worldtradepress.com

The Business of Shipping, Cornell Maritime Press www.cornellmaritimepress.com

The Sale of Goods Carried by Sea, Butterworths www.butterworths.co.uk

Transfer of Ownership in International Trade, ICC Publishing SA www.iccbooksusa.com

• Transportation

Bes’ Chartering & Shipping Terms, Barker Howard Ltd. (Note:The 11th edi-tion is out of print, and the 12th is promised soon.) www.newyorknautical.com

Intermodal Freight Transportation, Eno Transportation Foundation, Inc. andIntermodal Association of North America www.enotrans.com and www.intermodal.org

International Logistics: A Problem-Based Approach to Learning, Kendall/Hunt Publishing www.kendallhunt.com

NCBFAA Study Manual Series Cargo Transportation Basics, National Cus-toms Brokers and Forwarders Association of America, Inc. www.ncbfaa.org

NCBFAA Membership Directory, National Customs Brokers and For-warders Association of America, Inc. www.ncbfaa.org

LINKAGES

It is apropos that this, the last section in the book, should be the easiest. Just findeverything in your specialty. Readers who have patiently followed the Linkagespreaching throughout this book and who feel a little heroic should pick up a titleor website in another export-related specialty. Caution: do this only if you aren’tparticularly interested in the way things work, otherwise you may become asaddicted as this writer.

340 Keeping Current

A1, A2, A3, A4 country groups, 35AAEI. See American Association of

Importers and ExportersAcceptance, 316Account Party, 299Acknowledgments:

collection, 314order, 217

Actual total loss, 187Additional Permissive Reexports (APR), 43ADR. See Alternative dispute resolutionAdventure, 187Adverse Selection, 187Advising bank, 299AES Direct, 257Affreightment. See Vessel charterAfrican Growth and Opportunities Act, 132Agents, 93. See also EEC Directive 86/653 on

agents, 95–98Ag Export Action Kit, 115AGR. See Agricultural CommoditiesAgricultural Commodities (AGR), 44Agriculture Department. See also Ag Export

Action Kit, Buyer Alert, Rural BusinessCooperative Service, Trade Assistanceand Promotional Office

export finance, 319testing export products, 68, 285–287

AIB. See Association for International Busi-ness

Air freight, 233–237Air freight consolidator, 224Air transportation, 233–237Air waybill, 233–237Aircraft and Vessels (AVS), 43Airport (port) to airport (port), 223All risk (London Institute Clauses A),

189–190Alternative dispute resolution, 208AMCHAMS. See United States Chamber of

Commerce

Amendment, 299American Association of Exporters and

Importers (AAEI), 327American Association of Railroads, 270American Conditions. See Free of Particular

Average (FPA)Andean Trade Preference Act, 132Antiboycott:

Commerce Department, 50–51sales contracts, 205Treasury Department, 51

Antiterrorism (AT), 30Applicant, 299APR. See Additional Permissive ReexportsArbitrary, 241Arbitration, 208Assailing thieves, 187Assignment of proceeds, 310Association for International Business

(AIB), 118–119, 327–328Assured, 194AT. See AntiterrorismAutomotive Products Trade Act, 132Average, 187AVS. See Aircraft and Vessels

B country group, 35BAG. See BaggageBaggage (BAG), 42Bank, buyer’s, 303Bank, seller’s:

credit information, 293export promotion, 119

job description, 3operations versus lending, 18Bareboat charter, 249Barratry, 187Barter, 152, 321Basic export references, 330Beneficiary, 299Berth terms. See Liner terms

341

Index

Beta test software, 38Bid bonds, 180–181BIS. See Bureau of Industry and SecurityBisnis Bulletin, 111Bolero, 320Both-to-blame clause, 190Bulk cargo, 239Bureau of Industry and Security (BIS), 21,

