(Appeared in the November/December 1997 TMA Journal)
All Rights Reserved
Contrary to popular belief in the trade community, there are many different techniques that importers and exporters can use to reduce the costs they incur in international trade transactions. Employing such techniques increases the profitability of international trade, does not require any significant cash outlay and does not increase the risks encountered in international trade. This article examines specific cost-saving techniques that are available to importers and exporters and provides guidance on implementation. Only by implementing the techniques discussed in this article can importers and exporters be assured that their international trade transaction costs have reached the lowest possible level.
Select the most appropriate payment technique
There are essentially five different payment techniques that importers and exporters can use in their international trade transactions. These payment techniques include: open account, collection, advised letter of credit, confirmed letter of credit and cash in advance. The referenced payment techniques provide different levels of security to importers and exporters. In general, the greatest to lowest level of payment security for an importer runs as follows: open account, collection, advised letter of credit, confirmed letter of credit and cash in advance. For exporters, on the other hand, the greatest level of payment security is found in cash in advance followed by confirmed letter of credit and advised letter of credit, whereas the lowest level of payment security is found in open account followed by collection.
The choice of one payment technique over another should be based upon a case by case evaluation of diverse factors including: the financial strength of the buyer, the financial strength of the buyer. s bank, the economic stability of the buyer. s country of domicile, the political stability of the buyer. s country of domicile, the seller. s reputation for performance, market conditions and the amount of the trade transaction. The objective of conducting such an evaluation is to identify the risks inherent in an individual trade transaction and to select a payment method that is appropriate, given the presence of such risks. The level of payment security afforded by a particular payment technique that is selected for a specific trade transaction should be commensurate with the level of risk inherent in such transaction. Choosing a payment technique that provides payment security that is not commensurate with the level of risk in an international trade transaction generally adds unnecessary cost to the trade transaction. Ranking individual international payment techniques in terms of lowest cost to highest cost yields the following result:
open account cash in advance;
collection
advised letter of credit
confirmed letter of credit
The fact that a particular payment technique is selected for use in a specific trade transaction on one occasion, does not eliminate the need for future payment technique evaluations. Rather, importers and exporters should routinely reevaluate the payment techniques they have used in specific trade transactions, giving consideration to current facts and circumstances. Doing so insures that the payment method of choice is the payment method that is most appropriate for the transaction that is under consideration.
Reduce Bank Charges for the International Trade Payment Technique Selected
Banks develop standard rate schedules which establish standard fees for each of the five different international payment techniques discussed above. While the rate schedules developed by banks in one geographic area are often similar, they are generally not identical. Importers and exporters should take note of this discrepancy and use it to their advantage. Additionally, importers and exporters should realize that they can often achieve a reduction in a bank. s standard rate schedule by negotiating with their bank and by taking advantage of any price incentives offered by their bank. Banks typically offer their customers price incentives when a specific way of transacting banking business results in reduced operational costs for the banks. This occurs, for example, when a bank devises a short cut for executing a banking transaction as in the case of a direct collection or when a banking customer initiates a banking transaction electronically as in the case of electronic initiation of import letters of credit and export collections.
Shift Responsibility for Bank Charges
When not specifically provided for by the parties to a trade transaction, responsibility for bank charges arising from the payment method of choice default to the party located in the same country of domicile as the processing bank. Savvy importers and exporters aware of this default procedure often attempt to shift responsibility for bank charges away from themselves. This can be accomplished in a written agreement or in a party. s terms and conditions.
Understand the Ramifications of the Sales Term Quoted
Sales terms define the parties. respective responsibilities for costs in a sales transaction. There are different groupings of sales terms available to the parties. For international trade transactions, the most commonly used group of sales terms are the sales terms that have been developed by the International Chamber of Commerce (ICC) in Paris.
