International Trade (Intl Trade) 101: Export Import Operations Import Process Purchase Order Customs Clearance Duty Payment Delivery

What This Is

The import process is a critical component of international trade, involving the purchase of goods from a foreign supplier, customs clearance, duty payment, and delivery to the buyer. A common example is a US-based importer purchasing a shipment of electronics from a Chinese exporter. The importer must navigate the complexities of customs clearance, duty payment, and delivery, while ensuring compliance with relevant regulations and laws.

Key Terms & Rules

• Incoterms 2020: A set of international trade terms that define the responsibilities of buyers and sellers in the delivery of goods. Understanding Incoterms is crucial for accurate risk allocation and cost estimation.
• UCP 600: Uniform Customs and Practice for Documentary Credits – governs LC transactions globally, ensuring that banks and traders follow standardized procedures for letter of credit transactions.
• Duty Calculation: The process of determining the amount of customs duty payable on imported goods, based on factors such as the Harmonized System (HS) code, country of origin, and value of the goods.
• Harmonized System (HS) Code: A standardized system for classifying goods for customs purposes, used by over 200 countries worldwide.
• Free on Board (FOB): An Incoterm where the seller bears the costs and risks until the goods are loaded onto the vessel or aircraft.
• Cost, Insurance, and Freight (CIF): An Incoterm where the seller bears the costs and risks until the goods are delivered to the buyer's destination.
• Letter of Credit (LC): A payment instrument that guarantees payment to the seller upon presentation of compliant documents.
• Bill of Lading (B/L): A document issued by the carrier that serves as evidence of the contract of carriage and ownership of the goods.
• Commercial Invoice: A document that provides detailed information about the goods, including their value, quantity, and weight.
• Certificate of Origin: A document that certifies the country of origin of the goods, often required for customs clearance and preferential trade agreements.

Step-by-Step Process

1. Purchase Order: The buyer places an order with the seller, specifying the goods, quantity, and delivery terms.
2. Letter of Credit (LC) Application: The buyer applies for an LC with their bank, which guarantees payment to the seller upon presentation of compliant documents.
3. Customs Clearance: The importer clears the goods through customs, providing necessary documents such as the commercial invoice, bill of lading, and certificate of origin.
4. Duty Payment: The importer pays the customs duty on the imported goods, based on the duty calculation.
5. Delivery: The goods are delivered to the buyer's destination, in accordance with the agreed-upon delivery terms.

Common Mistakes

• Mistake: Confusing CIF and CIP Incoterms.
• Correction: CIF means the seller bears the costs and risks until the goods are delivered to the buyer's destination, while CIP means the seller bears the costs and risks until the goods are delivered to the buyer's destination, but the buyer bears the risks of loss or damage during transit.
• Example: A US importer purchases a shipment of electronics from a Chinese exporter under CIF New York. The seller bears the costs and risks until the goods are delivered to the buyer's destination, but the buyer bears the risks of loss or damage during transit.
• Mistake: Assuming "open account" is risk-free.
• Correction: Open account means the buyer pays the seller without a letter of credit or other payment guarantee, which can expose the buyer to payment risks.
• Example: A US importer purchases a shipment of textiles from a Chinese exporter on open account terms. The buyer pays the seller without a letter of credit or other payment guarantee, which exposes the buyer to payment risks.
• Mistake: Misusing "free on board" with air freight.
• Correction: Free on board (FOB) means the seller bears the costs and risks until the goods are loaded onto the vessel or aircraft, but air freight is typically delivered to the buyer's doorstep, not loaded onto an aircraft.
• Example: A US importer purchases a shipment of electronics from a Chinese exporter under FOB Shanghai, but the seller delivers the goods by air freight to the buyer's doorstep in New York. The seller bears the costs and risks until the goods are delivered to the buyer's doorstep, not loaded onto an aircraft.

Exam / Certification Tips

• Common question patterns: Expect questions on Incoterms, customs clearance, duty payment, and delivery terms.
• Tricky distinctions: Be aware of the differences between FOB and FCA, confirmed and unconfirmed LCs, and DPU and DAT.
• Memory aids: Use the "FOB" acronym to remember that the seller bears the costs and risks until the goods are loaded onto the vessel or aircraft.
• Key terms: Familiarize yourself with key terms such as Incoterms, UCP 600, and Harmonized System (HS) code.

Quick Practice Scenario

Scenario: A Chinese exporter sells a shipment of electronics to a US importer under FOB Shanghai. Who pays for the main carriage?

Answer: The seller pays for the main carriage.

Explanation: Under FOB Shanghai, the seller bears the costs and risks until the goods are loaded onto the vessel or aircraft.

Last-Minute Cram Sheet

• ⚠️ Under FOB, risk transfers when goods are on board the vessel – not at the port gate or on the dock.
• Incoterms 2020 defines the responsibilities of buyers and sellers in the delivery of goods.
• UCP 600 governs LC transactions globally.
• Duty calculation is based on the Harmonized System (HS) code, country of origin, and value of the goods.
• Free on board (FOB) means the seller bears the costs and risks until the goods are loaded onto the vessel or aircraft.
• Cost, Insurance, and Freight (CIF) means the seller bears the costs and risks until the goods are delivered to the buyer's destination.
• Letter of Credit (LC) guarantees payment to the seller upon presentation of compliant documents.
• Bill of Lading (B/L) serves as evidence of the contract of carriage and ownership of the goods.
• Commercial Invoice provides detailed information about the goods, including their value, quantity, and weight.
• Certificate of Origin certifies the country of origin of the goods.
• Harmonized System (HS) code is used for customs purposes worldwide.
• Incoterms allocation determines the responsibilities of buyers and sellers in the delivery of goods.