World trade is becoming more simple and easy.
Trading globally does not mean full 40’ standard high cube container volume transaction between two conglomerates. Until 2000s, trade had been a very high entry barrier. Massive budget was essential to win a contract from other party by arranging an international business trip or attending an international fair. However, as the internet develops, more information was shared globally. Upgrades on finance technology has helped to reduce the burden of traditional global payments such as telegraphic transfer by banks, letter of credit, or collection basis (D/A, D/P). The development of logistics services of e-commerce platforms has made small volume trade easier. Anyone can participate in global trade field without substantial expenses. To know more about the process please check the factors below.
Trade documents
The papers contains payment and shipping-related documents issued directly or indirectly by importers and exporters, mostly in the course of paying to exporters and delivering goods to importers under a trade contract.
Trade documents are mainly composed of Bill of Lading (B/L) when the products are about to be shipped, commercial Invoice (C/I), and packing list (P/L) from consignor’s side. purchase order (P/O) or letter of intention (LOI) is issued by buyers when ordering, proforma invoice (P/I) is written by exporters when presenting the quotation. Sometimes certificates of origin (C/O), material safety data sheet (MSDS), etc. are needed during the process of custom clearance and quarantine sanitation. When the products are delivered by air, then the shipping company issues airway bill (AWB).
Payment
There are various payment methods. The payment can be through bank using telegraphic transfer (T/T) service, or letter of credit (L/C) when exporters are not reliable enough to pass the goods safely door to door, and collection base such as document against payment or acceptance. As fintech improves, paying through online became one of the means for global trade. Paypal, Payoneer, Union Pay, etc are the example of finance technology.
Then what method should buyers choose to do the payment? Well it depends, if small orders, then I prefer Paypal, but if the order increase, then telegraphic transfer is another method. When selecting payment as Paypal, then 100% payment in advance is recommended since the commission fee is high (approximately 3%) and the orders are small. If order starts to get bigger, then I recommend doing telegraphic transfer. Buyers can pay 30%-50% of down payment for safety, and when the products are ready to be shipped, the rest can be paid afterwards. Remained balance payment can be decided depending on the situation such as an issue of check B/L or other materials that can prove the safety of shipment.
If the seller is extremely unreliable, then I recommend L/C usance or D/A. In cases of most frontier countries, advising bank can be untrustworthy as well, T/T after 00 days of invoice might be the safest method during international trade. Payment method should be negotiated carefully.
Shipment
Delivery of goods varies on gross weight and volume of the product.
1) Air: couriers such as Fedex (TNT), DHL, UPS, EMS
Shipping cost is calculated on the volume and gross weight. Larger amount the consignee import, more charges it would cost. It is recommended to small amount orders since the cost can be extremely high that buyers cannot afford and the delivery lead time can be shortened. (It takes about 3-5 days in most of the countries) Most of the packings are in cartons or boxes.
2) Ocean: logistic (shipping) companies
Shipping cost depends on cubic meter (CBM) and gross weight. CBM is the size of the volume (length x width x height). If it is over 1 CBM, then the shipping cost will be cheaper. Most the transaction goods are packed in pallet when buyer prefers less than container load (LCL), or full container load (FCL) when total amount is over 10 pallets. Lead time can take from 2 weeks to more than a month depending on the distance.
Incoterms 2020
The terms are used to specify who is in charge of the shipping cost and custom clearance fee. It also includes who is applying for the insurance during the shipment. There are total of 11 terms, three terms are used widely during global trade.
EXW (Air)
It refers to the sellers (or also regarded as shippers) handing over contracted product from their factory or warehouse to the buyer (or also considered as consignee). The seller has minimum obligation, on the other hand, buyer covers all costs and organizes transport. (Buyer takes responsibility from seller's factory) Convenient condition for exporters who are not familiar with trade transactions since buyers takes own risk and cost for carrying out all the trade process. EXW is proceeded when seller is in A's position and buyer is in B's position.
FOB (Ocean)
It is the most commonly used condition with CIF in practice. The divergence of risk and cost ends when the seller puts the goods on board of the buyer's nominated ship. Subsequent risks and additional costs are all up to the buyers. They have the right to sign the nomination of vessel (frieght forwarder) and the contract of carriage, and at the same time bear all costs such as freight and insurance to the destination (port).
CIF (Ocean)
Seller's Cost: CFR + Sea Insurance Fee
Under the CIF terms, if there is no agreement for insurance between each other. The seller must pay for insurance. When signing an insurance contract, the policyholder and the insured are the sellers, but after the transaction begins and the goods are shipped, the insured becomes the buyer. The rules dealing with the rights and obligations of the parties under the CIF are the Warsaw-Oxford Rule-Waluso-Oxford Rules. If CIF is changed to a combined transport method, it becomes CIP.
To see more Incoterms 2020, please check my blog.
Custom Clearance
It depends on the countries, since they have different laws and regulation. There are several reasons for it; to protect their manufacture industry or to screen the products’ safety when their nation use it. To say in common, cosmetics, foods, medical cares, electronics with electromagnetic waves are the subject to be examined during custom clearance. Small quantities of samples are not the problem to import or export. On the other hand, mass amounts of products may encounter problem when entering custom regulations. Even though the products are extremely safe in manufacturing countries, consignees still need to acquire foods and drugs administration (FDA).
To proceed FDA, exporters can help by sending ingredient list or MSDS. If importers want to reduce tariffs, then C/O is required. If buyers do not like to involve in complicated process, or manufacturing companies do not want to reveal their ingredient, there is method of shipping separately by dividing partially in different consecutive days. Using countries which has less custom regulation is another methods, such as Hongkong, Singapore, and Dubai.
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