International Trade (Intl Trade) 101: Export Import Operations - Export Process, Sourcing, Order Processing, Documentation, Shipping, Payment Collection

What This Is

The export process is a crucial step in international trade, involving sourcing, order processing, documentation, shipping, and payment collection. A misstep in any of these stages can lead to costly delays, disputes, or even losses. For instance, a US importer ordered 1000 units of Chinese-made smartphones under FOB Shanghai, but the seller failed to provide the commercial invoice on time, resulting in a 2-day delay in payment collection. The importer had to pay a $5000 fine for late payment, while the seller lost a valuable customer.

Key Terms & Rules

• EXW (Ex Works): Buyer bears all costs and risks from seller’s premises – most seller-friendly Incoterm.
• UCP 600: Uniform Customs and Practice for Documentary Credits – governs LC transactions globally.
• FOB (Free on Board): Buyer bears risks and costs from the point of loading onto the vessel – commonly used for sea freight.
• CIF (Cost, Insurance, and Freight): Seller bears risks and costs from the point of loading onto the vessel, including insurance and freight – more expensive than FOB.
• Incoterms: International Commercial Terms – standardized rules for international trade, published by the International Chamber of Commerce (ICC).
• HS Codes: Harmonized System codes – standardized classification system for goods, used for customs clearance and trade statistics.
• LC (Letter of Credit): A financial instrument guaranteeing payment upon presentation of compliant documents – commonly used for high-value transactions.
• UCP 600: Uniform Customs and Practice for Documentary Credits – governs LC transactions globally.
• DPU (Destination Port Unloaded): Seller bears risks and costs from the point of unloading at the destination port – commonly used for sea freight.
• DAP (Delivered at Place): Seller bears risks and costs from the point of delivery at the destination – commonly used for air freight.

Step-by-Step Process

1. Sourcing: Identify potential suppliers, assess their creditworthiness, and negotiate prices and payment terms.
2. Order Processing: Confirm orders, prepare purchase orders, and issue payment instructions.
3. Documentation: Prepare and issue commercial invoices, packing lists, and other required documents.
4. Shipping: Arrange for transportation, prepare shipping documents, and ensure compliance with customs regulations.
5. Payment Collection: Receive payment from the buyer, either through a letter of credit or open account terms.

Common Mistakes

• Mistake: Confusing CIF and CIP – both involve seller's risks and costs, but CIP includes insurance.
• Correction: Remember that CIP includes insurance, while CIF does not.
• Example: A US importer ordered 1000 units of Chinese-made smartphones under CIF Shanghai, but the seller failed to provide insurance documents, resulting in a $5000 fine for late payment.
• Mistake: Assuming "open account" is risk-free – buyers may still dispute invoices or delay payment.
• Correction: Always negotiate payment terms and ensure compliance with local laws and regulations.
• Example: A US importer ordered 1000 units of Chinese-made smartphones under open account terms, but the buyer disputed the invoice, resulting in a 30-day delay in payment.
• Mistake: Misusing "free on board" with air freight – FOB is typically used for sea freight.
• Correction: Use DAP or DDU for air freight, as they better reflect the risks and costs involved.
• Example: A US importer ordered 1000 units of Chinese-made smartphones under FOB Shanghai, but the seller failed to provide delivery at the destination, resulting in a $5000 fine for late delivery.

Exam / Certification Tips

• Tricky Distinctions: Distinguish between FOB and FCA, as FCA involves more seller's risks and costs.
• Confirmed vs Unconfirmed LC: Understand the differences between confirmed and unconfirmed letters of credit, as confirmed LCs provide greater security for buyers.
• DPU Successor to DAT: Recognize that DPU has replaced DAT as the standard Incoterm for sea freight.
• Memory Aid: Use the acronym "FOB" to remember that the buyer bears risks and costs from the point of loading onto the vessel.

Quick Practice Scenario

A Chinese exporter sells 1000 units of smartphones under FOB Shanghai to a US importer. Who pays for the main carriage?

Answer: The buyer pays for the main carriage. Explanation: As the shipment is under FOB terms, the buyer bears risks and costs from the point of loading onto the vessel.

Last-Minute Cram Sheet

• EXW: Buyer bears all costs and risks from seller's premises.
• UCP 600: Governs LC transactions globally.
• FOB: Buyer bears risks and costs from the point of loading onto the vessel.
• CIF: Seller bears risks and costs from the point of loading onto the vessel, including insurance and freight.
• Incoterms: Standardized rules for international trade, published by the ICC.
• HS Codes: Standardized classification system for goods, used for customs clearance and trade statistics.
• LC: A financial instrument guaranteeing payment upon presentation of compliant documents.
• DPU: Seller bears risks and costs from the point of unloading at the destination port.
• DAP: Seller bears risks and costs from the point of delivery at the destination.
• Under FOB, risk transfers when goods are on board the vessel – not at the port gate or on the dock.
• CIP includes insurance, while CIF does not.
• Always negotiate payment terms and ensure compliance with local laws and regulations.