23. See also Export Administration Reg-ulations

Buyback, 152, 321Buy USA, 113Buyer:

concerns, 3, 4loyalty and retention, 15need to be kept informed, 14, 15role in export control compliance, 54, 205role in sales contracts and purchase

orders, 201–220role in terms of sale, 178Buyer Alert, 116

BXA. See Bureau of Industry and Security

C-TPAT. See Customs-Trade PartnershipAgainst Terrorism

CAF. See Currency adjustment factorCanada. See North American Free Trade

AgreementCanadian harmonized tariff numbers, 262Capital goods, 108Cargo insurance, 184–197Cargo security, 252–254Caribbean Basin Economic Recovery Act,

132Carnets, 182–183Carriage contract, 221Carriage and Insurance Paid (CIP), 170Carriage of Goods by Sea Act of 1936

(COGSA), 238Carriage Paid To (CPT), 169Carrier, 221

export credit, 321insurance, 198selection under Incoterms 2000, 175

Case of need, 314Cash against documents, 297, 314–315Casualty insurance, 179CB. See Chemical and Biological WeaponsCC. See Crime controlCCC mark. See Chinese standardsCCEWeb, 320

CCL. See Commerce Control ListCE mark. See Conformite Europeen markCertificate of origin:

generic, 272–274North American Free Trade Agreement,

274–277U.S.-Israel Free Trade Agreement,

277–280CFR. See Cost and FreightCharter. See Vessel charterCharterparty (Charter party), 249Chemical and Biological Weapons (CB), 30Chemical Weapons Convention (CW), 30–31Chinese standards, 75–76CIF. See Cost, Insurance, and FreightCIP. See Carriage and Insurance PaidCISG. See United Nations Convention on

Contracts for the International Sale ofGoods

Civil End-Users (CIV), 36CIV. See Civil End-UsersClaim, insurance, 195–197Clean drafts, 297–298Clean report of findings, 281–285Clean transport document, 157clearance, export, 51–52CMI. See Comite Maritime InternationalCo-insurance, 197COGSA. See Carriage of Goods by Sea Act

of 1936Comite Maritime International (CMI), 238Commerce Control List (CCL):

definition, 24finding entries, 29

Commerce Country Chart, 26, 32–34Commerce Department. See Bisnis Bulletin,

Bureau of Industry and Security, BuyUSA, Commercial News USA, ExportAssistance Centers, Flexible MarketResearch, Gold Key Service, Interna-tional Buyer Program, InternationalPartner Search, Matchmaker Trade Del-egations, My Exports, National MarineFisheries Service, National Oceanic andAtmospheric Administration (NOAA),Office of Textiles and Apparel, Office ofTrade and Economic Analysis, OverseasTrade Missions, Patent and TrademarkOffice, Permanent Exhibition Centers,Product Literature Centers, Top MarketOpportunities for Small Business, Top

342 Index

Targets for Trade Promotion, TradeDevelopment Industry Officers, TradeFairs and Exhibitions Program

Commercial invoice, 259–263Commercial News USA, 113Commercial risk, 290–291Compliance Department:

job description, 3role in documentation, 287role in export control compliance, 53role in export marketing, 129role in export pricing, 153–154role in product development, 80role in terms of sale, 178role in transportation, 255Compliance system, export control, 53

Computers (CTP), 37Confirming bank, 299Confirming house, 5, 89Conformite Europeen mark (CE), 69Self-certification option, 72Seven Steps to Qualify, 70Consignee, 221Consignor, 221Constructive total loss, 187Consumable product export marketing,

106–108Consumer products export marketing,

106–107Container rental surcharge, 241Containerization, vessel, 239Contingency insurance, 187Contract:

carriage, 221sales contract formation, 208–209sales contract provisions, 202

Cost and Freight (CFR), 168–169Cost cutting measures, 11–13, 135–138, 197Cost, Insurance, and Freight (CIF), 169Counterpurchase, 152, 321Countertrade, 151–153, 321Country groups, 35Country risk, 292CPT. See Carriage Paid ToCredit Department:

job description, 3role in documentation, 287role in export channels, 104role in export control compliance, 54role in export credit, 289–323role in export marketing, 129

role in insurance, 200role in terms of sale 178role in transportation, 255warning about supply problems, 15

