Incoterms in International Trade PDF (AY2024/25)

Student Copy LECTURE 1 – Week beginning 14 Oct 2024 INTERNATIONAL FINANCE TOPIC 1: INCOTERMS IN INTERNATIONAL TRADE OBJECTIVES At the end of the lecture, you should be able to: Describe international trade and the key parties involved. Describe the benefits and risks of intern...

Student Copy LECTURE 1 – Week beginning 14 Oct 2024 INTERNATIONAL FINANCE TOPIC 1: INCOTERMS IN INTERNATIONAL TRADE OBJECTIVES At the end of the lecture, you should be able to: Describe international trade and the key parties involved. Describe the benefits and risks of international trade. Describe the trends and developments impacting international trade processes. Define incoterms and technical delivery. Describe the trade rules and ownership risks for different incoterms. Apply incoterm trade rules to ascertain ownership risks involved for importers and exporters. Compute importer’s price quotations for different incoterms. LECTURE OUTLINE 1. Introduction to International Trade a. Basic Concepts b. Importance of International Trade 2. Parties Involved in International Trade 3. Benefits & Risk of International Trade 4. Barriers to International Trade 5. Trends and Developments in International Trade 6. Terms of Delivery (or Incoterms) 7. Purpose of Incoterms 8. Types of Incoterms 9. Responsibilities, ownership and risk of the importer and exporters under each type of shipping terms of delivery AY2024/25 Oct Sem. 1  Student Copy 1. Introduction to International Trade a. Basic Concepts 1. What is International Trade? - The exchange of goods across national boundaries. 2. Definition of Exports - Domestically produced goods purchased by other countries. E.g. Made in Singapore goods sold to Japan. 3. Definition of Imports - Goods purchased from other countries by the domestic economy. E.g. Made in Japan goods brought into Singapore. b. Importance of International Trade International trade has a pervasive importance in our lives. We find shoes, cars, mobile phones, etc imported from overseas to Singapore. These products reached us from other countries through the movement of goods between countries and money through financial networks/channels. The roles of importer and exporter are as follows: Importer receives goods makes payment (buyer) Exporter supplies goods receives payment (seller) 2. Parties Involved in International Trade As a trader ventures overseas, he does not deal with just the buyer. In addition to the sales contract made with the buyer, he may have to deal with the following parties too:- 1. Transport Companies - To arrange for transportation of the goods to the buyer 2. Banks - To request his banker to monitor for payment from the overseas buyer 3. Insurance Companies - to insure goods in transit 4. Government Bodies - to apply for import/export licence; pay custom duties etc. These parties will be dealt with in detail in future topics. AY2024/25 Oct Sem. 2  Student Copy 3. Benefits & Risks of International Trade International trade is a mutually beneficial activity that can bring about a wide range of benefits to both businesses and consumers. Benefits of international l trade include: 1. Consumers have access to a wider variety of goods and services than they would otherwise have. This is because different countries have different resources and capabilities. 2. Cheaper goods due to competition and existence of comparative advantage. 3. Businesses can reach a larger customer base than they would be able to domestically, potentially increasing its sales. 4. Allows businesses to achieve economies of scale by producing larger quantities of goods and services. This can lead to lower costs and higher profits. 5. Increase job opportunities in both the exporting and importing countries. However, international traders also face a variety of risks when carrying out international trade. These risks can be summarised in five main areas: 1. The importer and exporter are separated by distance and time - The exporter worries that for some reason he cannot receive the money for goods already shipped out. - On the other hand, the importer is worried that the supplier may ship inferior goods and may not meet the deadline. 2. Unfamiliarity with the practices and laws applying in each other's country - Understanding the governing laws of a country is important, especially if legal action has to be taken for any breach of contract. 3. Fluctuations in exchange rates of foreign currencies - The seller may suffer from foreign exchange rate risks if the overseas buyer pays in foreign currency. - E.g. When a Singapore exporter receives Indonesian Rupiah from the Indonesian buyer, the Singapore exporter will have to exchange the Rupiah to Singapore Dollar. The exporter is faced with exchange rate risk due to exchange rate fluctuation AY2024/25 Oct Sem. 3  Student Copy 4. Government licensing, import controls and exchange controls The seller may face difficulty exporting to certain countries. The government in the buyer’s country may impose the following restrictions: - Quota : Limit (or even ban) the amount of goods that can be imported e.g. Singapore bans the import of chewing gums - Import Duty (Tax) : Institute (or impose) an import levy, thus adding to the cost of the imported goods 5. Country risks - Any war, revolution, political and social upheavals may lead to a restriction in the import/export of the goods - A country suffering from an economic financial crisis may result in the importer’s inability to pay 4. Barriers to International Trade Singapore pursues a free and fair-trade policy. Other than a Goods & Services Tax which was introduced on 1 April 94, very few goods are dutiable or under control. Goods may be imported and exported in and out of Singapore freely. Singapore's prosperity is due in large part to its free trade policy. However there are various factors that may threaten free trade policy. One of the most pressing problems faced is protectionism. What is protectionism? It is the policy of protecting the domestic industry against foreign competition by having restrictions placed on imports. What are the goals of protectionism? 