CHAPTER THREE

IMPORT PROCEDURE
3.1 Reasons for Importing Commodity
Although strengthening domestic sources can be justified from its multi- effect on national socio-
economic aspects, it is difficult, and now a day’s seems even impossible to be a closed economy,
to become self- supporting in all requirements. Particularly the poor countries like ours are
highly dependent on international sources.

As the consequence of the only being poor, but also the globalization has further strengthened
the inter-dependence of countries of the world where the issue of self-sufficiency became almost
a far cry, particularly in the poor countries.

Importing should not, however, understand from the pressures it creates on balance of payments
only. It has to be recognized as an essential economic function since many of the technological
output and industrial products required in the production systems are missing in many of the
developing countries. Such imported materials would be fundamental in the endeavors made for
self- sufficiency including from the long – term perspective. Infect though the exchange may not
be in a balanced manner where developing countries who depend on only very few export items
of mostly raw nature, with less value added and mainly agricultural products are at a
disadvantaged position, the developed countries also are not self- sufficient. So the industrially
advanced countries also import items from other countries.

As stated above, importing is an essential economic function which cannot be completely

eliminated. In connection with this, Ricardo’s principle of comparative advantage states that it
would be beneficial for an economy to concentrate on the production of items in which it
specializes, export these items and import its requirement of other items. The principle, though
not totally practical, cannot be dismissed. International trade is undoubtedly governed by
political motives and, as such, a country cannot totally rely on another country for its
requirements of specific items. Accounting various parameters, countries have their respective
policies on imports. These days import policies are liberated in many countries as possessed the
import substitution policies that were common practices and procedures are very important to
industries which depend on import for their production. Policies consider, among others, the

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impact of imports on indigenous production and its influences on foreign exchange resources.
Generally, policies need to be neither liberalized nor restrictive, but with a balance between the
need for import and export production.

In relation to the classification of the purchasing process as to the possible source, the points
highlighted above suffice to indicate that foreign purchase is one important source. But the detail
aspects of the importing are looked in to the following chapter.

Most businesses go overseas to obtain lower manufacturing costs and protect themselves
from lower-priced imports being sold in their own country. It enables them to be competitive
with other companies doing business in their country.

Developing countries are highly dependent on technological and industrial product imports for
the progresses they endeavor especially in the industrial sector. Not only they have to import
machineries but the spare parts for their maintenances as well as other inputs for
their continuous production.

The reason for importing goods from abroad are many and actually vary with the specific
commodity needed, however, the underlying principal and governing reason for using foreign
vendor is that better value is perceived to be available from that source than from a domestic
vendor.

Importing goods and services of foreign origin can be highly challenging. Importing requires
additional efforts when compared with domestic sourcing, though may be with higher rewards.
One of the complexities of buying goods and services of foreign origin is the wide variability
among the production countries in characteristics such as quality, service, and dependability.
With this perception in mind, however, there are common reasons for importing/ purchasing
goods and services from international sources as highlighted below.

A. Quality

Although the issue of quality is argumentative, for there can be practices when foreign items are
purchased while their quality may not be better than domestic products, the key reason
forwarded by purchasing managers for international sourcing is to obtain the required level of

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quality. This is not to imply infect there are no higher quality products in the international market
than in domestic markets. Especially in developing countries like Ethiopia, there may not be
domestic sources for many industrial products and hence this may eventually lead to developing
lack of confidence one’s own products. Such understanding impedes their progresses and
domestic industrial development potential.

B. Price

It may seem surprising to see a foreign vendor producing and transport an item several miles at
the lower cost than domestic supplier (producer). But, it actually is observed in the international
trade through additional costs, import duties, and transportation expenses are required on
international sourcing. Several factors can influence the issue and be reasons for the specific
commodity, such as:

i. The labor costs in the producing country may be substantially lower than the costs
incurred domestically.
ii. The exchange rate may favor buying foreign
iii. The equipment and processes used by the foreign vendor may be more efficient than
those used by domestic vendors.
iv. The foreign vendor may be concentrating on certain products and pricing export products
at particularly attractive levels to gain volume.
C. Product and Process Technologies
International sources in some industrial products are more advanced technologically than
their domestic counter parts. So importing may be advisable than an attempt to produce an
item.

D. Unavailability of Items Domestically

Some items may only be available in foreign sources. In such situations there may not be
option than depending on foreign purchase.

E. Faster delivery and continuity of supply

Because of limited capacity of the domestic sources, foreign vendor can deliver faster than the
domestic supplier. The foreign supplier may even maintain an inventory of products. In related

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connection professional buyers want to develop and maintain an adequate supply base for
required materials. It may be necessary to develop international suppliers in order to have a
completive supply base.

F. Better Technical Service

If the foreign vendor has a well – organized distribution network in various areas; better
supply of parts, warranty service, and technical advice may be available than from
domestic suppliers.

G. Counter Trade

The term ―counter trade‖ refers to any transaction in which payment is made partially or fully
with goods instead of many. Counter trade links two normally unrelated transactions; the sale of
a product in to a foreign country and the sale of goods out of that country. Under such
arrangement countries require their domestic suppliers to purchase materials in their country as
part of the sales transactions, which commonly are called barter, offsets, or counter trade.

F. Tie – in with Foreign Subsidiaries

Firms can consciously be made to operate in foreign countries to support the local, foreign
economy by purchasing there and for export to own country.

