Company Name:
Lishui Huanqiu Bearing Trading Co., Ltd.
Company Address:
No.11 Shiting Road, Shuige Industrial Zone,Lishui, Zhejiang,China
Contact Person: William
Email: admin@tradebearings.com
Homepage: www.asiabearings.com
Bearing B2B: www.tradebearings.com
International trade is both important and problematic.
Important, because we live in a globally interconnected economy where we depend on one another for commercial activity. At times this dependence is dangerous, as the problems created in one country may affect others. A good example of this is the global financial crisis and the continuing fall-out that has spread far beyond the USA, affecting markets in the EU, among others.
Problematic, because international trade is not easy. As one of my former staff members used to say when trying to explain the complexity of export transactions to others in the organisation: when you export, you just don't whistle for a taxi. How true this is.
The purpose of this article is not to explore the various challenges and benefits of international trade transactions, as this would probably fill up a series of volumes. Rather, this article revisits the continuing problem of one aspect of international trade transactions that continues to create potential problems; that is, the incorrect application of Incoterms® 2010 rules, based on the mode of transport and commercial practices.
Recent research in Australia has shown the following distribution of Incoterms usage among exporters of manufactured goods to the Association of Southeast Asian Nations (ASEAN), as shown in Figure 1. It should be noted that this research was conducted just prior to the introduction of the Incoterms 2010, and the terms have been adjusted accordingly to reflect current usage.
<img src=http://www.bearing.com.cn/direc/myimg/201112284.bmp>
Figure 1: Incoterms® 2010 Rules Usage by Exporters to ASEAN
There are some interesting data patterns that can be observed from Figure 1. The term EXW, that is transport neutral as far as the seller is concerned, is used in 18% of occasions. On further enquiry, it was discovered that the term is not actually being used as intended, and that indeed there are considerable variations.
Let me provide an example. A seller in Australia has contracted with a buyer in Japan for the supply of certain goods on an EXW basis. This means the seller is neither responsible for carriage, nor border clearance. The buyer in Japan has contracted a freight forwarder to pick up the goods at the seller's warehouse. The forwarder has advised the seller that they will need forwarding instructions from them and that they (the seller) will be shown as the shipper on the transport document. Furthermore, the seller discovers that the freight forwarder has been clearing the consignments for export, declaring the seller as the exporter.
"So what?" some may well ask. So what is that these practices are not correct. The seller has become alarmed about this, worrying about their risk exposure and asks what they can do. The simple answer to this is to revisit the Incoterms 2010 and apply them correctly, and that is what we are going to do now.
Imagine the conversation between the seller and their adviser on this issue. It may go something like this:
Adviser: Why did you provide the forwarding instructions to the freight forwarder?
Seller: Because they asked for them.
Adviser: Are you responsible for the contract of carriage?
Seller: No, the buyer is.
Adviser: Did you appoint the freight forwarder?
Seller: No, the buyer did.
Adviser: So, if you did not engage the freight forwarder and you are not a party to the contract of carriage, why would you complete the forwarding instructions that usually state that you are authorising the forwarder to do things on your behalf?
Seller: I am not sure. They asked us to do it, and they were quite emphatic that it was our responsibility.
Adviser: Well, the short answer to this problem is that you have no obligation to contract for carriage or make any arrangements for carriage and, in fact, you are not the exporter.
Seller: But the forwarder has told us that we need to be shown as the shipper on the transport document.
Adviser: The forwarder has not been engaged by you, and therefore, there is no contractual link between you and them. They ask what they like, but that does not mean they are going to get it. Who is paying them to perform the arrangement for clearance and carriage?
Seller: The buyer.
Adviser: And, therefore you are not responsible for these charges, correct?
Seller: No, we have nothing to do with these.
Adviser: And you should have nothing to do with these processes. By the way do you get a copy of the export declaration made to customs?
Seller: No. Why, does it matter?
Adviser: Well, I would be concerned. You have no idea what the freight forwarder is declaring to customs, yet they are using your organisation's name in doing so. This is risky; far too risky for me. I would not be happy about it. If I am not exporting, my organisation should not be named anywhere.
Seller: So, what should I do?
Adviser: Here is a suggestion. Do not complete forwarding instructions. Do not have yourself shown as the shipper. Instead let the freight forwarder be shown as the shipper, as after all they are acting on behalf of the buyer under instructions. And one more thing, as you are selling EXW, at least under Australian legislation, you are not the exporter. Certainly that is how the taxation department looks at it, so do not have the freight forwarder list you as the seller on the customs export declaration. Again, they can list themselves as being the agent of the buyer.
Seller: But will this not make it more complicated or messy?
Adviser: No, not really, but it may create problems for the buyer from a tax perspective. But I am not a tax expert, so you would need further advice. There is another option to overcome the issue of export clearance and potential buyer taxation liability at the local level. Sell FCA and make the delivery point your nominated works.
Seller: But this means that I have to do the export clearance and provide a transport document to the buyer.
Adviser: No, it does not mean all of that. Yes, you do have to provide export cleared goods to the buyer's agent (the freight forwarder). It means that the risk in transit will transfer from you to the buyer at the nominated premises. It does not mean that you have to provide a transport document, unless you agree to do so. If you do not want to enter into a contract of carriage, then you do not have to. Does this make sense to you now, do you understand where you stand on an EXW transaction and that you can use FCA instead to overcome some of the difficulties that EXW may present?
Seller: Yes, I get it now. Thanks a lot. This was helpful, but I have one more question. May I ask?
Adviser: Sure, go ahead.
Seller: We are sending goods in containers by sea, as you know, so why not use FOB?
Adviser: Oh dear, this requires another session....