Credit information sources, 292–295Credit insurance, 183–184Credit risk. See Commercial risk and Coun-

try riskCrime Control (CC), 30CTP. See ComputersCurrency adjustment factor (CAF), 241Current information, 324–340Customs of port and trade, 162Customs Service:

bond requirement, 181export clearance, 51export control, 22

Customs-Trade Partnership Against Terror-ism (C-TPAT), 253

CW. See Chemical Weapons Convention

D1, D2, D3, D4 country groups, 35DAF. See Delivered At FrontierData Freight Receipt, 244Date Draft, 316DDP. See Delivered Duty PaidDDU. See Delivered Duty UnpaidDEA. See Drug Enforcement Administra-

tionDe minimis, export control, 27Debarred Parties List, 47Deductible, 197Deemed export, 20, 46Del credere agent, 94Delay clause, 190Delivered At Frontier (DAF), 170–171Delivered Duty Paid (DDP), 172–174Delivered Duty Unpaid (DDU), 172Delivered Ex Quay (DEQ), 171–172Delivered Ex Ship (DES), 171Demise charter. See Bareboat charterDenial order, 26Denied Persons List, 47General Prohibition Four, 27Department of Homeland Security, 253DEQ. See Delivered Ex QuayDES. See Delivered Ex ShipDesiccant, 63Destination country, 32Development (export control), 26Direct collection letter, 314

Index 343

Direct costs, 131–132Direct exports, 91–102Direct investment, 104Direct mail promotion, 120–124Direct sales to end-user buyers, 91–93Disappearing deductible. See FranchiseDISC. See Domestic International Sales Cor-

porationDiscounts, 144–145Discrepancy, 299, 311–312Dispute resolution 207–208District Export Councils, 325Dock receipt, 241–244Document, 299Documentary collections, 313–317Documentary letter of credit, 297, 302–308Documentary time drafts, 297, 316–317Documentation, 257–288Seminars, 329Domestic-only costs, 133Domestic merchandise (Shipper’s Export

Declaration), 270Domestic International Sales Corporation

(DISC), 133Domestic trade (compared to export), 1Door to door, 222Door to port (airport), 223Draft, 314Documentary collections, 313–317Letter of credit, 302–306Drawback, 131Drawee, 314Drawer, 314Drug Enforcement Administration (DEA),

21Dumping, 147

E1, E2 country groups, 35EAR. See Export Administration Regula-

tionsEAR99, 28ECCN. See Export Control Classification

NumberEI. See Encryption ItemsElectrics, product design, 58Embargoed Destinations, General Prohibi-

tion 6, 27EMCs. See Export Management CompaniesENC. See Encryption Commodities and

SoftwareEncryption Commodities and Software

(ENC), 43–44

Encryption Items (EI), 30Endangered species, 21Energy Department, 21English conditions. See Free of Particular

Average (FPA)Enhanced Proliferation Control Initiative

(EPCI), 46Enhanced export markup, 141–142Entity List, 47Entry level pricing, 140Environmental Protection Agency (EPA),

287EPA. See Environmental Protection AgencyEPCI. See Enhanced Proliferation Control

InitiativeError and omission insurance, 199ETCs. See Export Trading CompaniesEuropean Union:

Conformite Europeen mark, 69–73Consumer Goods Product Warranty

Directive, 73EEC Agency Directive 86/653, 95–98

Evolution of a company’s exports, 5–6Ex works (EXW), 164–165Exclusivity:

Export management company, 90Export merchant, 90–91Export trading company, 90Sales representative (overseas), 93–99Importing distributor, 99–102

EXIM Bank. See Export Import Bank of theUnited States

Expiration date, 299Export:

basic process, 4channels, 81–105clearance, 51compared to domestic trade, 1compliance system, 53control, 20–55control definition, 20cost analysis, 138–140cost cutting measures, 11–13, 135–138, 197credit, 289–323credit insurance, 318documentation, 257–288evolution, 5–6marketing, 106–129pricing, 130–154proforma invoices, 201–220purchase orders, 201–220record keeping, 52–53

