18/3/2015

ESCI INTERNATIONAL TRADE

Universitat Pompeu Fabra | David de Andrés Garrido

UNIT 1: The World Trade Environment......................................................................... 4
Globalisation and Liberalization of Markets .............................................................. 4
Effects of Globalisation ......................................................................................... 4
UNIT 2: Export Department.......................................................................................... 6
Export Benefits and Risks.......................................................................................... 6
But, are we ready to export? ..................................................................................... 7
Company Readiness Assessment .......................................................................... 7
Product Readiness Assessment ............................................................................. 7
Introduction to the Export Department .................................................................... 8
The channel .............................................................................................................. 8
UNIT 3: Export Packing & International Carriage .......................................................... 9
Marking packages ................................................................................................... 10
Containerization ..................................................................................................... 11
How to fill a Container ......................................................................................... 12
Documentation ....................................................................................................... 12
Internal Documentation ...................................................................................... 12
External Documentation ..................................................................................... 12
Freight Rates........................................................................................................... 13
Activity (example) ............................................................................................... 13
Activity 2 (adjustments example) ........................................................................ 14
WEIGHT CALCULATION .............................................................................. 14
VOLUMMETRIC CALCULATION .................................................................. 14
Activity 3 (% of the price example) ...................................................................... 15
WEIGHT CALCULATION .............................................................................. 15
VOLUMMETRIC CALCULATION .................................................................. 15
UNIT 4: The Export Quotation [Incoterms]................................................................. 16
EXW (Ex-Works).......................................................................................................17
FCA (Free Carrier) ................................................................................................... 18
FAS (Free Along Side) ............................................................................................. 18
FOB (Free On Board)............................................................................................... 19
CFR (Cost & Freight) ............................................................................................... 19
CPT (Carriage Paid To) ............................................................................................ 20

ESCI | Globalisation and Liberalization of Markets 2

 CIF (Cost Insurance & Freight) ................................................................................. 20
CIP (Carriage & Insurance Paid)............................................................................... 21
DDP (Delivery Duties Paid) ..................................................................................... 21
General ................................................................................................................... 22
Activity (Cost plus pricing example) .................................................................... 22
UNIT 5: International Modes of Payment ................................................................... 24
Against Payment .................................................................................................... 24
Against Acceptance ................................................................................................ 25
Letter of Credit ....................................................................................................... 25

ESCI | Globalisation and Liberalization of Markets 3

 UNIT 1: The World Trade Environment
Globalisation and Liberalization of Markets
Globalisation is the internationalization of everything related to different countries.
Internationalization however, differs from globalization. Global is commonly used as a
synonym for “international”.

 Global -> One World

 International-> Between Countries

Economic globalization can be measured in different ways:

 Goods and Services

 Labour/People (Immigration Flows)
 Capital: Inward or outward direct investment.
 Technology: Proportion of population using particular inventions.

When we talk about globalization we must include the logistics.

Manufacture
Raw Material
and Distribution
Logistics

End Consumer

It’s crucial to continued developed growth on a global basis, only those countries with
sufficiently developed infrastructures can successfully globalise and maintain pace
with competitors.

Effects of Globalisation
 Industrial: Emergence of worldwide
production markets and broader access to a
range of foreign products for both
consumers.
 Financial: Emergence of worldwide
financial markets and better acces to
external financing for national borrowers.
 Economic: Realization of a global common
market, based on the freedom of exchange

ESCI | Globalisation and Liberalization of Markets 4

 of goods and capital.
 Political: Creation of governing bodies which regulates the relationships
among nations.
 Informational: Increase in information flows.
 Cultural: Desire to consume foreign products and ideas.
 Ecological: International cooperation to solve environmental challenges.
 Social: Free circulation by people of all nations.
 Transportation: Fewer and fewer European cars on European roads each year.