The ICC. s sales terms are referred to as the INCOTERMS. INCOTERMS are grouped into four general categories: departure terms, freight unpaid terms, freight paid terms and delivery terms. In a freight unpaid INCOTERM such as FOB (free on board), the buyer is responsible for payment of the main transportation of the goods purchased, whereas in a delivery INCOTERM such as DDP (delivery duty paid), the seller is responsible for payment of all transportation charges as well as all import duty charges. The difference between FOB (INCOTERMS) and DDP (INCOTERMS) in a sales quotation is therefore very significant from both the perspective of the buyer and the perspective of the seller. If the INCOTERM used in a sales quotation is wrongly applied or misinterpreted, excess money can be made andor excess costs can be incurred. It is very important, therefore, to understand the significance of each individual INCOTERM and to insure that the INCOTERM used in a sales quotation corresponds with the parties. understandings with regard to responsibility for transaction costs. The common reference for defining the INCOTERMS is the Guide to INCOTERMS published by the ICC and available through the ICC in New York City.
Obtain Appropriate Insurance for International Trade Transactions
Importers and exporters can obtain insurance for their international trade transactions on a case by case basis or on a general policy basis. Insurance obtained can vary from limited transportation risk coverage (general average loss) to full transportation risk coverage (all risk coverage) to full transaction risk coverage (all risk coverage plus strikes, riots and civil commotion coverage plus war risk coverage).
It is important for importers and exporters to obtain insurance that is appropriate for their specific international trade transactions. Importers and exporters should be careful not to obtain insurance that is excessive, considering the nature of their international trade transactions. Additionally, importers and exporters should make sure that the level and type of insurance they obtain correspond with the payment technique employed in their international trade transactions. For example, an exporter who is paid on a cash in advance basis has little need for transportation and transaction insurance, whereas an exporter who is paid on an open account basis has substantial need for transportation and transaction insurance. Likewise, an importer who pays on a cash in advance basis has significant need for transportation and transaction insurance, whereas an importer who pays on an open account basis has virtually no need for transportation and transaction insurance.
Manage the Logistics Costs for International Trade Transactions
The logistics costs for an international trade transaction involve transportation costs, insurance costs, broker and forwarder fees and other miscellaneous costs and fees. Importers and exporters generally receive an accounting of these costs and fees on their broker forwarder bills. These costs and fees should not be accepted as charged. Instead, importers and exporters should examine all costs and fees levied and question their broker forwarder with regard to costs and fees that are not readily explicable. Importers and exporters can conduct this examination process on their own or employ the services of an independent auditor to examine the costs and fees billed by the broker forwarder. Independent auditors typically charge a percentage or the excess costs and fees identified.
Minimize Costs of Importation
There are many opportunities available to importers for minimizing import costs. These opportunities are found at the front end of the import process, during the import process and upon the completion of the import process.
At the front end of the import process importers can minimize import costs by contracting with all relevant foreign exporters to insure that the foreign exporters comply with U.S. marking requirements. Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), requires that every article of foreign origin (or its container) imported into the U.S. must be marked to indicate the article. s country of origin. Failure to mark articles of foreign origin in this manner results in the assessment of a 10% penalty calculated against the final appraised value of the imported article. In addition to these general marking requirements, there are various government-agency-specific product marking requirements with which importers must also comply and under which importers. noncompliance is penalized.
During the import process importers can minimize their import costs by:
(a) using a continuous Customs. entry bond as opposed to a single Customs. entry bond, because continuous Customs. entry bonds are generally less costly than single Customs. entry bonds;
(b) insuring that their imports are entered under the appropriate harmonized number, because the use of an improper harmonized number can result in the imposition of import duties which are higher than those that would have applied, had the correct harmonized number been used;
(c) taking advantage of any available and relevant preferential duty programs, such as the Generalized System of Preferences (GSP), the North American Trade Agreement (NAFTA), the Caribbean Basin Initiative (CBI) and the Israeli Free Trade Agreement, because these agreements often result in a lower prescribed duty rate or a zero duty rate;
(d) taking advantage of the various American Goods Returned Programs on goods that are exported from the U.S. and later imported for repair or further manufacture, because these programs exempt the value of the American goods returned from duty imposition at the time of reentry into the U.S.; and
(e) taking advantage of available duty deferral opportunities such as Foreign Trade Zones (FTZ) and Customs. Bonded Warehouses, because these deferral opportunities enable importers to postpone the payment of duties on imported products until the products are entered into the U.S. for consumption.