3.2 Parties that Facilitate the Importing of Commodity

There are several participants in facilitation of international trade. An exporter or importer can
draw on a greater number of professional services-bankers, transporters, freight forwarders, and
insurers-for advice and assistance. The following are the parties that are among the active
participants of international trade.

I. Freight forwarders

For the smooth flow of customs clearing activities in any country customs Authority/House,
freight forwarders or Customs Clearing Agents (CCA) play critical roles. Freight forwarding is
the representation of a consignor or consignee locally or internationally in fulfilling customs,
port and other formalities for import and export cargo. The freight forwarder is a person who is

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licensed to carryout freight forwarding. In other words, freight forwarder refers to a service
provider working from his/her premises and taking care of a range of operations relating to
his/her clients’ goods: transshipment, handling, storage and various commercial and
administrative formalities. He/she is generally also a customs broker. The exporter or importer
must take appropriate policies in order to insure risks as per the terms of sales contract such as
CIF (cost insurance and freight).

A freight forwarder is an independent company that acts as your agent in moving the cargo from
its point of origin to its overseas destination. Freight forwarders provide a valuable service to
exporters. They coordinate the shipment of the goods from the factory, arrange to have the cargo
loaded onto the vessel, and process the documentation on the shipment. Especially when you’re
new to importing, having a freight forwarder you can trust helps ease the stress of sending your
first shipments overseas.

Freight forwarders also assist exporters by advising them about freight costs, port charges,
consular fees, cost of special documentation, and handling fees. They do this as part of their
price quote process for their prospective customers. So you don’t have to worry about getting
slammed with a charge you hadn’t expected. Every charge you pay should be spelled out ahead
of time, allowing you to budget and plan accordingly.

Freight forwarders can recommend proper packing so that the goods arrive in good condition,
and they can also arrange to have the cargo export packed at the point of shipment or coordinates
the packing of goods into a container. When the order is ready for shipment, the freight
forwarder coordinates the preparation of all shipping documents required by the foreign
government, as well as those required as part of the payment process. Freight forwarders also
arrange to have the goods delivered to the carrier in time for loading, prepare the bill of lading
and any special required documentation, and forward all documents directly to the customer or to
the paying bank, if applicable.

II. Custom Clearing Agent

Customs brokers act as agents for importers in the transaction of their Customs business.
Brokers are private individuals or firms licensed by the Customs Service to

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  Prepare and file the necessary Customs entries
 Arrange for the payment of duties
 Take steps to effect the release of the goods in Customs custody
 Represent the importer in Customs matters

In addition to assisting in the entry process, Customs brokers can also:

Help you decide which shipping routes are best, to get your goods in the shortest possible
time
Tell you which method of shipment is best for your goods and advise you on packing
requirements for those goods
Guide you on matters relating to international payments

When you’re choosing a Customs broker, consider the following questions:

 Do you have a specialized product line or type of import? You may want to find a
broker who either specializes or has a great deal of expertise in clearing your type of
products.
 How many ports will you be using for your imports? If you’re importing through a
large number of ports, you’ll want to hire a broker who has offices in those ports.
 How connected is the broker? You want to identify a broker who is fully
automated with full connectivity with various Web portals and cargo tracking sites.

Consider using a firm that participates in the Automated Broker Interface (ABI),
which is a system that permits transmission of data pertaining to merchandise being
imported into the United States.

 What is the broker’s general reputation? The best source of information about a
broker’s reputation comes from the broker’s own customers. Ask for references and be
sure to contact them.

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III. Commercial Banks

Owing to commercial banks’ vital role in export-import business activity, the exporter once
conclude the sales contract with his/her counterpart importer, arranges the delivery of documents
to be given to exporting bank. The exporter’s bank, in turn, scrutinizes the documents and gets
confirmation from its correspondent importer’s bank. If there are no discrepancies in the content
of documents, the exporter’s bank will effect payments to the exporter outright.

IV. Transportation and shipping company

In importing goods from abroad transportation company play a prominent role by moving goods
from point of origin or exporter country to the importers country. There are five modes of
transport involved in the international transportation of goods. These modes include Water/sea
transport, Railroad transport, Motor vehicle/Road transport, Air transport, and Pipelines
transport.

V. Insurance and Insurers Company

Insurance is legal contract that protects people from the financial costs that result from loss of
life, loss of health, lawsuits, or property damage. Insurance provides a means for individuals and
societies to cope with some of the risks faced in everyday life. People purchase contracts of
insurance, called policies, from a variety of insurance organizations.

Insurances facilitate in import/export trade by protecting the goods against an expected loss and
damages and their purpose to redistribute the loss and thereby eliminate risk. Insurance company
they issue a certificate of insurance to the insured goods to importer/exporter as an evidence to
claim against damage or loss of the goods and to get compensations. Insurance certificate — an
insurance certificate is issued by an insurance company or agent and is proof that the shipment is
insured to the extent stated (and no more) an insurance certificate gives evidence of risk
coverage for merchandise shipped. It is sent to the bank with other collection documents, and
normally is used only when required by Letter of Credit or Documentary Collection procedures.
There are many types of insurance policies available.

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It is compulsory to insure goods import from abroad .There are several type of insurances for
cargos to be transship from origin to a place or importers premises and depends up on the nature
costs ,and other environmental factor of the cargo and transportation mode. Marine insurance,
one of the oldest forms of insurance, covers damage to and losses of boats, ships, marine
workers, cargo, and passengers. Both businesses and individuals may purchase various forms of
marine insurance.

