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Incoterms demonstration – October 2013 So today I wanted to introduce the concept
of Incoterms, International Commercial Terms. So this is related to the concept of who is
responsible between the US seller and the foreign buyer for the different pieces of
the transportation process. So the different chunks are demonstrated here.
If a product is leaving from Milwaukee going through Miami, going on an ocean vessel to
Santos, Brazil, and then to the final destination customer in Rio de Janeiro.
So if you are the seller what part of this transportation process are you responsible
for and what part is the buyer responsible for. The Incoterms are used to indicate the
responsibilities of the buyer and the seller in an international shipment.
Pre-carriage is the piece that is from Milwaukee to Miami, it is also called inland freight.
That makes sense, right, you’re shipping the product from Milwaukee to Miami on a truck
or a rail car. It is getting on an ocean vessel or an airplane maybe, to Santos, Brazil, which
is the port on the Brazil side. On-carriage is the term for getting it from the port in
Brazil to the final customer in Rio de Janeiro in this example.
So pre-carriage, main carriage, this is where it is transferring from one country to another,
and then on-carriage. In each country the product has to be taken
through customs, so on the US side it is “cleared for export” which means you are allowed
to export it to that particular country and buyer, and you need to indicate that on your
paperwork. Then when it enters Brazil duties and taxes have to be paid, which is typically
the importer’s responsibility, and it has to be cleared for import in terms of it is
a product that is allowed to enter Brazil and so on.
Any questions on what I have up so far. So the International Chamber of Commerce is
the organization out of Europe that has developed these Incoterms. There are 11 of them but
for the purpose of this class we are only going to look at the first four within that
grouping of 11. You will need this for your project. The second
part of the project includes looking at shipping and specifically you’ll be looking at what
is called the CIP Incoterm, the last one on the piece of paper. If you’re taking other
global business classes you get more into all 11 of them, we are just going to introduce
four of them today. To demonstrate I have a box containing medical
devices that is being shipped to Brazil. Let’s say it is going from GE Healthcare here in
Milwaukee to Brazil. I need two volunteers, one will be the seller and one will be the
buyer in Brazil. So I need two volunteers please, to come up. We’re going to go through
these four Incoterms demonstrated here. We have the US seller with her box, and we’re
going to start with the term Ex-Works. Under the term Ex-Works, the buyer is responsible
for everything. She has manufactured the medical devices and has them in a box ready to be
shipped. The buyer has to do everything else under the Ex-Works Incoterm. So buyer you
have to come all the way from Brazil and get the box from the seller. You are handling
it from Milwaukee to Miami, from Miami to Santos, and Santos to your final destination
in Rio de Janeiro. So the buyer in this case is dealing with
everything; pre-carriage, inland freight in the US, clearing the good for export through
US customs, ocean or air shipment, Brazilian Customs, paying import duties and taxes, and
getting it from the port at Santos to Rio de Janeiro.
So that is the least work for the seller, the most work for the buyer. Of course the
buyer, let’s say is a hospital in Rio, it is not a person from the hospital that comes
all the way to get the goods, right, they hire a freight company that handles the movement
of the goods all the way from Milwaukee through all the steps to Rio de Janeiro.
Does that make sense? Any questions on Ex-Works? Alright, so that is the first one.
You can give the goods back to the seller. So, the next one on the sheet is Free Carrier,
FCA. What we can say, we can do a couple of different things with FCA. We will start with
saying FCA Milwaukee, Free Carrier the plant in Milwaukee. So essentially it is almost
the same as Ex-Works. But she is going to, as the seller, she is still in Milwaukee,
but she is going to handle this US customs clearance. So we are going to put this customs
clearance over here right now, sorry for being right in your face.
She is going to clear the goods for export as the exporter, which is what every US exporter
should do. You should never rely on your foreign buyer to clear your goods for export. So really
under Ex-Works a US exporter should never agree to sell under Ex-Works. Some exporters
think that is easier, because again the buyer did everything. But it is really not a good
idea to allow your foreign buyer to clear your goods for export. Essentially they are
communicating to your government, what you’re selling, how much you’re selling it for.
Not a good idea. You want to control that piece of communicating to your own government
about your exports. So Free Carrier Milwaukee is essentially like Ex-Works but she is clearing
for export. So we won’t go through the process, it looks the same as Ex-Works.