344 Index

reporting, 51–52sales contracts, 201–220seminars, 328–329terms of sale, 155–178transportation, 221–256

Export Administration Regulations (EAR):antiboycott, 50–51Bad guy lists, 46–47BIS license application, 48–50classification, 28Commerce Control List entry, 29–30Commerce Country Chart, 32–34Country groups, 35deemed exports, 46definition, 23domain, 23–24EAR99, 28Export Control Classification Numbers, 28knowing your customer, 47–48list based license exceptions, 35–37prohibited end users, end uses, and

Enhanced Proliferation Control Initia-tive, 44–46

record keeping, 52red flags, 48related definitions, 24–26Ten General Prohibitions, 26–27transaction based license exceptions,

37–44unique control procedures, 31–32

Export Alert, 69Export Assistance Centers, 113Export compliance:

cost, 134system, 53

Export Control Classification Number(ECCN):

composition, 28–29definition, 26description of entry, 30–31Export Directory of U.S. Food Distributor

Companies, 116Export Import Bank of the United States

(EXIM), 318–319Export license:

application, 48–50definition, 26exception:

list based, 35–37 transaction based, 37–44

Export Management Company (EMC),87–88

Export merchants, 88–89, 289–290Export packing. See PackingExport price lists, 142–143Export Trading Company (ETC), 81–87,

289–290Exporter, 2EXW. See Ex Works

Factoring, 321FAF. See Fuel Adjustment FactorFAS. See Free Alongside ShipFC. See Firearms ConventionFCA. See Free CarrierFCL. See Full containerloadFCPA. See Foreign Corrupt Practices ActFederal tax treatment, 133Federation of International Trade Associa-

tions (FITA), 9FILO. See Free In, Liner OutFIO. See Free In and OutFirearms Convention (FC), 31FITA. See Federation of International Trade

AssociationsFlexible Market Research, 110FOB. See Free On BoardFOB/FAS clause, 190Food and Drug Administration:

export control, 21testing export products, 68, 287

Foreign aid, 109Foreign Corrupt Practices Act (FCPA), 205Foreign currency invoicing, 143–144Foreign exchange forward contracts, 144Foreign exchange forward options, 143Foreign merchandise (Shipper’s Export Dec-

laration), 271Foreign Periodicals, 120Foreign products of U.S. technology, General

Prohibition 3, 27Foreign Sales Corporation (FSC), 133Forfaiting, 297, 312–313Form Design, 258–259Fortuitous, 179Forwarder:

error and omission insurance, 199export promotion, 119income, 17industry consolidation, 17information required of shipper, 18job description, 3, 16, 224–226selection, 16, 119seller-forwarder relationship, 17

Index 345

Forwarder (Continued)Shipper’s Export Declaration filing, 18size, 17

4PL. See Lead logistics providerFPA. See Free of Particular AverageFranchise, insurance, 197Franchising, 103–104Free Alongside Ship (FAS), 166–167Free Carrier (FCA), 165–166Free In, Liner Out (FILO), 250Free In and Out (FIO), 250Free of capture and seizure, 190Free of Particular Average (FPA, London

Institute Clauses C), 189Free On Board (FOB):

Incoterms 2000, 167–168Uniform Commercial Code, 175–176

Freight costing:air, 234marine, 240–241

Freight forwarder. See ForwarderFSC. See Foreign Sales CorporationFSC Repeal and Extraterritorial Income

Exclusion Act, 133Fuel Adjustment Factor (FAF), 241Fulfillment (order), 218–219Full containerload (FCL), 247–248

GBS. See Shipments to Country Group B General average, 187General Software Note “Mass Market” Soft-

ware, 42Generalized System of Preferences (GSP),

132GFT. See Gift Parcels and Humanitarian

DonationsGift Parcels and Humanitarian Donations

(GFT), 40–41Gold Key Service, 114Goods, 221GOV. See Governments, International Orga-

nizations and International InspectionsUnder the Chemical Weapons Conven-tion

Government bond requirements, 181Governments, International Organizations

and International Inspections Underthe Chemical Weapons Convention,40

Green clause credit, 309GSP. See Generalized System of Preferences

HAB (HAWB). See House air waybillsHague Rules of 1924, 238Hague-Visby Rules of 1968, 238Hamburg Rules, 238Harmonized System, 52

seminars, 329Hazardous materials (HAZMAT), 251–252,

329HAZMAT. See Hazardous materialsHealth insurance, 199High Performance Computers (XP), 31House air waybill, 233Hypothecation letter, 314