Insurance for commercial ships or boats at sea, docked in a port or on some inland waterways—
as well as their cargo or passengers—is known as ocean marine insurance. There are four main
types of ocean marine insurance: (1) hull insurance, (2) cargo insurance, (3) freight insurance,
and (4) marine liability.

Hull insurance covers damage to a ship itself. Cargo insurance covers losses to a ship’s physical
cargo. Freight insurance covers shippers against a loss of freight (payment for the transportation
of cargo). Marine liability covers damages to people and property from collisions and other
incidents.

3.3 Import Procedure: International Practices

Before beginning to import, and on each importation, the importer/buyer should consider a
number of preliminary matters that will make a great deal of difference in smooth and efficient
importing.

A. Products

Before actually importing, or whenever the importer is considering importing a new item, the
characteristics of that item should be reviewed. That is, is the product being imported as a raw
material or component to be used in the manufacturing process? Is it a finished product that is
going to be resold in the form imported or with some slight or significant modification? Is it a
replacement or spare part? Is the item sold singly or as a part of a set or system? Does the
product need to be modified, such as in size, weight, or color, to be suitable for the domestic
market? Often the appropriate methods of manufacturing and marketing, the appropriate
purchase and import documentation, the appropriate procedures for importation, and the

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treatment under law of a given country , including ,Customs law, will depend upon these
considerations (for example, whether or not the product may be imported duty-free or what the
correct classification and duty will be).

In addition to the general procedures and documents, some products are subject to special import
restrictions, permits, licenses, standards, and/or procedures. Therefore before actually engaged in
to import of a given product, you have to check the legal fulfillment and custom laws of given
the country.

B. Volume

What is the expected volume of imports of the product? Will this be an isolated purchase of a
small quantity or an ongoing series of transactions amounting to substantial quantities? Small
quantities may be imported under purchase orders and purchase order acceptance documentation.
Large quantities may require more formal international purchase agreements; more formal
methods of payment; special shipping, packing, and handling procedures; an appointment as the
U.S. sales agent and/or distributor from the foreign exporter; or commitments to perform after-
sales service.

C. Country Sourcing

One of the principal preliminary considerations will be to identify those countries that have the
products that the importer is seeking to purchase. If the importer seeks to import a raw material
or natural resource, the importer may be limited to purchasing from those countries where such
products are grown or mined. If the importer is looking for a manufactured product, it is likely
that the number of countries where such products are available for sale will be much greater;
however, identifying the low-cost countries based upon proximity to raw materials, labor costs of
manufacturing, current exchange rates with the United States, or transportation costs may require
considerable study and analysis.

In identifying the potential country, the importer should ascertain whether the products of that
country are eligible for duty-free or reduced duty treatment under the different nation’s trade

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agreement. Sourcing or importing products from hostile or internationally sanctioned country is
restricted.

D. Identification of Suppliers

Once the countries with the products available for supply have been identified, of course, the
importer still needs to identify a specific supplier. This will be just as important as identifying
which countries can provide the products at the lowest cost.

An unreliable supplier or one that has poor product quality control will certainly result in disaster
for the importer. The importer should spend a significant amount of time in evaluating the
potential supplier if there are going to be ongoing purchase transactions. The importer should
ascertain the business reputation and performance of the potential supplier. If possible, the
importer should inspect the plant and manufacturing facilities of the supplier. The importer
should determine whether there are other customers within its own country who might be able to
confirm the quality and supply reliability of the potential supplier.

E. Compliance with Foreign Law

Prior to importing from a foreign country or even agreeing to purchase from a supplier in a
foreign country, an importer should be aware of any foreign laws that might affect the purchase.
Information about foreign law can often be obtained from the supplier from whom the importer
intends to purchase. However, if the supplier is incorrect in the information that it gives to the
importer, the importer may have to pay dearly for having relied solely upon the advice of the
supplier. Incorrect information about foreign law may result in the prohibition of importation of
the supplier’s product, or it may mean that the importer cannot resell the product as profitably as
expected. Unfortunately, suppliers often overlook those things that may be of the greatest
concern to the importer. As a result, it may be necessary for the importer to confirm its supplier’s
advice with third parties, including attorneys, banks, or government agencies, to feel confident
that it properly understands the foreign law.

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F. Import Packing and Labeling

Prior to the exportation of the purchased products, the importer should ascertain the type of
packaging and labeling that the exporter will use. Different packaging is often required to
withstand the rigors of international transportation and to ensure that the importer is going to
receive the products in an undamaged condition.

Generally, container transportation will protect best against damage and pilferage. Certain types
of containers may be needed, such as ventilated, refrigerated, flat, open top, or high cube. If the
merchandise is a hazardous material, it cannot be transported unless it complies with the
International Maritime Dangerous Goods Code or the International Air Transportation
Association Dangerous Goods regulations depending on the mode of transport.

The packing, labeling, and invoicing requirements for such hazardous materials must be
communicated to the seller before shipment. Where the supplier sells FOB factory or on any
term or condition of sale other than delivered to the buyer, the buyer/importer will be taking the
risk of loss during the transportation.

G. Commercial Considerations

There are several commercial considerations that the importer must take into account.

