Exporting and Logistics Special Issues for The Small Business Chapter 15

An Export Sale From Show to Installation  Feb. 3 - Trade Show and Order  Mar. 3 - Financing  Jul. 3 - Import License and Letter of Credit  Aug. 1 - Closing The Deal  Sep.4 - Production and Shipment  Nov. 1 - Submission of Letter of Credit  Dec. 12 - Final Inspection of Shipping Schedules  Dec. 13 - Test Run  Jan. 2 - “It’s on the way” 15-2 Irwin/McGraw-Hill

The Exporting Process Leaving the Exporting Country Physical Distribution Entering the Importing Country Licenses General Validated Documentation Export declaration Commercial invoice Bill of lading Consular invoice Special certificates Other documents International shipping and logistics Packing Insurance Tariffs, Taxes Non-tariff Barriers Standards Inspection Documentation Quotas Fees Licenses Special certificates Exchange permits Other barriers 15-3 Irwin/McGraw-Hill

Export Administration Regulations (EAR) A new country and commodity classification system has been devised, making it the exporter’s responsibility to select the proper classification number for an item to be exported. The exporter must decide if there are end-use restrictions on the items, such as their possible use in the development of nuclear, chemical, and biological weapons. The exporter now has the responsibility to determine the ultimate end customer and ultimate end uses, regardless of who may be the initial buyer, or face the legal consequences of doing business with unauthorized trading partners. A special category for the control of encryption-related products has been established. 15-4 Irwin/McGraw-Hill

Typical Commerce Control List (CCL) Description for OA984 OA984 Shotguns, barrel length 18 inches (45.72 cm) or over; buckshot shotgun shell; except equipment used exclusively to treat or tranquilize animals, and except arms designed solely for signal, flare, or saluting use; and parts, n.e.s.License Requirement. Reason for Control: CC, FC, UN Control(s) Country Chart FC applies to entire entry. FC Column 1 CC applies to shotguns with a barrel length greater than or equal CC Column 1 to 18 in. (45.72cm), but less than 24 in. (60.96 cm) or buckshot shotgun shells controlled by this entry, regardless of end-user. CC applies to shotguns with a barrel length greater than or equal CC Column 2 to 24 in. (60.96 cm), if for sale ore resale to police or law enforcement. CC applies to shotguns with a barrel length greater than or equal to CC Column 3 24 in. (60.96 cm) if for sale or resale to police or law enforcement. UN applies to entire entry. Rwanda; Federal Republic of Yugoslavia (Serbia and Montenegro). 15-5 Irwin/McGraw-Hill

Typical Commerce Control List (CCL) Description for OA984 License Exceptions LVS: N/A GBS: N/A CIV: N/A List of Items Controlled Units: $ value Related Controls: This entry does not control shotguns with a barrel length of less than 18 in. (45.72 cm). These items are subject to the export licensing authority of the Department of State, Office of Defense Trade Controls. Related Definitions: N/A Items: The list of items controlled is contained in the ECCN heading. 1465 15-6 Irwin/McGraw-Hill

Export License General License Validated License 15-7 Irwin/McGraw-Hill

Commerce Country Chart: Reasons for Control (Selected Countries) Country Chemical & Nuclear Non- National Missle Regional Firearms Crime Anti- Biological Weapons Proliferation Security Tech Stability Convention Control Terrorism CB 1 CB 2 CB 3 NP 1 NP 2 NS1 NS2 MT 1 RS1 RS2 FC 1 CC1 CC2 CC3 AT1 AT2 Albania X X X X X X X X X X X Argentina X X X X X X X X X Australia X X X X Canada X China X X X X X X X X X X X France X X X X India X X X X X X X X X X X Mexico X X X X X X X X X X X X Sudan X X X X X X X X X X X X Syria X X X X X X X X X X X X 15-8 Source: “Supplement No. 1 to Part 738, Commerce Country Chart,” Export Administration Regulation, January 2001. Available at http//www.access.gpo.gov/hxa/ear/ear_data.html Irwin/McGraw-Hill

