Chapter 6- Incoterms

The Incoterms rules or International Commercial Terms are a series of pre-defined commercial terms published
by the International Chamber of Commerce (ICC) that are widely used in International commercial transactions
or procurement processes. A series of three-letter trade terms related to common contractual sales practices,
the Incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the
transportation and delivery of good
General Transport
EXW Ex Works (named place of delivery).
The seller makes the goods available at their premises. Maximum obligation on buyer Place the goods at the
disposal of the buyer, and providing assistance in necessary licenses rather than the seller. EXW means that a
buyer incurs the risks for bringing the goods to their final destination. Easiest of incoterms for exporter not the
importer.
EXW Loaded (Ex-works Loaded)
Exporter and importer agree that the expense and responsibility of loading the goods should fall on the
exporter. Variant of incoterm, completed by including to the invoice
FCA - Free Carrier (named place of delivery)
The seller to deliver goods to a named airport, terminal, or other place where the carrier operates e.g.
FREMANTLE. Costs for transportation and risk of loss transfer to the buyer after delivery to the carrier, delivery
takes place when goods are loaded onto carrier if Incoterm refers to exporters plant, or the premises. Transfer
of responsibility involves the receipt given to carrier by exporter
Exporter responsible for placing product on carrier, importer responsible for arranging Contract of Carriage,
and communicating to who the carrier is.
Container descriptions are as follows; Full Containers Load (FCLs) only goods in container or Less-than-
container-loads (LCL) your shipment will share container space with others.
CPT Carriage Paid To (named place of destination)
Same as CFR and is used for all kind of shipments. Delivery takes place where the exporter delivers the goods to
carrier. Exporter is responsible for packaging, transporting to port, loading onto ship, prepayment of carrier.
Clearing of goods in country (pay for inspections) and assisting in the import country. Importer is responsible for
goods from point of departure, customs clearance in country, inspection paid by them.
CIP Carriage and Insurance Paid to (named place of destination)
The containerized transport/multimodal equivalent of CIF. Exporter pays for carriage and insurance to the
named destination point, but risk passes when the goods are handed over to the first carrier. CIP is used for
intermodal deliveries & CIF is used for Sea. Exporter is responsible for packaging, transporting to port, loading
onto ship, prepayment of carrier and marine cargo insurance at 110% of goods value. Clearing of goods in
country (pay for inspections) and assisting in the import country .Importer is responsible for goods from point of
departure, customs clearance in country, inspection paid by them.
DAF Delivered at Frontier (named place of delivery) is followed by a named place,
This term can be used when the goods are transported by rail and road. The passing of risk occurs at the border
city named in incoterm, no specific document; some carriers use a through document of transport. Exporter is
responsible for packaging, transporting them to border city. Clearing of goods in country (pay for inspections)
and assisting in the import country .Importer is responsible for goods from border city, customs clearance in
country, inspection paid by them.
DDU Delivered Duty Unpaid (named place of destination)
Designed for any means of transportation, but not to port. Exporter is willing to perform most tasks but not
customs clearance and duty payment. Exporter is responsible for packaging, transporting them to final
destination city. Clearing of goods in country (pay for inspections) and assisting in the import country .Importer
is responsible for unloading goods, customs clearance in country, inspection paid by them.
DDP Delivered Duty Paid (named place of destination)
Exporter covers all logistics costs, importer just has to unload the consignment, sometime duty is levied on
imported goods, no specific document is used but bill of lading at time of delivery is customarily provided
Sea and Inland Waterway Transport
FAS Free Alongside Ship (named port of shipment)
Term designed for ocean transportation. Exporter has responsibility to bring goods to port alongside specified
ship by importer, also responsible for clearing goods for export. Exporter responsible for packaging of goods,
transport to port, Delivery usually occurs when goods is alongside the ship. This means that the buyer has to
bear all costs and risks of loss of or damage to the goods from that moment. The FAS term requires the seller to
clear the goods for export, which is a reversal from previous Incoterms versions that required the buyer to
arrange for export clearance. However, if the parties wish the buyer to clear the goods for export, this should be
made clear by adding explicit wording to this effect in the contract of sale
FOB Free on Board (named port of shipment)
Located in the exporting country. Old term of trade and reflects the billing practice of some ports which charge
separately for the loading, stowing and securing of merchandise. FOB POINT is where responsibility shifts from
an exporter to an importer.
It means the seller pays for transportation of goods to the port of shipment, loading cost. The buyer pays cost of
marine freight transportation, insurance, unloading and transportation cost from the arrival port to destination.
The passing of risk occurs when the goods are in buyer account. The buyer arranges for the vessel and the
shipper has to load the goods and the named vessel at the named port of shipment with the dates stipulated in
the contract of sale as informed by the buyer
The seller must advance government tax in the country of origin as off commitment to load the goods on board
a vessel designated by the buyer. Cost and risk are divided when the goods are actually on board of the vessel.
The seller must clear the goods for export.
CFR Cost and Freight (named port of destination)
Exporter is responsible for packaging, must pay the costs and freight to bring the goods to the port of
destination, clearing the goods and assisting importers customers. However, risk is transferred to the buyer
once the goods are loaded on the vessel, Insurance for the goods is NOT included and importer must pay for all
inspections required by import authorities.
CFR Landed- exporter pays costs of unloading the merchandise in the importing port
CFR Undischarged- the importer pays the costs of unloading the merchandise in the importing port

