International Trade (Intl Trade) 101: Logistics and Transportation - Logistics Costs, Freight Insurance Handling Inland Trucking Warehousing

What This Is

Logistics costs are a crucial aspect of international trade, encompassing various expenses associated with moving goods across borders. These costs can significantly impact a company's bottom line and are essential to understand for trade professionals and students. For instance, consider a shipment of electronics from China to the US. The buyer and seller must agree on who bears the costs of freight, insurance, handling, inland trucking, and warehousing. Failure to do so can lead to disputes and additional expenses.

Key Terms & Rules

• Incoterms 2020: A set of international trade terms that define the responsibilities of buyers and sellers for logistics costs and risks. Understanding Incoterms is crucial for international trade.
• EXW (Ex Works): Buyer bears all costs and risks from seller's premises – most seller-friendly Incoterm.
• FCA (Free Carrier): Seller bears costs and risks until the goods are handed over to the carrier at the named place or point.
• CIF (Cost, Insurance, and Freight): Seller bears costs and risks until the goods are delivered to the buyer's nominated port of destination.
• UCP 600 (Uniform Customs and Practice for Documentary Credits): Governs LC transactions globally, ensuring that documentary credits are used correctly and efficiently.
• URC 522 (Uniform Rules for Bank-to-Bank Reimbursements): A set of rules governing bank-to-bank reimbursements for documentary credits.
• Duty Calculation: The process of calculating customs duties based on the Harmonized System (HS) code, country of origin, and other factors.
• Free on Board (FOB): A term that can be used in various ways, but generally means the seller bears costs and risks until the goods are loaded onto the vessel or aircraft.
• DAT (Delivered at Terminal): A term that means the seller bears costs and risks until the goods are delivered to the terminal or port of destination.
• DPU (Delivered at Place Unloaded): A term that means the seller bears costs and risks until the goods are delivered to the buyer's premises and unloaded.

Step-by-Step Process

1. Classify Goods Using HS Codes: Determine the Harmonized System (HS) code for the goods being shipped to calculate customs duties and other taxes.
2. Calculate Duty: Use the HS code, country of origin, and other factors to calculate customs duties.
3. Determine Logistics Costs: Agree with the buyer or seller on who bears the costs of freight, insurance, handling, inland trucking, and warehousing.
4. Choose Incoterms: Select the appropriate Incoterm based on the agreed logistics costs and risks.
5. Issue a Documentary Credit (LC): Use UCP 600 to issue a documentary credit that meets the requirements of the buyer and seller.
6. Clear Customs: Ensure that all necessary documents are in order to clear customs and avoid delays or penalties.

Common Mistakes

• Mistake: Confusing CIF and CIP.
• Correction: CIF means the seller bears costs and risks until the goods are delivered to the buyer's nominated port of destination, while CIP means the seller bears costs and risks until the goods are delivered to the buyer's nominated airport of destination.
• Mistake: Assuming "open account" is risk-free.
• Correction: Open account means the buyer pays the seller without a documentary credit, but it does not eliminate the risk of non-payment.
• Mistake: Misusing "free on board" with air freight.
• Correction: FOB is typically used with sea or inland waterway transport, not air freight.

Exam / Certification Tips

• FOB vs FCA: FOB means the seller bears costs and risks until the goods are loaded onto the vessel or aircraft, while FCA means the seller bears costs and risks until the goods are handed over to the carrier at the named place or point.
• Confirmed vs Unconfirmed LC: A confirmed LC is guaranteed by the issuing bank, while an unconfirmed LC is not guaranteed.
• DPU Successor to DAT: DPU is a more specific term than DAT, meaning the seller bears costs and risks until the goods are delivered to the buyer's premises and unloaded.

Quick Practice Scenario

A Chinese exporter sells goods to a US importer under FOB Shanghai. Who pays for the main carriage?

Answer: The buyer pays for the main carriage.

Explanation: Under FOB, the seller bears costs and risks until the goods are loaded onto the vessel or aircraft, but the buyer is responsible for the main carriage.

Last-Minute Cram Sheet

• Incoterms 2020: A set of international trade terms that define the responsibilities of buyers and sellers for logistics costs and risks.
• EXW: Buyer bears all costs and risks from seller's premises.
• FCA: Seller bears costs and risks until the goods are handed over to the carrier at the named place or point.
• CIF: Seller bears costs and risks until the goods are delivered to the buyer's nominated port of destination.
• UCP 600: Governs LC transactions globally.
• URC 522: A set of rules governing bank-to-bank reimbursements for documentary credits.
• Duty Calculation: The process of calculating customs duties based on the Harmonized System (HS) code, country of origin, and other factors.
• FOB: Seller bears costs and risks until the goods are loaded onto the vessel or aircraft.
• DAT: Seller bears costs and risks until the goods are delivered to the terminal or port of destination.
• DPU: Seller bears costs and risks until the goods are delivered to the buyer's premises and unloaded.
• Under FOB, risk transfers when goods are on board the vessel – not at the port gate or on the dock.
• CIF means the seller bears costs and risks until the goods are delivered to the buyer's nominated port of destination – not airport.
• Open account means the buyer pays the seller without a documentary credit – but it does not eliminate the risk of non-payment.