ICAO. See International Civil AviationOrganization

ICC. See International Chamber of Com-merce

IMO. See International Maritime Organiza-tion

Importing distributors, 99–102Inchmaree clause, 191Inconvertible currency, 314Incoterms 2000, 155–178

seminars, 329Indirect costs, 132–134Indirect exports, 81–91Inherent vice, 187Inland marine insurance, 186Instructions (product presentation), 60–61Insurable interest, 179, 185Insurance, 162–163, 179–200Insurance certificate, 188Insured party. See AssuredIntangible product, 76Intellectual property, 77–79Interior Department, 21International Buyer Program, 114International Chamber of Commerce (ICC):

Incoterms 2000, 155–178information source, 328International Court of Arbitration, 208Paction, 209Rules for Arbitration, 208

International Civil Aviation Organization(ICAO), 251

International Maritime Organization (IMO),251

International Organization for Standardiza-tion (ISO). See ISO standards

International Partner Search, 113

346 Index

International Standby Practices (ISP98),301–302

International Traffic in Arms Regulations(ITAR), 21

Internet, 101Irrevocable credit, 299ISO standards:

9000 series, 65–6714000 series, 67publication, 67–68

ISP98. See International Standby PracticesIsrael. See United States – Israel Free Trade

AgreementIssuing bank, 299ITAR. See International Traffic in Arms

Regulations

Japan External Trade Organization(JETRO), 117

JETRO. See Japan External Trade Organiza-tion

Jordan. See United States – Jordan FreeTrade Agreement

Key Management Infrastructure (KMI),37–38

KMI. See Key Management InfrastructureKnowing your customer, 47–48Known shipper rule, 252

L/C. See Letter of creditLabeling, product presentation, 61–62LASH. See Lighter Aboard ShipLaw:

applicable law, 203–205Incoterms, relation to, 203–204seminars, 329

LCConnect, 320LCL. See Less-than-containerloadLead logistics provider (4PL), 232Legalized documents, 281Less-than-containerload, 247–248Letter of credit (L/C), 298–312License exception:

definition, 26list based exceptions, 35–37shown on commercial invoice, 262terms and conditions, 27transaction based exceptions, 37–44

License terms and conditions, General Pro-hibition 9, 27

Licensing, 102–104LIFO. See Liner In, Free OutLighter Aboard Ship (LASH), 239Liner in, Free Out (LIFO), 250Liner terms, 239Linkages, 6–9List based license exceptions, 27, 35–37Litigation, 207–208Logistics, 221–256seminars, 329London Institute clauses. See All risk, With

particular average, Free of particularaverage

LVS. See Shipments of Limited Value

MAB. See Master air waybillMain carriage, 157, 222Manufacturer, 2Manufacturing Department:

job description, 3role in documentation, 287role in export control compliance, 54role in export credit, 323role in product development, 80MARAD. See Maritime Administration

Marine cargo insurance, 187–197Marine extension clause, 191Marine transportation, 237–251Marine transportation document, 244–247Maritime Administration (MARAD), 21–22Markup, 140–142Mass Market Software. See General Soft-

ware Note Mass Market SoftwareMaster air waybill (MAB), 233Matchmaker Trade Delegations, 115Material cost, 131Materials, export marketing, 107–108Mediation, 208Metrics, product design, 59Mexican NOMS, 74Mexico. See North American Free Trade

AgreementMilitary merchandise (for Shipper’s Export

Declaration), 271Minimum cover. See Free of Particular Aver-

ageMinimum order charges, 145Missile Technology (MT), 31Mixed credits, 309Moisture barriers, 63MT. See Missile technology