ESCI | Globalisation and Liberalization of Markets 5

 UNIT 2: Export Department
Export Benefits and Risks
To export we need:

 Develop long term strategies

 Staying with the times
 Develop empathy with the buyers of the market
 Be sufficiently competent

POTENTIAL BENEFITS POTENTIAL RISKS

Increased turnover (that doesn’t mean to Different payment terms, we might receive
increase profitability). the payment later than we need the money
and we must pay bank interests. Also there
are countries with different payment
methods like Germany; they have the early
payment discount.
Improved competitively (we’re stronger) Hidden economic variables
Benefits of a larger order book (more sells, Macro Economic/Financial/Commercial as
more turnover, more possibilities of not getting paid
borrowing money)
Better used resources (more profitability) Credit Facilitation+restriction
Increased visibility, our product is seen (the Cost of overseas launches
known products can have brand recognition)
Spread of risk as we have more costumers Lack of qualified personnel
Greater profit so greater investment too Knowledge of distribution channels

There are two kinds of exporting:

Almost pasive,
Indirect
low cost, for
Exporting
newcomers...

Direct Exporting Full implication

ESCI | Export Benefits and Risks 6

But, are we ready to export?

Company Readiness Assessment

1. Already established?
2. Domestic coverage?

Domestic
Sales force Retailer Consumer
Factory

3. Distribution?
If we have a distributor he buys my product but I must sell the product cheaper
4. Market Research?
5. Advertising and Promotion?
6. Export marketing expertise?
7. Foreign Demand?
8. Inventory Levels?
9. Processing new orders?
10. Current status of your export activity?
11. Is management committed?
12. Export Budget?
13. Acceptable timeline?

Product Readiness Assessment

14. Have the sales grown?
15. Domestic market share?
16. Is your product price-competitive?
17. What payment terms can you offer?
18. Do you compare favourably with competitors?
19. Capable to adapt product and/or packing to suit
foreign markets?
20. Is transportation costly?
21. Is any special training required to assemble,
install or operate your product?
22. Does the product need after sale service?
23. Can the product tolerate changes in the environment?

ESCI | But, are we ready to export? 7

Introduction to the Export Department
In the export department we find some main players.

 Export Director
 Export Area Manager>Sells to Agents and Distributors
He has several tasks like plan the sales strategy in the assigned territory,
negotiate orders, contracts, the % of commission for agents, travel, solve
claims, check and analyse the sales
 Export Marketing Manager
 Communication officer
 Category Manager
 Export Admin/Shipping Manager
Avoid errors in the documents and he manages all the documents (send,
receive,...)
 Export Admin executive
 Packing and Dispatch Operatives

The channel

Distributor

Sales
Agents
representative

Channels

Foreign
Directs sells
retailers

ESCI | Introduction to the Export Department 8

 UNIT 3: Export Packing & International Carriage
The export packing wants to ensure that the good are delivered and arrives to our
buyer in perfect conditions.

There are 3 kind of packing:

 Transport or export packaging: The good are protected during the transit
 Outer packaging: Are packed in an intermediate point
 Sales packaging: Are immediately packed (liquids in bottles)

The main types of export packaging include:

 Loose or unpacked: a common option for large items such as heavy vehicles.
 Boxes or crates: one of the most prevalent options.
 Drums: usually made of metal or plastic, commonly used for transporting
liquids and powders or goods that need to be kept dry.
 Wrapping: often used with goods stacked on pallets, it adds stability and
protects goods.
 Pallets: allow smaller packing units such as boxes and cartons to be grouped
together. They allow easy mechanical transporting.