CIF Cost, Insurance and Freight (named port of destination)
Exactly the same as CFR except that the seller must in addition procure and pay for the insurance. Mandate is
for min coverage. Point of and proof of delivery required.
Exporter is responsible for packaging, transporting to port, loading onto ship, prepayment of carrier and marine
cargo insurance at 110% of goods value. Clearing of goods in country (pay for inspections) and assisting in the
import country
Importer is responsible for goods from point of departure, customs clearance in country, inspection paid by
them.
DES Delivered Ex Ship
Specifically for ocean, mostly bulk shipments where parties wish importer to pay for unloading of the ship.
Delivery takes place at the port of destination but no specific documentation reqd. Exporter is responsible for
packaging, transporting to port, Clearing of goods in country (pay for inspections) and assisting in the import
country
Importer is responsible for goods from point of departure, customs clearance in country, inspection paid by
them, unloading the ship and paying transport cost
DEQ Delivered Ex Quay (named port of delivery)
Specifically for ocean, mostly bulk shipments where parties wish exporter to pay for unloading of the ship,
exporter is responsible for goods until loaded on the ship am received by importer at port of destination.
Exporter is responsible for packaging, transporting to port, unloading the ship and paying transport cost,
Clearing of goods in country (pay for inspections) and assisting in the import country
Importer is responsible for goods from point of departure, customs clearance in country, inspection paid by
them.
Incoterms as Marketing Tool
A strategic advantage can be gained by an exporter willing to facilitate the sale of its products by assisting a
novice importer in the handling of a shipment.
On the other hand, an experienced importer may be intent on performing all or most of the tasks involved in the
shipment.
Most exporters would gain by being flexible, offering a quote where they list several possible Incoterms:

CONTRACT OF CARRIAGE is a contract between a carrier of goods or passengers and the consignor, consignee
or passenger. Contracts of carriage typically define the rights, duties and liabilities of parties to the contract,
addressing topics such as acts of God and including clauses such as force majeure. Among common carriers,
they are usually evidenced by standard terms and conditions printed on the reverse of a ticket or carriage
document.
ELECTRONIC DATA INTERCHANGE (EDI) is an electronic communication system that provides standards for
exchanging data via any electronic means. By adhering to the same standard, two different companies, even in
two different countries, can electronically exchange documents (such as purchase orders, invoices, shipping
notices, and many others).
'OCEAN BILL OF LADING is a document required for the transportation of goods overseas. An ocean bill of
lading serves as both the carrier's receipt to the shipper and as a collection document. The document specifies
the details of the goods being transported, such as quantity, type and destination.
BILL OF LADING (sometimes abbreviated as B/L or BoL) is a document issued by a carrier which details a
shipment of merchandise and gives title of that shipment to a specified party.[1] Bills of lading are one of three
important documents used in international trade to help guarantee that exporters receive payment and
importers receive merchandise
DOCUMENTS AGAINST PAYMENT or D/P. It can give the documents to the importer in exchange for payment.
DOCUMENTS AGAINST ACCEPTANCE or D/A. It can give the documents to the importer in exchange for a
signature on a draft.