Index 347

Multiple export channels, 102MyExports.com, 113

NAM. See National Association of Manufac-turers

NP. See Nuclear ProliferationNAFTA. See North American Free Trade

AgreementNational Association of Manufacturers

(NAM), 326National Council on International Trade

Development (NCITD), 327National Customs Brokers and Forwarders

Association of America (NCBFAA),327

National Marine Fisheries Service, 68National Motor Freight Traffic Association,

270National Oceanic and Atmospheric Admin-

istration (NOAA), 287National Security (NS), 31NCBFAA. See National Customs Brokers

and Forwarders Association of AmericaNCITD. See National Council on Interna-

tional Trade DevelopmentNegative certification, antiboycott, 51Negotiating bank, 299Negative checking, marketing, 109Negotiable marine transportation document.

See OrderNOAA. See National Oceanic and Atmos-

pheric AdministrationNOMS. See Mexican NOMSNon confirming purchasing agents, 89Non delivery, 188Non export channels, 102–104Non operating carrier, 224Non-negotiable marine transportation docu-

ment, 244Non-Vessel-Operating-Common-Carrier

(NVOCC), 224Normal markup, 140–141North American Free Trade Agreement:

certificate of origin, 274–277duty phaseout, 149eligibility criteria, 150–151export costing, 132export pricing, 148–151need for correct classification, 150product design, 59–60treaty, 150

NRC. See Nuclear Regulatory Commission

NS. See National SecurityNuclear Proliferation (NP), 31Nuclear Regulatory Commission (NRC), 21NVOCC. See Non-Vessel Operating Com-

mon Carrier

Ocean bill of lading (B/L). See Marine trans-portation document

Ocean Cargo Handbook, 200Ocean Cargo Claims Handbook, 200Ocean Transport Intermediary (OTI), 224Ocean transportation. See Marine trans-

portationOFAC. See Office of Foreign Assets ControlOffer and acceptance, 201Office of Defense Trade Controls, 21Office of Foreign Assets Control (OFAC), 21Office of Textiles and Apparel, 110Office of the Coordinator for Counter-

terrorism, 47Office of Trade and Economic Analysis, 110Offset, 152, 321Omnimodal, 159On-carriage, 157, 222Open account, 298Open marine cargo policy, 188Opening bank, 299Operation technology and software, 41Order, consignment for negotiable marine

transportation document, 244Order entry, 218Origin, 59–60OTI. See Ocean Transport IntermediaryOver invoicing, 146Overhead, 132Overseas Trade Missions, 115, 117Ownership transfer:

relationship to Incoterms 2000, 161–162sales contracts, 202–203

Packaging, product presentation, 62Packing, 63Packing list, 263–265Paction, 209Particular average, 188Patent and Trademark Office:

export control, 21intellectual property, 77

Payment terms. See Terms of paymentPayment with order, 296–297Performance bonds, 181Performing carrier, 224, 233

348 Index

Peril, of the sea, on the sea, 188Permanent Exhibition Centers, 115Piers Export Tracking Service, 111Platinum Key Service, 114Political Risk Insurance, 198Port (airport) to door, 223Port (airport) to port (airport), 223Port congestion surcharge, 241Positive certifications, antiboycott, 51Possession rights:

relationship to Incoterms 2000, 162sales contracts, 203

Pre-shipment inspection:clean report of findings, 281–285mandatory, 64optional, 65

Precarriage, 157, 222Preprinted forms, 258Presenting bank, 314Principal, 314Proceeding, General Prohibition 10, 27Product, 56–80Product characteristics, 56–57Product design:

electrics, 58export control, 59metrics, 59origin, 59–60size, 58user characteristics, 59

Product liability insurance, 199Product Literature Centers, 115Product presentation:

instructions, 60–61labeling, 61–62packaging, 62–63

Production, Export Administration Regula-tions, 26

Proforma invoice, 201–220Prohibited end users, 26–27, 46–47Prohibited end uses, 26–27, 46–47Proliferation, General Prohibition 7, 27Protest, 316Purchase order, 201–220attention to incoming order, 14Purchasing Department:

job description, 3role in documentation, 287role in export control compliance, 54role in export pricing, 153role in insurance, 200