1. Prevailing Market Price

In planning its import purchases, the importer must pay attention to the prevailing market price.
Obviously, if raw materials or components can be purchased in the domestic at a lower price
than they can be purchased abroad, depending upon the source country, importation will not be
economically feasible. In purchasing for resale, if the purchase price is not sufficiently low to
permit an adequate markup when the product is resold at the prevailing domestic market price,
the importation will not be economic.

2. Industry Standards

Merchandise manufactured abroad should comply with quality standards of given country. Prior
to agreeing to purchase foreign products, the importer should check any applicable industry

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standards to make sure that the products will comply. The importer may need to advise the
manufacturer of the appropriate specifications so that the products can be manufactured to meet
an importer country industry standard.

H. Terms of Purchase

Although there are ordinarily many terms and conditions that the buyer will include in its import
purchase agreements, the terms of purchase upon which seller and buyer must agree is that
relating to passage of title, risk of loss, price, and payment.

Although a buyer can purchase on different terms of sale from different sellers in accordance
with whatever terms are expressed in each seller’s quotation or purchase order acceptance, it is
ordinarily much better for the buyer to think about and formulate policies relating to its terms of
purchase in advance of placing its order. There are a number of considerations, the first of which
relates to the use of abbreviations. The international commercial (13 in number we will discuss
later in this chapter) developed by international chamber of commerce shows clearly the
responsibility and duties of buyer and seller to be used as contract terms of statement in
international trade.

I. Method of Transportation; Booking Transportation

Transportation may be made by air or by ship. Transportation can be arranged directly with air
carriers or steamship companies or through freight forwarders.

Air transportation is obviously much quicker, but is more expensive. Large shipments cannot be
shipped by air. In obtaining quotations from various carriers, it is important to record and
confirm any such quotations to avoid future increases and discrepancies. When checking with
transportation carriers, the name of the person making the quotation, the date, the rate, and the
appropriate tariff classification number used by the carrier should be recorded.

J. Import Financing

Some foreign governments offer financing assistance to for importers who are purchasing
merchandise from exporters in their countries. Some state government agencies even offer

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financing to purchase imported components if the finished products will be exported. If the
importer intends to utilize any import financing program, the program should be investigated
sufficiently in advance of commencing imports.

The necessary applications and documentation must be filed and approvals obtained prior to
importation of the merchandise.

k. Payment

An importer may be required to pay for merchandise it purchases by cash in advance or a letter
of credit, unless the exchange control regulations of the government of the buyer do not require it
or the buyer has sufficient bargaining leverage to purchase on more liberal terms. The buyer’s
methods of payment are discussed in Chapter 2. If a letter of credit is required, the seller will
often provide instructions to the importer), and the importer will have to make an application in
the nature of a credit application to a bank that offers letter of credit services.

For payment by documentary collection, a sample of the seller’s instructions to the bank is.
Sample sight or time drafts that the seller will present to the correspondent bank under a letter of
credit to obtain payment when the goods are shipped. A buyer using a letter of credit should
realize that the bank does not verify the quantity, the quality, or even the existence of the goods.
The bank will make payment as long as the seller presents documents that appear on their face to
be in compliance with the terms of the letter of credit. For this reason, a buyer may wish to
arrange for a pre-shipment inspection by an inspection service.

3.4 Contract Considerations for Importers

The purchase agreement is a formal contract governed by law. In general, a purchase agreement
is formed by agreement between the seller and the buyer and is the passing of title and ownership
to goods for a price. An agreement is a mutual manifestation of assent to the same terms.
Agreements are ordinarily reached by a process of offer and acceptance. This process of offer
and acceptance can proceed by the seller and the buyer preparing a purchase agreement
contained in a single document that is signed by both parties, by the exchange of documents such

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as purchase orders and purchase order acceptances, or by conduct, such as when the buyer offers
to purchase and the seller ships the goods.

From the view of clarity and reducing risks, preparation of a purchase agreement contained
in a single document is best. Both parties negotiate the agreement by exchanges of letters,
emails, or faxes or in person. Before proceeding with the performance of any part of the
transaction, both parties reach agreement and sign the same purchase agreement. This gives both
the seller and the buyer the best opportunity to understand the terms and conditions under which
the other intends to transact business, and to negotiate and resolve any differences or conflicts.
This type of purchase agreement is often used if the size of the transaction is large, if the seller is
concerned about payment or the buyer is concerned about manufacture and shipment, or if there
are particular risks involved, such as government regulations or exchange controls, or differences
in culture, language, or business customs that might create misunderstandings.

Common Forms for the Formation of Purchase Agreements

There are a number of forms that are customarily used in the formation of purchase agreements.
In order to save time (and discourage changes by the other party), both buyers and sellers often
purchase preprinted forms from commercial stationers or develop and preprint their own forms.
However, it is important to be familiar with the various forms.

A. price lists

Sometimes a seller will send a price list to a prospective buyer as its first communication.
Ordinarily, a buyer should not consider such lists as offers to sell that entitle the buyer to accept.
The buyer should ordinarily communicate with the seller (specifying that he is not making an
order), asking for a quotation and confirming that the terms of the price list are still current.

B. Requests for Quotations and Offers to Purchase

Sometimes the first document involved in the formation of a purchase agreement is a request
from the buyer to the seller for a quotation (RFQ). Ordinarily, such a request— whether it be
informal, in an email, facsimile, or letter, or formal, in a printed form—will ask for a price
quotation from the seller for a specific quantity and often a shipping date.