1. Revenue - Some nations impose tariffs (e.g. import taxes) on international trade to collect revenue for the country. 2. Job protection - Strong pressures from the local citizens against foreign competition arises when established economic activities become threatened by foreign competitive forces - E.g. Car industry in the USA. USA may place a restriction on the cheaper imports of cars from Japan. This is to protect the jobs of its citizens working in the car industry. AY2024/25 Oct Sem. 4  Student Copy 3. Development - This is practised by some countries which are trying to encourage the establishment of new economic activities 4. Political - Policies over international trade has long been used to reward political friends and oppose political enemies - E.g. Trade sanctions imposed on Iraq led by the United Nations, Arab countries’ policy on firms dealing with Israel, no Israeli products in Malaysia etc. 5. National security - This may occur whereby a country protects industries it deems as important. E.g. Steel production in the USA. Although cheaper imports can be found, USA will continue to produce its own steel. This is important so that supplies of critical materials are available in case of war. - For the purpose of national security, a country may also ban the import of certain goods. This may include raw materials used in biological, chemical and nuclear warfare, and related technology and machines. 5. Trends & Developments in International Trade International trade is constantly evolving, with new trends and developments emerging all the time. Some of the most significant trends and developments impacting international trade include: Digital trade: The use of e-commerce is increasing the volume and speed of international trade. Businesses are now able to sell their products and services to customers all over the world without having to set up physical stores in each market. This is creating new opportunities for trade in small and medium-sized enterprises (SMEs). Supply chain resilience: The COVID-19 pandemic has highlighted the importance of supply chain resilience. Businesses are now looking to diversify their supply chains and reduce their reliance on any single country or region. This is leading to increased trade between developing countries and emerging markets. Sustainability: Businesses and consumers are increasingly demanding that goods and services are produced and traded in a sustainable manner. This is leading to new trade regulations and standards on issues such as environmental protection and labour rights. AY2024/25 Oct Sem. 5  Student Copy 6. Terms of Delivery (or Incoterms) UK Singapore Seller from UK Customs & Customs & Buyer in SG (Exporter) Cargo Terminal Cargo Terminal (Importer) What price should an exporter quote to the buyer? - The price to the buyer overseas depends on who is to pay the various charges e.g. transportation , insurance of the goods, etc. - The various ways of quoting the price so as to indicate who is to pay these charges are called Terms of Delivery (Incoterms) Incoterms (International Commercial Terms) The terms were first adopted in 1936 and are presently accepted by more than 50 countries. 7. Purpose of Incoterms These include: - to define responsibilities, obligations and liabilities of contractual parties including payment of various charges - to provide a set of standardised terms which mean the same to the contracting parties - to assist the layman in understanding implications of customary commercial contracts - to save time and money by avoiding possible misunderstanding and disputes AY2024/25 Oct Sem. 6  Student Copy 8. Types of Incoterms The most commonly used Incoterms include: - Ex Works - FOB - CFR - CIF Ex Works Customs & Customs & Seller Cargo Terminal Cargo Terminal Buyer Risks Risks Costs Costs EXW i.e. Ex Works, means that - the seller fulfils his obligation to deliver when he has made the goods available at his premises (i.e. factory, warehouse, etc.) to the buyer. Technical delivery is deemed to have taken place. - the buyer bears all costs and risks involved in taking the goods from the seller's premises to the desired destination. - this term thus represents the minimum obligation for the seller. What is ‘technical delivery’? Technical delivery is the point where the risk and title of ownership passes over from the exporter to the importer. AY2024/25 Oct Sem. 7  Student Copy Free On Board (… named port of shipment) Customs & Customs & Seller Cargo Terminal Cargo Terminal Buyer Risks Risks Costs Costs FOB i.e. Free on board (…named port of shipment), means that - the seller fulfils his obligation to deliver when the goods have passed over the ship's rail at the named port of shipment. Technical delivery is deemed to have taken place. - the buyer bears all costs and risks of loss or damage to the goods when the goods have passed over the ship's rail. Cost And Freight (… named port of destination) Customs & Customs & Seller Cargo Terminal Cargo Terminal Buyer Risks Risks Costs includes freight Costs CFR i.e. Cost and freight (…named port of destination), means that - the seller must pay the cost and freight necessary to bring the goods to the named port of destination but technical delivery will take place when the goods pass the ship's rail at the port of shipment. AY2024/25 Oct Sem. 8  Student Copy Cost, Insurance And Freight (... named port of destination) Customs & Customs & Seller Cargo Terminal Cargo Terminal Buyer Risks Risks Costs includes freight & insurance Costs CIF i.e. Cost, insurance and freight (…named port of destination), means that - the seller must pay the cost, insurance and freight necessary to bring the goods to the named port of destination but technical