Chapter 14 - Packaging for Export,
Primary Packaging
Is consumer packaging or what the consumer sees. Marketing function of the firm, promotional efforts
Secondary Packaging
Groups several consumer goods into one unit- Two alternatives
1) Cardboard Box or Corrugated Paperboard Box
a. Thickness
b. Types of flutes
c. Paper sandwiching
d. Layers
e. Paperboard available and used, single, double or triple wall thickness

2) Plastic Wrap over several units of primary packaging, consolidated and protected from water
a. Shrink Wrap (heat shrunk)
b. Stretch Wrap
c. Both above vary in thickness (shrink generally thicker so resistant to multiple handlings)
Tertiary Packaging
Transport packaging includes all the additional protection given to goods to ensure safe, efficient, sound
condition at low cost. Packaging around secondary or sole packaging for protection during shipment
1
st
Function: Correct Packaging protection of goods from hazards by ocean and air. Direct cost implications its an
area where money value is necessity. Exporter key interests to ensure goods are undamaged at destination
2
nd
Function: Facilitate handling of goods whilst in transit, well-designed packaging, shipping line, transport
companies to handle without difficulties or inappropriate handling methods
3
rd
Function: Customer Service strategy of the firm. Goods in sellable/usable condtions yet also efficient to
unpack so less time/money being spent to use or sell product
3 objectives of proper tertiary packaging
1. Protect the goods in transit from mechanical damage: breakage, crushes, nicks, and dents (these perils
represent roughly 43 percent of all claims made by shippers to their insurance companies).
2. Protect the goods from water damage: sea water, rain, floods, and container sweat (15 percent of
claims made).
3. Protect the goods from theft and pilferage (21 percent of claims made)
4. Provide good customer service to recipient (smarter packaging, increasing environmental practices)

Ocean Cargo
Choice of Container
Determining correct type, exporter should inspect the container- goods wont be unitized on pallets
Container free from possible structural damage- preventative of collapse
Containers are designed to withstand 8 other containers on top
Containers inside should have no light present inside (leakage), wooden floor and side, no odours and
allow securing

Palletization (unitized)
Assemble in a single larger unit, manipulated and moves efficiently
Placing on pallets. One more layer of protection. Shrink wrapped protects them from water
Prevents primary from being crushes, secondary may be sufficient as long as corners are ok
Blocking Materials
Fill out space as much as possible to avoid cargo shifting- but not really realistic
Dunnage-packing material designed to prevent cargo from moving
Secure goods to container- and inserting spacers (like old pallets)
Loading the Container
Heavier ones should always be on the bottom, lower to gravity and centre of container. Loaded in
symmetrical fashion and blocking material placed between goods
LCL Ocean Cargo
Should aways be better protected. Unitization mandatory and shrink wrapped to protect from water
damage
Handling instructions always listed and container checked as per above
Break Bulk Cargo
Crates and Boxes- Should be a size that accommodates good, solidly built and reinforced. Devices affixed onto
container to record handling of products . Directly placed in hold of ship
Shipping Bag
1. Multi-wall shipping Bag
a. Holds 25kg used for chemicals, plastics, other materials unaffected by water and unlikely to be
stolen. Sensitive to handling hence palletizing and shrink-wrapping
2. Flexible intermediate bulk container
a. Constructed of woven polumer fibres. Can weigh up to 1tonne, transporting granular cargo,
plastics, grains and chemicals
b.
Drums
1. Metallic/Steel
a. Wet or Dry Cargo. Withstand good abuse. Water resistant and pilferage
b. Disadvantage is their cost and weight
2. Polymer Drums
a. Able to carry liquid/wet cargo less resistant to handling
3. Fiber Drums
a. Only for dry cargo, usually lined with polymer bag
b. Slightly more water resistant than bags and pilferage
c. Often damaged due to handling like steel which they arent built for. Also mechanical damge
International Plant Protection Convention (IPPC)
Mandates that wood used for packaging/dunnage be treated with chemicals to prevent insect
infestations
IPPC identifies which country was treated with first 2 letters as well as what it was treated with
Markings
International pictorials, translations, metric units, dimensions, consignee name, shipping tape and use of
codes
Air Transport
Less hazardous, secondary packaging is not sufficient protect goods and organisation markings tempt
theft
Packaging
Tertiary in nature is the most practical and efficient. Manual handling is poor hence additional layer of
corrugated paperboard and shrink-wrapped
Fragile Cargoes, box in a box. Shipping is charged at volume weight. Humidity hence material used to
absorb.
Markings
International pictorials, translations, metric units, dimensions, consignee name, shipping tape and use of
codes
Security
Shouldnt bear name of shipper, FCL and use seals
Hazardous Cargos
International Maritime Organization (IMO) puiblish IMDG every 2 yrs
-Explains packaging, labelling, handling and emergency responses (Mostly dangerous goods eg.
Flammable, explosive or toxic)
International Air Transport Association (IATA)
- The IATA DGR is the trusted source to help you prepare and document dangerous shipments.
Domestic regulations in every country
Refrigerated Goods
Travel Alone- Particular care and specialised packaging services, very special handling
Need for circulation and dunange- Placed in a reefer
Fresh produce needs to be kept at specific humidity levels
Domestic Retail Packaging
Legal requirements; different countries, multiple metric units. Packaging sizes
Storage and Transportation of Environment- Environmental factors, high humidity, temperature that
influence design and material used in primary packaging
Goodwill that it generates, importers shipments arrive safely dont have to challenge invoices- Creates a
good relationship