When we want to export we must consider different factors like the time, price,
security, if the good is perishable, the way of transport... each kind of transport has its
own pros and cons:

Air Sea Road Rail

Advantages Advantages Advantages Advantages
•Rapidity •For long distances •Door to Door •Competitive & Fast
•Security •Low Price •No customs for long distances
•Low risk of Damage •Cost optimitzation if examination •Perfect for big
•Airport well locateds you share container •Complementary to deliveries
the others

Disadvantages Disadvantages Disadvantages Disadvantages

•High Prices •Delivery dates •High price for long •No competitive for
•Depends on the (slow) distances short distances
weather •Security •Security •Depend on road
•Limited Weight •Several •Scheduled infrastructure
manipulations departures

ESCI | The channel 9

Marking packages

ESCI | Marking packages 10

Containerization
Containerization has revolutionized cargo shipping…

 Today 90% of non-bulk cargo worldwide moves by containers stacked on

transport ships
 26% of all containers originate from China
 As of 2005, some 18 million total containers make over 200 million trips per
year

However, few initially foresaw the extent of the influence containerization would
bring to the shipping industry.

In the 50’s it was predicted that containerization would benefit New York by allowing
it to ship industrial goods produced there more cheaply to the Southern United States
than other areas, but did not anticipate that containerization might make it cheaper
to import such goods from abroad.

The widespread use of ISO standard

containers has driven modifications in
other freight-moving standards,
gradually forcing removable truck bodies
or swap bodies into the standard sizes
and shapes (though without the strength
needed to be stacked), and changing
completely the worldwide use of freight
pallets that fit into ISO containers or into
commercial vehicles.

Improved cargo security is also an important benefit of containerization. The cargo is

not visible to the casual viewer and thus is less likely to be stolen and the doors of the
containers are generally sealed so that tampering is more evident. This has reduced
the "falling off the truck" syndrome that long plagued the shipping industry.

Use of the same basic sizes of containers across the globe has lessened the problems
caused by incompatible rail gauge sizes in different countries.

The majority of the rail networks in the world operate on a 1,435 mm (4 ft 8½ in)
gauge track known as standard gauge but many countries (such as Russia, Finland,
and Spain) use broader gauges while other many countries in Africa and South
America use narrower gauges on their networks. The use of container trains in all
these countries makes trans-shipment between different gauge trains easier.

ESCI | Containerization 11
How to fill a Container
We find 2 shipping forms:

 FCL (Full Container Load): the goods of one exporter are the only cargo being
shipped inside that shipping container.
 LCL (Less-Than-Full Container Load): the cargo of one exporter is being
shipped along with other exporters’ goods inside the same shipping container.

Arrangement Exporters Importers

FCL/FCL 1 1
FCL/LCL 1 More than 1
LCL/FCL More than 1 1
LCL/LCL More than 1 More than 1

Documentation

Internal Documentation
 Pro forma invoice: Customers asks for Credit
 Purchase order: The buyer’s offer
 Order of confirmation: The company accepts the offer
 Work order / Picking List: Separate the bought unities from the others in the
warehouse.
 Delivery Note: The first transport document generated and refill the
warehouse.
 Packing List: Inventory of the container and how the goods are organized in
containers.
 Invoice: “Factura”

External Documentation
 Transport documents: Generated when the goods are loaded in the transport.
o Bill of Lading (BoL) (Sea)
o Air Way Bill (AWL) (Air)
o CMR (Road and Railway)
 Certificate of Origin
 Certificate of Quality
 Consular Invoice

Bill of Lading is the document that is expended by the transport company with a relation of
the good received and loaded on board. There are two Bills of Lading:

 Negotiable Bill of Lading: The order bill of lading is handed over only
when the foreign importer has paid for the goods or made acceptable
credit arrangements.

ESCI | Documentation 12
  Non-negotiable Bill of Lading: It is made out to a specifically named
consignee, from which the steamship company acknowledges receipt of
the freight and agrees to move it to its destination.

Freight Rates
The freight rates are the cost to deliver the goods. The price can be taken from the
volume or from the weight.

In addition, the freight rates can be modified by adjustments caused by the variation
of the currency (CAF) or the price of the oil (BAF), in the other hand we can find also
rebates (discounts) for to be from one “Shipping Conference” or surcharges for
problems occurred.