delivery will take place when the goods pass the ship's rail at the port of shipment. AY2024/25 Oct Sem. 9  Student Copy 9. Responsibilities, ownership and risk of the importer and exporters under each type of shipping terms of delivery The tables on Pg 10 – 12 summarises the roles and responsibilities of exporters and importers. It is useful for revision as it provides a broad overview of the exporters and importers’ responsibilities using the various terms of delivery. Responsibilities undertaken by the Buyer (B) / Seller (S) Ex Works (EXW) FOB CFR CIF 1 Supply the goods according to contractual terms. S S S S 2 a. Place the goods at an agreed place for collection by the S (factory, buyer. warehouse, etc.) b. Deliver the goods on board the ship at the port of shipment. B S S S 3 a. Inform the buyer of the time and place to collect the goods. S b. Inform the buyer when the goods have been delivered on Not applicable S S S board the ship. (Goods collected by buyer) 4 Before technical delivery is deemed to have taken place, seller Technical delivery is Technical delivery is Technical delivery is Technical delivery is bears all risks of loss and damage to the goods. deemed to have deemed to have deemed to have deemed to have taken place when… taken place when… taken place when… taken place when… After technical delivery is deemed to have taken place, buyer the seller has the seller has the seller has the seller has bears all risks of loss and damage to the goods. placed the goods at delivered the goods delivered the goods delivered the goods the agreed place for on board the ship at on board the ship at on board the ship at collection by the the port of the port of the port of buyer. shipment. shipment. shipment. AY2024/25 Oct Sem. 10  Student Copy Responsibilities undertaken by the Buyer (B) / Seller (S) Ex Works (EXW) FOB CFR CIF 5 Costs incurred in the delivery of the goods. Seller pays for Seller pays for the Seller pays for the Seller pays for the the following following costs: following costs: following costs: costs: e.g. e.g. e.g. e.g.  checking quality,  checking quality,  checking quality,  checking measuring, measuring, measuring, quality, weighing, weighing, counting, weighing, counting, measuring, counting, packing. packing. weighing, packing. counting,  transportation to  transportation to packing.  transportation to port, customs port, customs port, customs duties, taxes, duties, taxes, duties, taxes, loading charges and loading charges loading charges other official and other official and other official charges payable charges payable charges payable upon export. upon export. upon export.  freight charges.  freight charges.  insurance 6 Obtain official documents necessary for the export of the B S S S goods e.g. export licence AY2024/25 Oct Sem. 11  Student Copy Responsibilities undertaken by the Buyer (B) / Seller (S) Ex Works (EXW) FOB CFR CIF 7 a. Arrange to book shipping space and pay freight. B B S S b. Obtain and pay cargo insurance. B B B S 8 Accept delivery of the goods when the ship arrives at the B B B B place of destination. 9 Obtain official documents necessary for the import of the B B B B goods e.g. import licence 10 Pay unloading charges, import duties and other official B B B B charges for customs clearance of the goods at the port of destination. End of Lecture Notes AY2024/25 Oct Sem. 12  Student Copy TUTORIAL 1 – Week beginning 14 Oct 2024 INTERNATIONAL FINANCE TOPIC 1: INCOTERMS IN INTERNATIONAL TRADE _________________________________________________________________________ 1. Discuss the following three risks faced by the international trader? Distance between importer and exporter Import controls using quota and import duty Country risks 2. Explain the term “FOB” by elaborating on the responsibilities/obligations and risks of the seller and buyer. 3. In a CIF contract, a. discuss the responsibilities of the exporter. b. who bears the risk of damages to the goods if such damage occurs after technical delivery has taken place. Can this party claim insurance to reduce the loss? 4. It is better for an importer for goods to be shipped using CIF than Ex Works. Do you agree with this statement? Explain. 5. Star Fish Trading (Long Beach, USA) is importing USD 80,000 of aquarium accessories from Bocas Puerto Manufacturing (Mexico). The port of shipment is Manzanillo, Mexico. The incoterm agreed by the two companies is CFR (Long Beach, USA). Following are the costs associated with the shipment (in USD): Price of aquarium accessories= 80,000 Checking/packing aquarium accessories= 400 Delivery charges to port @ Manzanillo= 1,800 Delivery charges from Long Beach to importer’s warehouse = 2,200 Manzanillo port levy & loading charges= 800 Long Beach unloading charges = 800 Other associated fees upon export= 400 Freight charges = 2,500 Insurance = 1,200 Import custom duties= 600 (USD: United States Dollar) AY2024/25 Oct Sem. 13  Student Copy a) Calculate the USD amount Bocas Puerto Manufacturing will quote Star Fish Trading for the above order based on CFR. b) The vessel carrying the aquarium accessories left Port at Manzanillo and was sailing towards its destination. A fire broke out onboard the vessel and all the goods carried on board were damaged by the fire. Which party bears the loss of the goods from the fire? Self-Review Questions (Solutions released on IF LMS subject site after tutorial week) 6. What is protectionism? List three ways a country imposes protectionism through import controls. 7. Compare an FOB and a CFR contract in the following areas:- a. When technical delivery takes place b. The party responsible for the various transport charges c. The party responsible for the insurance charges FOB CFR Technical Delivery Various transport charges 1. from exporter’s factory to port of shipment 2. from port to port 3. from port of destination to importer’s place Insurance charges End of Tutorial Questions AY2024/25 Oct Sem. 14