Chapter 7 Terms of Payments
CHARACTERISTICS OF INTERNATIONAL PAYMENTS
BECAUSE of the below issues a climate of mistrust is created
Credit Information
Difficult to acquire information on a person from a foreign nation. Although information may be
recorded not always readibly obtainable
Lack of Personal Contact
Due to geographical reasons, communication and transactions is done in impersonal fashion. Making it
difficult to know someone and evaluate character of importer greater risk
Difficult and Expensive Collections
If customer fails to pay it becomes difficult, time consuming and expensive to collect on past due
accounts
Debt collectors (services) can be hired, could use unsavoury techiques hence tainting image e.g. Citibank
India
No easy legal recourse
In international trade not many governing (laws) No single court has jurisprucidence over an
international trade dispute
Higher litigation costs
If legal proceedings required they are more expensive and complicated. And improbability of a swift
decision

RISKS IN INTERNATIONAL TRADE
Risk
Non-payment is probability of not getting paid or paid late, dictates terms chosen by exporter
1. COUNTRY RISK
a. primarily political and economical affect the risk that a country represents.
b. It includes the possibility of not being paid because a customers country does not have the
foreign currency to pay the debt, or the customer is not allowed to pay.
c. Political unrest, chances of a strike, and variations in interest and exchange rates should also be
taken into account
2. COMMERCIAL RISK
a. An individual firm may not be able (or willing) to pay for a number of reasons. It is difficult to
find reliable credit information on international firms.
Exposure
The risk on non-payment or he consequence of a loss to a particular firm
e.g. A small firm has more exposure in a $50,000 transaction than a large firm
CASH IN ADVANCE no trust
1. Cash in Advance
a. The exporter requests that the customer provide payment in advance, before shipment of the
goods can take place.
b. This method is totally risk free to the exporter no collections worries, no foreign exchange
fluctuations exposure, no cash-flow problem, and only nominal fees to pay to banks. Exporter
doesnt trust importer
c. The risk is transferred to the importer of receiving product requested, quantity and time, as well
as customs provided all documentation.
2. Applicability
a. Recommended for doing business in very few countries; those in which fraud is rampant, where
there is political instability, where the currency is non-convertible or where there is the
possibility of foreign exchange freezes. E.g. Soviet Union
b. Not recommended for business conducted in developed countries and in countries in which
there is some level of sophistication in international business. Insisting this payment will create
resentment
OPEN ACCOUNT- expression of trust
1. Open Account
a. The exporter conducts international business in a manner similar to the way it conducts
business domestically.
b. The exporter sends an invoice to the customer and expects the customer to pay it promptly (or
within a certain pre-arranged period).
c. This method presents many risks for the exporter.
2. Applicability
a. This method should be used with well-established customers or with customers the exporter
expects to have a long term relationship.
b. The customers credit should be checked before this method is used.
c. Necessary in some markets e.g EU 80% of their customer outside EU
FACTORING- with/without recourse
Most frequently in domestic. Uses an intermediary to finance a receivable
International scale importer wants credit terms beyond what exporter is comfortable, therefore using
factoring to extend credits