Upon completion of the import process importers can minimize their import costs by applying for a refund of the duties that they paid on imported products that are subsequently exported. The process of applying for a refund of import duty is called duty drawback. Under the duty drawback program currently available in the U.S., eligible importers can receive duty refunds up to 99% of the original duty amount.
Minimize Costs of Exportation
As in the case of import costs, there are many opportunities for exporters to minimize export costs. These opportunities are found before the export process, during the export process and upon the completion of the export process.
Before the export process exporters can minimize their export costs by establishing a foreign sales corporation (FSC) and by making their export sales through their FSC. A FSC is an offshore corporation that is established in certain specified offshore locations that have been pre-approved by the Internal Revenue Service (IRS). FSC. s operate under an exception to the U.S. tax code. s general rules on the worldwide taxation of U.S. citizens and corporations and under an exception to the U.S. tax code. s general rules applicable to foreign corporations. Exporters using a FSC obtain a partial exemption from U.S. taxation of their export profits. The exemption is equivalent to a 15% corporate tax savings, thereby reducing the effective tax on the export profits of a C corporation to between 29% and 30%. The FSC legislation is tightly written and there are a number of threshold requirements that an offshore corporation must meet to qualify as a FSC.
During the export process exporters can minimize their export costs by insuring that they are in complete compliance with U.S. Export Laws and Regulations. Customs traditionally has not paid much attention to exports, but this is changing as Customs entered the enforced compliance stage of its Outbound Compliance Program on June 1, 1997. From this date forward, exporters. compliance with U.S. export laws and U.S. export regulations will be monitored much more closely. This is significant as the U.S. Export Regulations underwent a major revision on 12/31/96. Many exporters have not yet adopted export procedures that give consideration to the revised Regulations and many exporters are not well versed in U.S. Export Laws and Regulations in any event. Exporters would be well advised to audit their export processes and insure that they are in complete compliance with the required Export Laws and Regulations, since noncompliant exporters will find themselves facing shipment detentions and/or monetary penalties.
Upon completion of the export process exporters can minimize their export costs by applying for a refund of the Harbor Maintenance Fee that they paid on their ocean-going exports. The Harbor Maintenance Fee (HMF) is a fee that U.S. Customs began charging in 1987 on the value of all incoming and outgoing waterborne cargo (i.e., ocean-going imports and exports). The constitutionality of the HMF on exports has been challenged by many exporters since the HMF was enacted. In Oct. 1995, a 3-judge panel of the Court of International Trade agreed with the exporters and ruled that the HMF is an unconstitutional tax on exports. Customs appealed the Court. s decision and on June 3, 1997, by a 4-1 decision, the U.S. Court of Appeals for the Federal Circuit in Washington affirmed the decision of the Court of International Trade and held that the HMF on exports is unconstitutional. U.S. Customs is likely to ask the Supreme Court to review the decision of the Appeals Court regarding the HMF on exports. This means that exporters will have to continue waiting for a final decision on the unconstitutionality of the HMF.
In the interim, exporters should continue to pay the HMF on exports. To safeguard their right to obtain an export-related HMF refund, however, exporters should file HMF refund requests. This is accomplished by filing: (a) individual lawsuits at the U.S. Court of International Trade on past HMF payments; and (b) protest letters to U.S. Customs on current HMF payments.
Summary
The techniques described in this article as techniques that can be used to minimize international trade transaction costs are simple, straight-forward techniques that are quick and easy to implement. Their lack of sophistication and technological prowess almost makes them appear lackluster. Nonetheless, importers and exporters who implement these techniques are likely to be satisfied with the results.