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When requesting a quotation, the buyer should be particularly careful to specify that its request is
not an offer to purchase and that such an offer will be made only by the buyer’s subsequent
purchase order. Another method is to expressly state that the buyer’s request is subject to or
incorporates all of the buyer’s standard terms and conditions of purchase.

C. Quotations

In response to a request for a quotation, the seller ordinarily prepares and forwards a quotation or
a pro forma invoice. In making quotations, the seller may use a printed form that may contain all
of its terms and conditions of sale on the front or back thereof. If this is the first communication
from the seller to the buyer, the buyer should be careful to ascertain whether the quotation
contains other terms and conditions of sale in addition to the price, quantity, and shipment date.

The quotation on the pro forma invoice form should include the following:

Names and addresses of the exporter (seller) and importer (buyer)

Any reference numbers.
Listing and description of products.
Itemized list of prices for each individual item being sold
Net and gross shipping weights (using metric units when appropriate)
Dimensions for all packages (total cubic volume, again using metric unit when
appropriate)
Any potential discounts
Destination delivery point
Terms of sale
Terms of payment
Shipping and insurance costs (if required)
Expiration date for the quotation
Total to be paid by the importer
Estimated shipping date
Currency of sale
Statement certifying that the information found on this pro forma invoice is true and
correct

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 Statement that provides the country of origin of the goods

D. Purchase Orders

The next document that may occur in a purchase transaction is a purchase order (PO) issued by
the buyer. Again, the purchase order may be informal, such as in an email, facsimile, or letter or
it may be on a printed form. This is the most important document for the buyer because it should
contain all of the additional terms and conditions that the buyer wants to be a part of the purchase
agreement when the purchase order is accepted by the seller. Before issuing a purchase order in
response to a quotation, the buyer should carefully calculate its costs. The buyer should
determine whether the quotation is ex- factory, FOB port, CIF, or delivered, since all expenses of
transportation from the point quoted will be expenses of the buyer, including customs duties. If
the buyer intends to resell the product in its imported form, it should determine whether the
quoted price plus additional expenses of importation will still permit the buyer to sell at the
prevailing market price with a reasonable profit or, if the product will be used as a raw material
or component, that its delivered cost will be lower than that from the domestic supplier If the
price is unacceptable, the buyer should make a counteroffer at a lower price before sending a
purchase order. Even though the buyer may expect that no purchase agreement will be formed
until she has sent a purchase order, if the seller has previously sent a quotation to the buyer, the
terms and conditions stated in the seller’s quotation may govern the purchase agreement.

E. Purchase Order Acknowledgments and Acceptances and Sales

Confirmations

When a purchase order is received, some sellers prepare a purchase order acknowledgment,
purchase order acceptance, or sales confirmation form. A purchase order acknowledgment may
state that the seller has received the purchase order from the buyer and is in the process of
evaluating it, such as checking on the credit of the buyer or determining the availability of raw
materials for manufacture, but that the seller has not yet accepted the purchase order and will
issue a purchase order acceptance at a later date.

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F. Commercial Invoices
Later, when manufacture is complete and the product is ready for shipment, ordinarily the seller
will prepare a commercial invoice, which is the formal statement for payment to be sent directly
to the buyer or submitted through banking channels for payment by the buyer.
Such invoices may also contain the detailed terms or conditions of sale on the front or back of
the form.

In additions to the above mentioned contract consideration; There are numerous terms and
conditions in an international purchase agreement that require special consideration different
from the usual terms and conditions in a domestic purchase agreement.

A. Quantity

To reach on the purchase agreement the buyer and the seller has clearly state the amount of the
items or goods and their measurements. The quantity term is even more important than the price.
One reason for forming a formal purchase agreement is for the buyer to obtain a lower price by
committing to purchase a large quantity, usually over a year or more. The seller may be willing
to grant a lower price in return for the ability to plan ahead, schedule production and inventory,
develop economies of scale, and reduce shipping and administrative costs.

B. Pricing

There are a number of considerations in formulating the buyer’s pricing policy for international
purchase agreements. A delivered price calculation sheet will identify all additional costs of
importing to make sure that the price of resale results in a net profit that is acceptable to the
buyer. Some of the constraints are laws regarding dumping, antitrust laws of a given country.

Another very important pricing area relates to rebates, discounts, allowances, and price
escalation clauses. Sometimes the buyer will ask for and the seller will be willing to grant some
form of rebate, discount, or allowance under certain circumstances, such as the purchase of large
quantities of merchandise.

Pricing should consider the currency fluctuations that occur between the countries of the seller
and the buyer. Currency fluctuation risk has to be taken in to account. Sometimes, when the term

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of the agreement is long, or when major currency fluctuations are anticipated, neither the seller
nor the buyer is comfortable in entirely assuming such risk. Consequently, they may agree to
some sharing of the risk, such as a 50/50 price adjustment due to any exchange fluctuations that
occur during the life of the agreement, or some other formula that attempts to protect both sides
against such fluctuations.

C. Terms of purchase or sales

In any sales agreement, you need to provide not only the price but also a corresponding term of
sale. Terms of sale are the conditions of sale that clarify who is responsible for what expenses, as
the goods move from the seller to the buyer. Terms of Sales used in import/export called
INCOTERMS (will discuss in detail in chapter two). These INCO terms are 13 in number and a
universal trade terminology developed by the International.