LETTER OF CREDIT- documentary credit
1. Letter of Credit
a. A letter of credit is a document in which the importers bank essentially promises to pay the
exporter if the importer does not pay. The credit worthiness of the bank is substituted for that
of the importer, and the exporter is protected.
b. Letters of credit are not paid until the exporter supplies the importer with a specified set of
documents, agreed in advance. The importer is therefore also protected.
c. Letters of Credit are frequently used in international transactions, especially in those cases in
which the exporter has no pre-existing business relationship with the importer, or when the
importer is located in a country that is considered to be risky.
d. They are also used when the importer is risk averse.
e. It is important to realize that letters of credit are documentary; the bank is only obligated to
pay upon presentation of certain documents by the importer.

2. Letter of Credit- Issuance
a. STEP 1 The exporter and the importer agree to conduct business on a letter of credit basis. The
exporter sends a pro forma invoice to the importer.
b. STEP 2 The importer asks his bank, called the issuing bank, to provide him a letter of credit,
naming the exporter as the beneficiary.
c. STEP 3 The importers bank sends the letter of credit to the exporters bank, called the advising
bank.
d. STEP 4 The exporters bank reviews (advises) the letter of credit, making sure that it is
conform to the terms to which the exporter agreed.
e. STEP 5 The exporter ships the goods to the importer. By doing so, it collects some documents
from the carrier (which documents depend on the Incoterm chosen), and sends all these
documents (including invoice and so on) to the advising bank.
f. STEP 6The advising bank checks the documents against the letter of credit, and then notifies the
importers bank that all documents are in order. The exporters bank then sends the documents
to the issuing bank.
g. STEP 7 The issuing bank sends the documents to the importer
h. STEP 8 After receiving the documents, the importer pays the importers bank.
i. STEP 9The importers bank transfers the funds to the exporters bank.
j. STEP 10 The exporters bank pays the exporter.


3. Letter of Credit- Shipment
a. When the advising bank checks the documents against the letter of credit, and notices that
there are differences (called discrepancies) between the documents submitted by the exporter
and the documents requested by the letter of credit, it asks the issuing bank to amend the letter
of credit.
b. It is only after the letter of credit has been amended (with the agreement of all parties) that the
advising bank forwards the documents to the issuing bank.
c. About 50 percent of all letters of credit transactions necessitate an amendment





4. Letter of Credit- Other Issues
a. On occasion, the exporters bank does not have the ability (or willingness) to advise a letter of
credit issued by a bank with which the exporters bank is not familiar. In that case, the
exporters bank asks an additional bank to advise the letter of credit.
b. In those cases, the exporters bank and the advising bank are two separate entities.
c. On occasion, there is a bank in the importers country with which the exporters bank has an
established relationship. Such a bank is called a correspondent bank.
d. It is also possible that there is a bank in the exporters country with which the importers bank
has a prior relationship. This is the correspondent bank for the importers bank.
e. It is therefore possible to have as many as two correspondent banks involved in a letter of credit
transaction, one for the exporters bank, and one for the importers bank.
f. On occasion, the exporter may be unsure about the credit worthiness of the bank that issued
the letter of credit.
g. It can then ask another bank (often the advising bank) to confirm the letter of credit; should the
issuing bank renege on the payment, the confirming bank will pay the exporter.
h. Although routinely used by some exporters, confirmed letters of credit are a reflection of an
excessively cautious mindset. Almost no letter of credit ever goes unpaid.

5. Documentary Collection
a. A process by which an exporter asks a bank located in the importing country to safeguard its
interests by not releasing the documents until the importer satisfies certain requirements.
b. The exporter gives the foreign bank very specific directions on the way it wants the transaction
handled, by supplying the foreign bank with a letter of instruction.
c. Documentary collection is less cumbersome and cheaper than a letter of credit. The exporter
keeps control of the documents (and therefore title) until the importer accepts the draft or
makes payment.
d. Once it has received the documents sent by the exporter, the presenting bank follows the letter
of instruction given by the exporter.
i. It can give the documents to the importer in exchange for payment. This type of
transaction is called documents against payment or D/P.
ii. It can give the documents to the importer in exchange for a signature on a draft. This
type of transaction is called documents against acceptance or D/A.
e. A draft is a promissory note (also called a bill of exchange) with which the importer promises to
pay the exporter within a defined timeframe.

