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International Trade Terms – What don’t you know about importing from China?

March 23, 2010 Articles 0 Comment

When planning to import from China, it is extremely important to understand all of the relevant terms that define the international trading process. Without a thorough understanding of these international trading terms in relation to shipping, insurance, payment, customs etc. you will have a very difficult time managing your importing process and negotiating these terms well in the beginning.

Trading Terms

The first collection of terms that you need to understand are the trading terms. Internationally, these are known as Incoterms. These terms signify to the buyer what is and what is not included in the selling price of the product. They also outline the responsibility of both the exporter and importer and where the responsibility of each party begins and ends. These terms need to be set out and negotiated in the beginning of the importing process so that no issues arise in the future. The most commonly used Incoterms include:

Ex Works – EXW

This term indicates that the price quoted is for the supply of the goods which will be ready to be discharged from the exporter’s premises. The exporter’s responsibility ends with making the goods available to the buyer and as such any costs for shipping, insurance or the cost of importing into the home country are born by the importer.

Free On Board – FOB

This in one of the most commonly used international trading terms.  In this situation the exporter is responsible for the costs involved with getting the goods onto the buyer’s choice of vessel. Once the goods pass the ships rail the buyer is responsible for any further costs including shipping, insurance, customs clearance etc.

Cost and Freight – CFR

This is where the exporter’s price includes all charges up until the arrival of the goods where they are discharged from the vessel. The price does not include insuring the goods against loss and damage during transit or customs clearance.

Cost, Insurance and Freight – CIF

This is also a very widely used term and indicates that the exporter’s price includes the cost of shipping and insuring of the goods against loss and damage in transit, up to the point of arrival where they are discharged from the vessel. After that point the remaining responsibilities transfer to the buyer of the goods.

Delivered Duty Unpaid – DDU

When referring to ‘DDU’, the exporter’s responsibility is to cover the cost up to the point where the goods are available in the buyer’s home country. In this case the importer is responsible for the duties and taxes payable to clear the good through customs.

Delivered Duty Paid- DDP

When referring to ‘DDP’, the exporter’s responsibility is to cover the cost up to the point where the goods are available in the buyer’s home country. In this case the exporter is also responsible for the duties and other customs clearance charges.

The above definitions are a brief summary of some of the most commonly used Incoterms. For a copy of the quick reference guide at the top of this article, that outlines the costs that are and are not included within each of the main Incoterms go to the Australian Customs Website.

Payment Terms

It is extremely important to understand the different methods that can be used to pay for the goods between the exporter and the importer. These will always be subject to negotiation between the two parties and need to be determined at the beginning of the process. The most commonly used methods of payment are:

Cash in Advance

In this situation the importer needs to remit the funds to the importer prior to shipment. This is the most risky method of payment for importers because funds have passed hands before the goods are even shipped. When using experienced negotiators in this area, in many occasions payment terms of 50% up front and 50% on final inspection of the goods can be a safer and better option.

Letter of Credit

Is where a chosen bank, on behalf of the importer, pays the exporter through the exporters corresponding bank overseas an amount of money provided the certain terms and conditions are met. Letters of credit can be for a predetermined future date or they can be drawn at sight. Irrevocable letters of credit cannot be cancelled or amended without the consent of both parties to the agreement.

This method of payment is safer for the importer because payment is not exchanged until certain terms and conditions are met. However this can be a costly payment method.

Sight Draft

In this case all shipping documents including the invoice and the document of title are delivered by the exporter to his/her bank under the cover of a Bill of Exchange which is drawn at sight. The exporter’s bank then transfers them to the importers bank. The importer’s bank will then surrender these documents to the importer once the importer pays the face value of the Bill of Exchange. The funds are then received by the exporter’s bank and transferred to the exporter.

This method is usually more favourable than a letter of credit as it does not have to be drafted by a bank.

Term Draft

Is very similar to a Sight Draft but the Bill of Exchange is to be paid at a predetermined future date. The documents are given to the importer against an undertaking that they will pay when the bill matures. Along with the benefits of a Sight Draft, a Term Draft has the added benefit of a period of credit between receiving the documents and transferring funds at a future date.

Open Account (Credit)

After the goods have been produced and despatched, the exporter sends the documents to the importer who then makes payment. This is the most beneficial method for the importer as they will receive the goods before having to make payment, which allows them to use the funds on other things in the mean time.

Other common terms used in International Trade

Bill of Lading

This includes the title of the goods and is a contract to carry goods via a ship. By transferring a Bill of Lading from one party to another, transfers the ownership of the goods between those parties.

Freight Forwarder

Is an agent that arranges the transfer of the cargo from one country to another. This will include the shipping, customs clearance etc.

FCL

Is a Full Container Load and refers to one shipment from an exporter to an importer that utilises one or more full shipping containers.

LCL

Is a Less than Container Load which refers to smaller shipments that do not fill an entire container and are consolidated from multiple suppliers into the one container.

Tariff

A duty or tax that needs to be paid on certain goods imported from one country to another.  This will add to the landed cost of the goods in question and the value depends on the type of product.

Landed Cost

The total cost of the goods to have them landed at your chosen location. The landed cost includes the Cost of Goods (COGS) from the factory, the cost of freight, customs duties, insurance, currency exchange etc. Basically any cost involved to have the product landed in your warehouse.

Commercial Invoice

This is prepared by the exporter and outlines the transaction, the description of the goods i.e. quantity, value, materials etc and details of both the importer and exporter. It is commonly used to work out the value of customs duties based on what the products are made from and their intended use.

As you can see the process of importing from overseas, especially China can be very daunting. Even just to understand the relevant terms in order to be able to negotiate them for yourself, is extremely important. If this seems like something that would fall into your ‘too hard’ basket, but you still want to import that awesome product idea from China, then you should consider using experienced and knowledgeable professionals that understand and use these terms every day and will be able to negotiate them on your behalf.

It is very important to negotiate both the trading terms and payment terms in the beginning of the process with your Chinese supplier. By negotiating the best price, shipping and payment terms in the beginning and documenting them, you will retain more bargaining power for the future should any issues arise.

  • For example assume you have negotiated 50% payment for you goods upfront and 50% on completion or final inspection of the goods. If you inspect the goods halfway through the mass production process and the quality is very bad you will have more negotiating power to have any changes made, because your Chinese supplier will still want to be paid the final 50%. If you paid 100% upfront the supplier will have less incentive (if any) to make the changes you are after.

Now that you have learnt many of the most commonly used International trading terms it is time to get out there and turn that product dream into a reality!!!

Written by Matt Edwards

Related posts:

  1. How do I Import From China? – Know the China Sourcing process and timeline
  2. The importance of Due Diligence – Sourcing or Importing from China
  3. Sourcing Products from China – Where to Start?

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