Chamber of Commerce (ICC). These terms were created to describe the responsibilities of the
exporter and importer in international trade and to resolve disputes among parties engaged in
international trade. Understanding and using these terms correctly are important, because any
misunderstanding may prevent you from living up to your contractual obligations and make you
accountable for shipping expenses that you had initially intended to avoid.

D. Methods of payment

In a domestic sales transaction, the buyer may be used to purchasing on open account, receiving
credit, or paying cash on delivery. In international purchases, it is more customary to utilize
certain methods of payment that are designed to give the overseas seller a greater level of
protection. The idea is that if the buyer fails to pay, it is much more difficult for a seller to
institute a lawsuit, attempt to attach the buyer’s assets, or otherwise obtain payment.

Any international transaction involves risk. You need to understand what those risks are and
what actions you can take to minimize them. The primary payments used in international
transactions are (we will discuss in detail in chapter two).

Cash in advance: This means that the exporter will receive his money in advance of making the
shipment.

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Letter of credit drawn at sight: This is a document issued by the importer’s bank guaranteeing
that the exporter will get paid, just as long as he presents required documents to the bank before
an expiration date.

Time letter of credit: This is the same as the letter of credit drawn at sight except that the
exporter will get the money a certain number of days after the documents have been presented
and accepted.

Bill of exchange (documentary collections): This is like buying something using cash on
delivery (COD) except the importer makes the payment when the required documents are
presented, instead of when the goods are received. There are two types of bills of exchange:

• Sight draft documents against payment: The importer pays when the documents are presented

• Sight draft documents against acceptance: The importer makes the payment a certain number
of days after he has accepted the documents.

Open account: With this method, no bank is involved in the transaction. The exporter sends the
documents to the importer and trusts that the importer will send him the money.

Consignment: The exporter ships the goods, and the importer only has to remit payment for
them after the goods have been sold and the importer gets paid from his customer.

3.5 Trade Terms in Foreign Purchasing

International terms of sale are contained in the Incoterms. The Incoterms are a set of terms that
define respective responsibilities and are published by the International Chamber of Commerce.
They are periodically reviewed and updated by delegates selected from many countries in order
to reflect current practice and changing technologies. The last revision was in the year 2000, and
the publication is referred to as Incoterms 2000. Although the International Chamber of
Commerce is not a governmental body, the terms are recognized worldwide as legally binding
upon the parties to an international transaction.

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3.5.1. Descriptions of International Commercial Terms (INCOTERMS)

The INCOTERMS are grouped in four categories, and 13 in number. The terms are
discussed and summarized below in Table 3.5.1.

Group Of The Acronym Of Description Of The Terms

Terms Incoterms
E-Terms EXW Ex Works (… named place)
F-Terms FCA Free Carrier (... named place)
FAS Free Alongside Ship (... named port of shipment)
FOB Free On Board (... named port of destination)
C-Terms CFR Cost and Freight (... named port of destination)
CIF Cost Insurance and Freight {... named port of destination)
CPT Carriage Paid To (... named place of destination)
CIP Carriage and Insurance Paid To (... named place of destination)
D-Terms DAF Delivered At Frontier (... named place)
DES Delivered Ex Ship (... named port of destination)
DDP Delivered Duty Paid (... named place of destination)
DDU Delivered Duty Unpaid (... named place of destination)
DEQ Delivered Ex Quay (... named port of destination)

Table 3.5.1: Trade Terms

3.5.2. Responsibilities of Foreign Purchaser (Importer) and Exporter

(Seller) in Specific INCOTERMS.

In this section we will see the responsibilities and duties of parties’ i.e exporter and importer
based on binding trade terms contracts.

1. EXW (Ex Works)

In this most basic transaction, the seller transfers all risk of loss and all responsibility for
expenses to the buyer at his loading dock. In an EX-Works transaction, goods are made available
for pickup at the seller’s factory or warehouse.

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Seller’s Obligation
Place the goods for disposal at his premises or another named place (i.e. works, factory,
warehouse, etc.).
Points of prime importance
Even after the delivery of the goods, seller still bear a considerable financial risk until full
payment has been made.
These conditions are disadvantageous for buyer. He bears a high risk and has to arrange
everything himself such as export, transportation, insurance etc.
Buyer’s Obligation
Take delivery of the goods as soon they have been made available at the seller's premises
or another named place (i.e. works factory, warehouse, etc.);
Bear all costs and risks involved with organizing the transport from that time on.
Points of prime importance
Risk of loss or damage to the goods is transferred to buyer as soon as they have been
placed at disposal at the seller's premises or other named place (i.e. works, factory,
warehouse, etc.);
The supplier is under no obligation to obtain marine insurance.

2. FOB-( Free on Board)

Officially, the Inco terms limit the use of FOB to carriage by water and define the point of title
transfer as occurring when the goods have passed over the ship’s rail. In other words, freight to a
vessel, loading aboard, and export clearance are the seller’s responsibility. Once the goods are
loaded, the risk of loss and costs of transport revert to the buyer.

Points of prime importance

Buyer may only be able to obtain restricted insurance from the port of shipment.
On the one hand, seller bears a considerable financial risk should no payment have been
made before the shipment; on the other hand, seller has no guarantee that the buyer has
obtained marine insurance.
The supplier has no obligation to obtain insurance for the maritime voye

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3. FCA (Free Carrier)
The seller hands over the goods, cleared for export, into the custody of the first carrier (named by
the buyer) at the named place. This term is suitable for all modes of transport, including carriage
by air, rail, road, and containerized / multi-modal transport.