Innovations Developed to Ease The Acquisition of Export Licenses Export License Application and Information Network (ELAIN) System for Tracking Export License Application (STELA) Electronic Request for Item Classification (ERIC) Simplified Network Application Process (SNAP) 15-9 Irwin/McGraw-Hill

Indicators for Possible Unlawful Diversion The customer or purchasing agent is reluctant to offer information about the end of a product. The product’s capabilities do not fit the buyer’s line of business; for example, a small bakery places an order for several sophisticated lasers. The product ordered is incompatible with the technical level of the country to which the product is being shipped. For example, semiconductor-manufacturing equipment would be of little use in a country without an electronic industry. The customer has little or no business background. The customer is willing to pay cash for a very expensive item when the terms of the sale call for financing The customer is unfamiliar with the product’s performance characteristics but still wants the product. 15-10 Source: “Red Flag Indicators.” Bureau of Export Administration, http://www.hxa.doc.gov/Enforcement/redflags.htm. Irwin/McGraw-Hill

Indicators for Possible Unlawful Diversion The customer declines routine installation, training, or maintenance services. Delivery dates are vague, or deliveries are planned for out-of-the-way destinations. A freight-forwarding firm is listed as the product’s final destination. The shipping route is abnormal for the product and destination. Packaging is inconsistent with the stated method of shipment or destination. When questioned, the buyer is evasive or unclear about whether the purchased product is for domestic use, export, or reexport. 15-11 Source: “Red Flag Indicators.” Bureau of Export Administration, http://www.hxa.doc.gov/Enforcement/redflags.htm. Irwin/McGraw-Hill

Import Restrictions  Tariffs  Exchange Permits  Quotas  Import Licenses  Boycotts  Standards  Voluntary Agreements  Other Restrictions 15-12 Irwin/McGraw-Hill

Terms of Sale  CIF- (Cost, Insurance, Freight) to a named overseas port of import. A CIF quote is more meaningful to the overseas buyer because it includes the costs of goods, insurance, and all transportation and miscellaneous charges to the named place of debarkation.  C&F- (Cost and Freight) to a named overseas port. The price includes the costs of goods and transportation costs to the named place of debarkation. The cost of insurance is born to the buyer.  FAS- (Free Alongside) at a named U.S. port of export. The price includes cost of goods and charges for delivery of the goods alongside the shipping vessel. The buyer is responsible for the cost of loading onto the vessel, transportation, and insurance. 15-13 Irwin/McGraw-Hill

Terms of Sale  FOB- (Free on Board) at a named inland point of origin, at a named port of exportation, or at a named vessel and port of export. The price includes the cost of goods and delivery to the place named.  EX- (Name Port of Origin). The price quoted covers costs only at the point of origin (example, EX Factory). All other charges are the buyer’s concern. 15-14 Irwin/McGraw-Hill

Who’s Responsible for Costs Under Various Terms? FOB (Free on FOB (Free on FAS (Free CIF (Cost Board) Inland Board) Inland Along Side) Insurance, Carrier at Carrier at Vessel or Freight) at Factory Points of Plane at Port Port of Shipment of Shipment Destination 15-15 Export packing* Buyer Seller Seller Seller Inland freight Buyer Seller Seller Seller Port charges Buyer Buyer Seller Seller Forwarder's fee Buyer Buyer Buyer Seller Consular fee Buyer Buyer Buyer Buyer ** Loading on vessel or plane Buyer Buyer Buyer Seller Ocean freight Buyer Buyer Buyer Seller Cargo insurance Buyer Buyer Buyer Seller Customs duties Buyer Buyer Buyer Buyer Ownership of When goods on When goods When goods When goods goods passes board an inland unloaded by alongside on board air carrier (truck, rail, inland carrier carrier, in or ocean etc.) or in hands hands of air carrier at port of inland carrier or ocean carrier of shipment * Who absorbs export packing? This charge should be clearly agreed on. Charges are sometimes controversial. ** The seller has responsibility to arrange for consular invoices (and other documents requested by buyer's government). According to official definitions, buyer pays fees, but sometimes as a matter of practice, seller included in quotations. Irwin/McGraw-Hill