Activity (example)

6 Boxes

120x80x80

50kg each

150 USD/Tonne

1 CBM= 1000 kg

WEIGHT CALCULATION

VOLUMMETRIC CALCULATION

We always choose the most expensive as the company transport is who choose the
prices so in this case the freight rate is 690$.

ESCI | Freight Rates 13

Activity 2 (adjustments example)

10 Boxes
AIR = 6000
100x100x120
ROAD= 3000
150 Kg each
SEA= 1000
150 USD/Tonnes

---------------------------------------
Rebate = -10%

CAF= 5%

BAF= 15%

TOTAL ADJ. = 10% (1,1)

WEIGHT CALCULATION

VOLUMMETRIC CALCULATION

ESCI | Freight Rates 14

Activity 3 (% of the price example)

150$/Tonne Rebate= 10%

12 euro pallet – 80x120x210 BAF= 15%

24 carton (2 carton/pallet) CAF= 7%

76,25$ unit Price TOTAL ADJ. = 12% (1,12)

200Kg/pallet

WEIGHT CALCULATION

VOLUMMETRIC CALCULATION

ESCI | Freight Rates 15

UNIT 4: The Export Quotation [Incoterms]
Incoterms are a set of guidelines that makes international trade easier. They aren’t
supported by any law, they are simple recommendations. In total it exists 11
incoterms, but the most important are:

INCOTERMS
EXW Risk Goods available at seller’s warehouse
Cost Goods available at seller’s warehouse
FCA Risk When goods are loaded
Cost When goods are loaded
CPT Risk When goods are loaded
CIP Cost When carrier arrives at the agreed place
+ RESPONABILITY-

DAT Risk Goods delivered at the terminal

Cost Goods delivered at the terminal
DAP Risk Goods delivered at the agreed place
Cost Goods delivered at the agreed place
DDP Risk Goods delivered at buyers warehouse
Cost Goods delivered at buyers warehouse
FAS Risk Goods placed by the boat (on the floor)
Cost Goods placed by the boat (on the floor)
ONLY FOR SEA

FOB Risk Goods loaded in the ship

Cost Goods loaded in the ship
CFR Risk When your goods are loaded on board
CIF Cost When ship arrives at destination port

There are 4 groups of incoterms:

 E= Departure
 F= Main carriage unpaid
 C= Main carriage paid
 D= Delivery

ESCI | Freight Rates 16

EXW (Ex-Works)
Vendor meets obligation when he makes goods available at the factory Door. The
buyer assumes all risks and costs involved in getting the goods to his warehouse at
this point.

ESCI | EXW (Ex-Works) 17

FCA (Free Carrier)
Vendor meets obligation when merchandise is made available to principal transporter
in the agreed point. He is responsible for export customs clearance.

If exchange takes place on vendor’s property, vendor is responsible for loading into
the vehicle. Costs and risks are transmitted at this moment. If exchange takes place
in any other place, the vendor is not responsible for loading.

FAS (Free Along Side)

Vendor assumes costs and transports risks until goods are alongside the ship in agreed
export port. From this point on (loading) buyer must assume responsibility. Vendor is
responsible for export customs clearance.

ESCI | FCA (Free Carrier) 18

FOB (Free On Board)
Vendor meets obligation when merchandise is placed on board, in the agreed port of
loading and without paying the freight costs.

Vendor is responsible for Customs Clearance in exporting port + loading on board.

CFR (Cost & Freight)

Vendor meets obligation when goods go on board ship in port of loading. Vendor is
responsible for all export costs, Customs Clearance, freight and necessary costs for
goods to reach agreed destination, not including insurance.

Off loading in port of destination is the buyer’s responsibility.

ESCI | FOB (Free On Board) 19

CPT (Carriage Paid To)
Vendor pays for transports costs to place agreed with buyer, including expenses and
export permits/clearance except insurance.

In this case the transmission of risk takes place when goods are delivered to 1st mode
of transport.