4. FAS (Free Alongside Ship)

In this transaction, the seller must arrange for delivery and assume all risks up to the ocean
carrier at a port of origin .Freight costs up to the ship, risk of loss, and costs of clearance
are borne by the seller.

5. CFR (Cost and Freight)

CFR is a new term replacing ―CNF,‖ which itself replaced ―C&F.‖ The ―Cost‖ portion of CFR
refers to the merchandise. The ―Freight‖ refers to all the freight, including export clearance, up to
the foreign port of unloading. What is not included is cargo insurance from the port of loading.
Indeed, risks are shared in a CFR transaction. The seller must deliver over the ship’s rail, so any
loss up to that point is the seller’s responsibility. Once loaded, the risk transfers to the buyer.

6. CIF (Cost, Insurance and Freight)

A CIF transaction includes the costs of freight and the costs of insurance. The seller retains the
risk of loss up to the foreign port of unloading. The buyer responsible to bear risks from import
port to final destination place. CIF is only applicable for goods to be transported using ocean or
vessel transportation mode.

Points of prime importance

If the insurance has been agreed "CIF named port of destination", it is usually possible to
obtain only restricted coverage for the subsequent overland transport.
Seller only has to obtain minimal coverage for the goods during the maritime voyage.
Without a qualitative and quantitative examination of the goods at the port of arrival,
only restricted insurance can be obtained for the subsequent transport to the destination.

7. CPT (Carriage Paid To)

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This term is similar to CFR, but it can be used for any mode of transport including air cargo.
CPT means that the seller will pay all freight costs all the way up to the foreign port and that the
buyer assumes all risk of loss beyond the loading port.

Points of prime importance

Even after the delivery of the goods seller still bear a considerable financial risk until full
payment has been made and your customer has obtained marine insurance.
The supplier is under no obligation to take out marine insurance.
Damage which is not detected before the carrier takes delivery of the goods can no longer
be claimed for from the supplier.
Without a qualitative and quantitative examination of the goods at the time the carrier
takes delivery, only restricted coverage can be obtained for the subsequent transport.

8. CIP (Freight, Carriage and Insurance Paid to)

This term is similar to CIF except that it is primarily used in multimodal transactions where the
place of receipt and place of delivery may be different from the port of loading or place of
unloading.

Points of prime importance

For subsequent transportation from the named place of destination (if different from
the final place of destination) your client can only obtain restricted insurance.
Sellers carry the risk for loss or damage to the goods during shipment. However, the
seller has to obtain insurance from warehouse to warehouse.
Buyers have the option of agreeing the scope of insurance with the seller. If no such
agreement is made, seller is only obliged to obtain insurance coverage which
conforms to market standards.
You neither know the insurance company nor the exact scope of coverage.

9. DES (Delivered Ex Ship)

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In this type of transaction, the seller must pay all the costs and bear all the risk of transport up to
the foreign port of unloading, but not including the cost or risk of unloading the cargo from the
ship. In the case of large pieces of equipment or bulk cargoes, the costs of unloading can exceed
the cost of the main freight.

10. DEQ (Delivered Ex Quay)

This is the same as DES except that the term provides for the seller to pay the costs of unloading
the cargo from the vessel and the cost of import clearance.

11. DAF Delivered At Frontier

Here the seller’s responsibility is to deliver goods to a named frontier, which usually means a
border crossing point, and to clear the transaction for export. The buyer’s responsibility is to
arrange for the pickup of the goods after they are cleared for export, carry them across the
border, clear them for importation and, effect delivery.

Seller’s Obligation

Place the goods at the disposal of the buyer on the arriving means of transport not
unloaded at the named place of delivery at the frontier;
Bear all costs and the risk of loss or damage to the goods as far as the named place of
delivery at the frontier.

Points of prime importance

Even after delivery of the goods you still bear a considerable financial risk until full
payment has been made and your customer has obtained marine insurance.
 Your client may only be able to obtain minimum insurance coverage for the
subsequent transport.

Buyer’s Obligation

Take delivery of the goods on the arriving means of transport not unloaded at the named
place of delivery at the frontier and from that time bear all costs to the final destination.

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Points of prime importance

The supplier is under no obligation to take out marine insurance.

Damage which occurs before the goods reach the named place of delivery at the frontier,
but which is only detected at the named place of destination can no longer be claimed for
from the supplier.
Without a qualitative and quantitative examination of the goods at the
named place of delivery at the frontier, only restricted coverage can be obtained for
the subsequent transport.

12. DDP (Delivered Duty Paid)

This is a new term mainly used in intermodal transactions whereby the seller undertakes all the
risks and costs from origin to the buyer’s warehouse door, including export and import clearance
and import customs duties. Essentially, the seller pays everything in a DDP transaction and
passes all related costs in the merchandise price.

Seller’s Obligation

Place the goods at the disposal of the buyer on any arriving means of transport not
unloaded at the named place of destination;
Bear all costs and the risk of loss or damage to the goods as well as all costs incurred
through customs formalities, duties, taxes and other charges.

Points of prime importance

Even after delivery of the goods you still bear a considerable financial risk until full
payment has been made and your customer has obtained marine insurance.
Your client may only be able to obtain restricted coverage for the subsequent
transportation.
You may encounter insurmountable problems when attempting to clear customs in the
country of destination (e.g. missing import licenses which must be procured by the
buyer).