However, we could change this to Free Carrier Miami. So in this case the seller is going
to do the inland freight, the pre-carriage to Miami, so you take it to Miami, please,
seller. You clear it for export with the US government, you tell the US government what
you’re exporting, what it is worth, what the harmonized tariff code is. The buyer does
everything else. Alright, buyer does the ocean or air, buyer does Brazilian customs, and
all the way to Rio de Janeiro. Everyone get free carrier?
Do you have a question? “I was just wondering if that was free carrier.” Yes, it is still
free carrier, so you can do free carrier from your facility, or you can do free carrier
from another domestic point, which is often the port where it is going to depart the US.
“But it is just in your country, right?” Right, at this point you’re still only in
the US. Free Carrier is a still a US delivery point.
Now we’re going to go to the next one on your piece of paper, CPT. Every Incoterm needs
to be followed by a place, you can’t just say CPT, you have to say CPT place, like Free
Carrier Milwaukee or Free Carrier Miami, you have to state where you are indicating.
CPT, Carriage Paid To. Let’s give the box back to the seller. She is selling the medical
products to Brazil. She is in Milwaukee. She is getting the goods to Miami, on pre-carriage,
a truck or rail. She is clearing it for US export through the US government, and then
this time she, the seller, is going to handle the main carriage, she is going to get it
across the ocean, either by air or by ocean vessel to Santos. So you go ahead all the
way to Santos port, and then the buyer is taking the goods. He is handling the import
into Brazil. She got it across the ocean and to the port in Brazil, but he is clearing
it through Brazilian customs paying the duties and taxes. And then he is getting it from
the port, paying the taxes, on to Rio de Janeiro. Any questions on that one? So this C-term
is the first one where the seller is handling this main carriage.
Any questions on CPT? Alright, one more. Give the box back. So the only difference
between what we just did under CPT to CIP is that the seller is also insuring the goods
during shipment. The three prior Incoterms that we just talked about do not indicate
who is paying for insurance, someone should be paying for insurance, and maybe that is
in your sales contract, but under these three terms, the Incoterm alone does not indicate
who is paying for the insurance. This is the Incoterm that does now indicate that seller,
in addition to paying all the way through the main carriage to Santos, Brazil, is also
paying for the insurance in case there is any damage to the goods during transit.
So if you want to do your shipment again all the way to Santos, Brazil. Buyer takes the
goods, if they are damaged, there is insurance and he would have to make the claim, but she
has paid for the insurance policy. So regardless of who is doing what, in the
end the seller is going to add any costs that she has paid for the shipment to the invoice
to the buyer so in the end the buyer is paying for it regardless. It is just who is controlling
that process. She is controlling it under CIP all the way to Santos, she is paying the
ocean carrier, she is paying the airline, but she is adding that cost to her invoice
to the buyer. So buyer ultimately is always paying for the transportation, in the end,
right. Any questions on those four Incoterms? Again
there are 11 altogether. The most extreme one, of course, is where the seller does everything
all the way through to the hospital in Rio de Janeiro. That is called Delivered Duty
Paid, where she is even paying the Brazilian duties and taxes, which you never, as an exporter,
want to be responsible for paying a foreign government’s duties and taxes. It is not
a good position to be in.
Any questions? “What is the difference between the CIP and the CPT?” “The insurance,
right?” Just the insurance, that “I” in the middle stands for insurance.
What I want you to do on your projects, which you’ll see in the second part of the rubric
that I hand out, is that I want you to be quoting your product for a shipment to your
foreign buyer using the CIP Incoterm. Because the CIP is really one of the best ones that
US exporters should be using for an export. You are controlling the documents for freight,
which is good and we’ll talk about that later with payment terms. You always want
to, as an exporter, control that main carriage because then you have the transportation documents
if you need them to get paid. You also have them in case you want to file a claim against
insurance that you might buy in the event your foreign buyer doesn’t pay you. You
have to prove that you shipped the goods in order to claim against your insurance that
you might buy. Which was mentioned in those video clips, they talked about export credit
insurance through the ExIm bank. If you buy that insurance policy, and your foreign buyer
doesn’t pay you, in order to make a claim against insurance you have to prove you shipped
the goods. If your buyer handled this whole process you don’t have any transportation
documents that indicate that you truly shipped the goods. Make sense?
So that is why I want you to use the CIP Incoterm in your project, understanding that it is
a very good term for an exporter to use in a real life situation. Questions? Alright,
thank you buyer and seller. Next time I’ll give you talking parts. “Can we at least
get extra credit for it?”