TYPES OF DRAFT- bill of exchange
Once the importer accepts the draft by signing it, the importer has to pay the exporter immediately. The
draft is payable at sight.
Promissory note signed by importer in presense of the presenting bank.
Legal document in the importing country as recognises a commercial debt owed to exporter
Easier to collect payment if importer decides not honour as becomes domestic issue

1. Sight Draft
a. Once the importer accepts the draft by signing it, the importer has to pay the exporter
immediately. The draft is payable at sight.
2. Time Draft
a. Once the importer accepts the draft by signing it, the importer has to pay the exporter a certain
number of days (30, 60, 90, or 180) after the date of acceptance.
b. Presenting banks should specifically be instructed to remit documents when draft is signed D/A
or against D/Pimporter will not take title to goods until after payment is made
3. Date Draft
a. Granting credit to the importer
b. Once the importer accepts the draft by signing it, the importer has to pay the exporter a certain
number of days (30, 60, 90, or 180) after the date of shipment for the goods.
c. Advantage of draft over date id that the exporter has control over the date at which shipment is
intitated
ACCEPTANCE
The exporter can specify in the letter of instruction whether it wants trade acceptance or bankers acceptance:
1. In requesting a trade acceptance (or traders acceptance), the exporter expects the importer to accept
(sign) the draft in a reasonable amount of time after being notified that the presenting bank has the
documents in its possession.
2. In a bankers acceptance, the exporter asks the presenting bank to accept the draft on behalf of the
importer.
3. A presenting bank will only agree to a bankers acceptance if it can be sure that the importer will honor
the banks commitment. It will therefore only sign if it can aval the importers commitment.
FORFAITING
An exporter can sell the draft it collected from the importer to a forfaiting firm who buys them, without
recourse.
An exporter can also sell international receivables to a factoring house (also called a factor) who can
buy them with or without recourse.
If a receivable is bought without recourse, it means that the factor cannot turn to the exporter if the
importer does not pay.
If it is bought with recourse, the factor can hold the exporter responsible for the debt.
PROCUREMENT CARDS
Procurement cards make a lot of sense for small transactions, for which a letter of credit or a documentary
collection would be too cumbersome.
The exporter is essentially paid in advance, because it is paid almost immediately after the goods have
shipped.
The importer does not have to pay until the monthly procurement card bill is due, or about 30 days after
the purchase is made.
The non-payment issue is transferred to the bank that issued the card and granted the credit to the
importer. The exporter bears no risk of non-payment.
The currency exchange rate on the transaction is the best one can get; it is the inter-bank exchange rate
for very large transactions.



TRADE CARDS
TradeCard is a proprietary electronic system that combines payment and document handling:
TradeCard makes no payment to the exporter until TradeCard has received all the documents, and they
are in order.
The importer does not have to pay TradeCard for about 30 days.
The system is efficient: documents are transmitted electronically, and payments are made at the inter-
bank exchange rates.
TradeCard is gaining greater acceptance in the trade community because it is extremely inexpensive,
charging only $150 for a transaction up to $100,000, in contrast to 1 to 3 percent for letters of credit
and 2 to 3 percent for procurement cards.

BANK GUARENTEES
A bank guarantee is another instrument used in international trade, but is used in different situations: A bank
guarantee is usually requested to secure the performance of the seller (exporter), rather than to ensure that
payment will be made by the buyer (importer).
1. Guarantee payable on first demand
a. A bank guarantee in which the beneficiary does not have to provide any evidence that the terms
of the underlying contract between the contractor and the beneficiary have not been met; the
issuing bank has to pay at the first request of the beneficiary.
2. Guarantees based upon documents (cautions)
a. A bank guarantee made conditional upon presentation of certain documents rather than on
first demand. The beneficiary must present documents that demonstrate that the contractor is
not meeting its obligations.
STAND BY LETTERS OF CREDIT
Covers more than one shipment; it allows for multiple bills of lading, issued on different dates. The bank
is obligated to pay if the exporter presents the documents required by the letter of credit and the
importer has not paid.
Can also be used to secure the performance of the exporter. The bank that issues the letter of credit is
obligated to pay the importer, if the importer provides documents showing that the exporter has not
performed its obligations.