CIF (Cost Insurance & Freight)

Vendor meets obligation when merchandise is placed on board, in the agreed port of
loading. Vendor must pay all freight costs, insurance and export charges, customs
clearance and all costs incurred for goods to reach agreed port. Vendor only obliged to
take minimal insurance in favor of the buyer until the agreed port.

Risk is transferred from vendor to buyer when the goods arrive on deck; however,
transport risk is covered by the insurance taken out by the vendor.

ESCI | CPT (Carriage Paid To) 20

CIP (Carriage & Insurance Paid)
Vendor pays for transports costs to place agreed with buyer, including expenses and
export permits/clearance and an Insurance of minimum cover.

In this case the transmission of risk takes place when goods are delivered to 1st mode
of transport.

DDP (Delivery Duties Paid)

Vendor fulfills his duty to the buyer when goods are made available to him free from
all costs; loading, export/import duties, at the agreed delivery point.

Only cost not included is unloading in final delivery point.

Additionally vendor must cover all costs and risks including taxes in the importing
country.

ESCI | CIP (Carriage & Insurance Paid) 21

 General

CFR/CIF

DDP
EXW FAS

FOB
 Terminal>DAT
 Place agreed> DAP

Activity (Cost plus pricing example)

Carriage to wharf= 1,5% u.cost

Custom clearance= 0,15% u.cost
Labour for transport= 1% u.cost
AWB/BOL= 1% FOB
Transport Contingency= 2% FOB
Marine Insurance= 0,5% FOB
Import duty= 15% CIF Calculate:
Custom clearance charge= 0,5% u.cost
FOB Barcelona
Delivery Charge= 1,5$
CPT Bangkok Airport
EXW=150
CIF Port Bangkok
Air freight= 5$/Kg
DDP Customer’s store in
Sea Freight 165$/Tonne
Bangkok
3 boxes (10 units)
60x80x80
22Kg each
EXW=150

ESCI | General 22
Carriage to wharf= 1,5% u.cost
Custom clearance= 0,15% u.cost
Labour for transport= 1% u.cost
2,65%

FOB Barcelona= 153,97$

AWB/BOL= 1% FOB
Transport Contingency= 2% FOB
Marine Insurance= 0,5% FOB
3,5%

SHIP AIR

3 boxes  10 goods x box (30)

CIF Port Bangkok = 165,09$

CPT Bangkok Airport = 191,36$

Import duty= 15% CIF

Custom clearance charge= 0,5% u.cost
Delivery Charge= 1,5$

DDP Bangkok = 192,10$

ESCI | 23
 UNIT 5: International Modes of Payment

Cash in Letter of Documentary Open

advance Credit Collection Account

-RISK (for the exporter) +RISK

 Cash in Advance
 Letter of Credit: When the bank guarantees the payment as it will pay you in
case of the buyer doesn’t do it. There are two kinds of letter of credits:
o Confirmed: Both banks guarantees the payment (Seller’s Bank &
Buyer’s Bank)
o Advised: Only the buyer’s bank guarantees the payment.
 Documentary Collection: The exporter uses his/her bank to obtain payment
or a commitment to pay from the importer. The documents evidencing the
shipment of goods are sent by the exporter through their bank to the
importer's bank so that the importer's bank can collect the payment or obtain
the commitment to pay at some future date. It is important to note that in
documentary collection transactions both banks are acting as agents for the
exporter. There are two types:
o Against Payment
o Against Acceptance (has access to the good before the payment)
 Open Account

Against Payment

1. Send Goods

5. Receive $$$

2.Documents 4. Exchange
to the bank payment/Documents

3. Send documents

ESCI | Against Payment 24

Against Acceptance
It’s the same as against payment but with the documents also is sent the Time Draft, it
estipulate the period of payment for the buyer but he can collect the goods in the port
and he will pay at the end of the period.

To get the documentation the buyer must sign an acceptance document of the Time
Draft.

Letter of Credit

ESCI | Against Acceptance 25

ESCI | Letter of Credit 26