Pure risk, 179

Rebating, 145Record keeping, 52–53Red clause credits, 309Red flags, 48Reexport:

Customs and usual definition, 131export control definition, 20

Regional Stability (RS), 31Remitting bank, 314Reporting, export, 51–52Resources. See Supplementary Knowledge

SourcesReverse trade missions, 115Revocable credit, 299Revolving credit, 309–310Rider, 188Risk:

credit, 289–292parties at (insurance), 185–186pure, 179

RPL. See Servicing and Replacement ofParts and Equipment

Roll-on, roll-off (Ro-Ro), 239Ro-Ro. See Roll-on, roll off.RS. See Regional StabilityRural Business Cooperative Service, 116

Sales contracts, 201–220Sales Department:

job description, 3role in documentation, 287–288role in export channels, 81–105role in export control compliance, 54role in export credit, 322role in export marketing, 106–129role in export pricing, 154role in insurance, 200role in product development, 79role in proforma invoices, 219role in sales contracts, 219role in terms of sale, 178role in transportation, 255

Sales representatives, 93–99Sales technology software, 41Sales terms. See Terms of SaleSBA. See Small Business AdministrationSCAC. See Standard Carrier Alpha CodeSchedule B, 52, 271Schedule C Code. See United States Cus-

toms District Port CodeSea waybill, 244SED. See Shipper’s Export Declaration

Index 349

Self-insurance, 185. See also Co-insurance,Deductible, Franchise

Seminars, 328–330Servicing and Replacement of Parts and

Equipment (RPL), 39–40Ship lines, 238–247Shipments of Limited Value (LVS), 35–36Shipments to Country Group B (GBS), 36Shipper, 221, 223Shipper’s Export Declaration (SED), 51–52,

265–272Shipper’s letter of instructions, 226–229Shore clause, 191Short Supply (SS), 31SI. See Significant ItemsSight draft, documents against payment, 297,

315Significant Items (SI), 31Size, product design, 58Slot chartering, 249Small Business Administration (SBA), 116,

319Small Business Development Centers, 113Software updates, 42South America clause, 191Special Comprehensive License, 48–49Specially Designated Nationals and Blocked

Persons List, 47Split Drafts, 316SRCC. See Strikes, Riots and Civil Commo-

tionSS. See Short SupplyStandard Carrier Alpha Code (SCAC),

269–270Standards:

Chinese (CCC Mark), 75Conformite Europeen (CE Mark), 69–73ISO, 65–68Mexican NOMS, 74–75Voluntary certification, 126–128

Standby letter of credit, 297, 300–302State governments, 116–117Straight marine transportation document,

244Strategic Council on Security Technology,

253–254Strikes, Riots and Civil Commotion (SRCC),

190Subchartering, 249Subrogation clause, 191Sue and labor clause, 191

Supplementary Knowledge Sources:books, 336–340newsletters and magazines, 331–332plug-in information, 331websites, 334–336

Surety, 180Swaps, 152Switching, 321

Tam Tam, 111Tangible product, 56TAPO. See Trade Assistance and Promo-

tional OfficeTax Reform Act of 1976, antiboycott, 51Tax treatment of exports, 133Technology and Software Under Restriction

(TSR), 36–37Technology and Software Unrestricted

(TSU), 41–42Temporary Imports, Exports and Reexports

(TMP), 38Ten General Prohibitions, 26–27Tenor, 314Terminal Handling Charge (THC), 241Terms of Payment:

cost, 134descriptions, 295–317relationship to Incoterms 2000, 174–175

Terms of Sale, 155–178Terrorist Organizations List, 47THC. See Terminal Handling ChargeThird party logistics provider (3PL),

229–2333PL. See Third party logistics providerTime-sight draft, 316Title transfer. See Ownership transferTMP. See Temporary Imports, Exports and

ReexportsTop Market Opportunities for Small Busi-

nesses, 111Top Targets for Trade Promotion, 111Trade and Development Agency, Reverse