Getting Paid Foreign Commercial Payments  Letters of Credit  Revocable  Irrevocable  Bills of Exchange  Cash in advance  Open Accounts  Forfaiting 15-16 Irwin/McGraw-Hill

A Typical Letter of Credit Transaction After you and your customer agree on the term of sale, the customer arranges for his or her bank to open a letter of credit. (Delays maybe encountered if, for example, the buyer has “insufficient funds.” In many developing countries, foreign currencies, such as the U.S. dollar, may be scarce. The buyer’s bank prepares an irrevocable letter of credit, including all instructions. The buyer’s bank sends the irrevocable letter of credit to a U.S. bank requesting confirmation. (Foreign banks with more than one U.S. correspondent bank generally select the nearest one to the exporter. The U.S. bank prepares a letter of confirmation to forward to you, along with the irrevocable letter of credit. You review carefully all conditions in the letter of credit, in particular, shipping dates. If you cannot comply, alert your customer at once. (Your freight forwarder can help advise you. 15-17 Source: “A basic Guide to Exporting.” U.S. Department of Commerce, International Trade Administration. Washington D.C. Irwin/McGraw-Hill

A Typical Letter of Credit Transaction You arrange with your freight forwarder to deliver your goods to the appropriate port or airport. If the forwarder is to present the documents to the bank (a wise move for new-to-export firms), the forwarder will need copies of the letter of credit. After the goods are loaded, the forwarder completes the necessary documents (or transmits the information to you). You (or your forwarder) present documents indicating full compliance to the U.S. bank. The ban reviews the documents. If they are in order, it issues you a check. The documents are airmailed to the buyer’s bank for review and transmitted to the buyer. The buyer (or agent) gets the documents that may be needed to claim the goods. 15-18 Source: “A basic Guide to Exporting.” U.S. Department of Commerce, International Trade Administration. Washington D.C. Irwin/McGraw-Hill

Export Payment Terms Risk/Cost Tradeoff Risk to Exporter Least Risk____________________________________________ Highest Risk Confirmed Irrevocable Bank Bank Cash in Irrevocable Letter of Collection Collection Open Advance Letter of Credit Credit Sight Draft Time Draft Account Cost to Buyer Highest Cost ___________________________________________ Least Cost 15-19 Irwin/McGraw-Hill SOURCE: Business America, February 1995.

Export Documents  Export Declaration  Consular Invoice or Certification of Origin  Bill of Lading  Commercial Invoice  Insurance Policy or certificate  Licenses  Others  Health Certificates  Packing Lists  Etc. 15-20 Irwin/McGraw-Hill

Customs-Privileged Facilities 15-21 Foreign Trade Zones Maquiladoras, In-Bond Companies, Twin Plants Irwin/McGraw-Hill

Real Physical Distribution Costs Between Air and Ocean Freight - Singapore to the United States In this example, 44,000 peripheral boards worth $7.7 million are shipped from a Singapore plant to the U.S. West Coast. Cost of capital to finance inventories is 10 percent annually; $2,109 per day to finance $7.7 million. Transport costs $31,790 $ 127,160 (in transit 21 days) (in transit 3 days) In-transit inventory financing costs $ 44,289 $ 6,328 Total transportation costs $ 76,079 $ 133,487 Warehousing inventory costs (60 days @$2,109/day) Singapore and U.S. $ 126,540 Warehouse rent $ 6,500 Real physical distribution costs $ 209,119 $ 133,487 15-15 Ocean Air SOURCE: Adapted from: "Air and Adaptec'c Competitive Strategy,” International Business, September 1993, p.44. Irwin/McGraw-Hill