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Buyer’s Obligation

Take delivery of the goods on the arriving means of transport not unloaded at the named
place of destination and from that time bear all costs to the final destination.

Points of prime importance

The supplier is under no obligation to take out marine insurance.

Damage which occurs before the goods reach the named place of destination, but which
is only detected at the final destination can no longer be claimed for from the supplier.
Without a qualitative and quantitative examination of the goods at the named place of
destination, only restricted coverage can be obtained for the subsequent transport.

13. DDU (Delivered Duty Unpaid)

This is the same as DDP except that duty is not paid. Since the importer is generally better
informed on local customs, a DDU transaction makes a great deal of sense even when the buyer
does not want to deal with transportation and insurance issues.

Summary of Trade Terms

For a given term, "Yes" indicates that the seller has the responsibility to provide the service
included in the price. "No" indicates it is the buyer's responsibility. If insurance is not included in
the term (for example, CFR) then insurance for transport is the responsibility of the buyer or the
seller depending on who owns the cargo at time of transport. In the case of CFR terms, it would
be the buyer while in the case of DDU or DDP terms, it would be the seller.

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Terms Loa Expor Transpo Unloa Lan Tran Lan Unloa Transpor Insur Entry- Entry -
d to t duty rt to d ding s ding d onto t to ance Custom Duties
truc paym exporte from char port char trucks destinati s and
k ent r's port truck ges to ges from on clearan Taxes
at the at imp at the ce
origin origi ort imp import
's n's 's orter ers'
port port port 's port
port
EX no no no no no no no no no no no no
WORK
FCA yes yes yes no no no no no no no no no
FAS yes yes yes yes no no no no no no no no
FOB yes yes yes yes yes no no no no no no no
CFR yes yes yes yes yes yes no no no no no no
CIF yes yes yes yes yes yes no no no yes no no
CPT yes yes yes yes yes yes no no no no no no
CIP yes yes yes yes yes yes no no no yes no no
DAF yes yes yes yes yes yes no no no no no no
DES yes yes yes yes yes yes no no no yes no no
DEQ yes yes yes yes yes yes yes no no yes no no
DDU yes yes yes yes yes yes yes yes yes yes no no
DDP yes yes yes yes yes yes yes yes yes yes yes yes

Table 3.5.2; Summary of Trade Term Responsibility and Duties of the Party

3.6 Compulsory Documentation in Foreign Purchasing

In import /export the numbers and type of documents to be processed is depending on the
complexity of the transaction, nature of items and financial weight as well as the legal
requirements and documentations to cross boundary. Therefore the documents commonly
referred as a mandatory documents in international trade are discussed below.

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A. Bills of Lading

A bill of lading is a contract between the owner of the goods (normally the exporter) and the
carrier of the goods. There are two types of bills of lading:

1. A non-negotiable straight bill of lading: The straight bill of lading is issued by the exporter.
It pertains to the shipment of the cargo from the point of origin to the port of shipment. This
document serves as evidence that the shipping carrier has received the goods and will be
transporting them to the destination listed on the document.

2. A negotiable shipper’s order bill of lading: The negotiable shipper’s order bill of, which can
also be referred to as a marine or ocean bill of lading, is prepared by the freight forwarder and
issued by the steamship company. It covers ocean transportation. The importer needs this
document as proof of ownership to take possession of the goods. When we say that this is a
negotiable bill of lading, I mean that the goods being shipped can be bought, sold, or graded
while they’re in transit. The bill of lading is endorsed, just like a check that can be endorsed from
one party to another; a negotiable bill of lading can be endorsed from one party to another.

B. Air waybill

The air waybill is a bill of lading for cargo being shipped by air. It is a nonnegotiable document,
issued by the air carrier that specifies the terms under which the air carrier will be transporting
the goods to their destination.

C. Commercial Invoices

The commercial invoice serves as a bill for the goods from the importer to the exporter, and it
also serves as evidence of a transaction. Additionally, the importer uses the commercial invoice
to classify the merchandise, so that he can get the shipment cleared expeditiously through
Customs and make sure that all duties and taxes have been accurately assessed.

Commercial invoice itemizing the merchandise sold and the amount due for payment. There
must be one invoice for each separate shipment. These commercial invoices must contain very

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specific items of information, such as quantities, description, purchase price, country of origin,
assists, transportation charges, commissions, installation service, and financing charges.

D. Pro Forma Invoices

An abbreviated invoice sent at the beginning of a sale transaction, usually to enable the buyer to
obtain an import permit or a foreign exchange permit or both. The pro forma invoice gives a
close approximation of the weights and values of a shipment that is to be made.

E. Packing Lists

A document describing the contents of a shipment. It includes more detail than is contained in a
commercial invoice but does not contain prices or values. It is used for insurance claims as well
as by the foreign customs authorities when examining goods to verify proper customs entry.

F. Inspection Certificates

A document issued by an inspection company or other person independent of the seller and
buyer that has inspected the goods for quality and/or value. It may be required for payment under
the terms of the sales agreement or a letter of credit.

G. Certificate of Origin:

A document in which the exporter certifies the place of origin (manufacture) of the merchandise
being exported. Sometimes these certificates must be legalized by the consul of the country of
destination, but more often they may be legalized by a commercial organization, such as a
chamber of commerce, in the country of manufacture. Such information is needed primarily to
comply with tariff laws, which may extend more favorable treatment to products of certain
countries.

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