Trade Missions, 115Trade Assistance and Promotional Office

(TAPO), 115Trade Compass, 118Trade Development Industry Officers, 110Trade Fairs and Exhibitions Program, 114TradeCard, 320Trademarks, 77–79, 134Trading partners:

350 Index

direct export, 91need to be kept informed, 16supporting (promotion), 125

Traffic Department:job description, 3role in documentation, 288role in export control compliance, 54role in export credit, 323role in product development, 79role in sales contracts and proforma

invoices, 219role in terms of sale, 178role in transportation, 221–256

Transportation, 221–256Transaction-specific costs, 135–138Transaction based license exceptions, 37–44Transferable credit, 310Transportation Department, 251, 253Transportation Security Administration

(TSA), 253Transshipments:

Commerce Country Chart, 32General Prohibition 8, 27TSA. See Transport Security Administra-

tionTSR. See Technology and Software Under

RestrictionTSU. See Technology and Software Unre-

strictedTT Club of London, 221

UCC. See Uniform Commercial CodeUCP. See Uniform Customs and Practices for

Documentary CreditsUN. See United NationsUnder invoicing, 146, 206–207Undercarrier, 224Uniform Commercial Code (UCC),

175–177Uniform Customs and Practices for Docu-

mentary Credits (UCP), 306–308Uniform Rules for Collections (URC), 313Unique Control Procedures, 31–32. See also:

Chemical Weapons Convention,Encryption Items, High Performance Com-

puters, Short Supply, Significant ItemsUnited Nations (UN):

Convention on Contracts for the Interna-tional Sale of Goods (CISG), 204–205

Convention on the Carriage of Goods bySea 1978 (Hamburg Rules), 238

export control, 31International Civil Aviation Organization

(ICAO), 251International Maritime Organization

(IMO), 251United States Chamber of Commerce, 327United States Customs District Port Code,

269United States Department of Agriculture.

See Agriculture DepartmentUnited States Department of Commerce.

See Commerce DepartmentUnited States Department of Energy. See

Energy DepartmentUnited States Department of the Interior.

See Interior DepartmentUnited States Department of State. See

Office of Defense Trade Controls andOffice of the Coordination for Counter-terrorism

United States Department of the Treasury.See Customs Service, Office of Foreign Assets Control, Tax Reform Actof 1976

United States Department of Transporta-tion. See Transportation Department

United States Food and Drug Administra-tion. See Food and Drug Administration

United States Government export productstesting, 68

United States Maritime Administration. SeeMaritime Administration

United States Nuclear Regulatory Commis-sion. See Nuclear Regulatory Commis-sion

United States person, 26United States Principal Party in Interest

(USPPI), 268United States Small Business Administra-

tion. See Small Business AdministrationUnited States Trade and Development

Agency. See Trade and DevelopmentAgency

United States – Caribbean Trade Partner-ship, 132

United States – Israel Free Trade Agree-ment:

certificate of origin, 277–280export costing, 132export pricing, 147–148product design, 59–60

Index 351

United States – Jordan Free Trade Agree-ment:

export costing, 132export pricing, 148product design, 60

Unrestricted Encryption Source Code, 42URC. See Uniform Rules for CollectionsUsance credits, 308–309Use (export control), 26User characteristics, product design, 59USPPI. See United States Principal Party in

Interest

Value, insurance, 194Vessel charter, 249–251Vessel Insurance Additional Peril (VIAP) 241Vessel transportation. See Marine trans-

portationVIAP. See Vessel Insurance Additional Peril

Vienna Convention. See United NationsConvention on Contracts for the Inter-national Sale of Goods

Voyage charter, 249Voyage Policy, 188

WA. See With Particular AverageWAND, 118War risk, 190Warehouse to Warehouse clause, 191Warranted free of, 188Wassenaar Arrangement, 22Western Hemisphere Corporation, 133With Particular Average (London Institute

Clauses B), 189Wood packing, 63World Trade Center Association, 118, 328

XP. See High Performance Computers

352 Index