It has been argued that importing is simply the opposite of exporting. An organization or an individual in one country purchases goods and services from a seller in another country with the aim of making a profit in the transaction. There are certain aspects of importing that are unique. For example, tariffs and import quotas are only relevant for the importers. The basics of importing involve customs brokers, import restrictions, terms of sale, foreign commercial payments, foreign trade zones, and customs bonded warehouses.
Customs Brokers
A customs broker is often a private company that operates as a middleman between the department of customs in a country and the importing public. Such a relationship will continue to proliferate as long as there are legal requirements regarding the movement of merchandise between countries. Just like a freight forwarder, the customs broker is a private service company licensed to assist importers in the movement of their goods.
Worldwide, billions of dollars in duty collections are filed each year with the customs departments of numerous countries, and they are all predominantly filed and prepared by customs brokers on behalf of importers. Some brokers are sole proprietors with a single office at one port of entry; others are multinational corporations with branches in many ports throughout the world. Customs brokers may be required to be licensed and regulated, for example, in Australia.
The customs broker is employed as an agent by the importer and is often the only point of contact the importer has with the Department of Customs in the respective countries. It is not necessary for an importer to employ a broker to enter goods on its own behalf; however, a bond is required if the importer chooses to handle entry. Most importers who have been in the business for a long time usually engage the services of customs brokers because of the additional services they offer and provide. These include satisfaction in the knowledge that an organization that knows what needs doing with respect to legislation and government bureaucracy is dealing with those issues for you and can provide the answers to many technical questions. Additionally, the importer’s time is more valuable and better spent in managing their organization than dealing with the paperwork involved for the product to gain entry into a country.
A customs broker’s duties include advising on the technical requirements of importing, preparing and filing entry documents, obtaining the necessary bonds, securing the release of products, arranging delivery to the importer’s premises or warehouse, and obtaining drawback refunds.
Drawback involves refunding import duties that have been paid on imported goods if those goods end up being exported out of the country. For example, re-exporting goods that were originally imported; exporting items that contain imported merchandise; or, exporting items that contain wholly imported components. For each of these different scenarios, an importer could be eligible to claim a drawback of the original tariffs paid when first imported. The key to this opportunity is good inventory management and being able to track and keep a record of the movement of inventory. The broker often consults with customs officials to ascertain the correct rate of duty. If the broker is dissatisfied with the rate, the broker will pursue the appropriate remedy on behalf of the importer.
Import Restrictions
When an importer plans a sale to a foreign buyer, it is necessary to examine the import restrictions and regulations of the importing country as well as the export restrictions of the home country. Although the responsibility of import restrictions rests with the importer, the exporter does not want to ship goods until it is certain that all import regulations have been met. Goods without proper documentation will be denied entry. Some of the import restrictions imposed by foreign countries include tariffs, import quotas, exchange control, and invisible tariffs to name but a few.
A tariff is a tax on products imported from other countries. The tax may be levied on the quantity, such as $.10 per kilogram, liter or meter, or on the value of the imported goods, such as 10 or 20 percent ad valorem. A tariff levied on quantity is called a specific duty and is used especially for primary commodities. Ad valorem duties are generally levied on manufactured products.
Governments have two purposes in imposing tariffs: They may wish to earn revenue and/or make foreign goods more expensive in order to protect national producers. Tariffs affect pricing, product, and distribution policies of the international marketer as well as foreign investment decisions. If the firm is supplying a market by exports, the tariff increases the price of its product and reduces its competitiveness in that market. This necessitates a price structure that minimizes the tariff barrier. The product may be modified or stripped down to lower the price or to get a more favorable tariff classification. For example, watches could be taxed either as time pieces at one rate or as jewelry at a higher rate. The manufacturer might be able to adapt its product to meet the lower tariff.
Another way the manufacturer can minimize the tariff burden is to ship the products completely knocked down (CKD) for assembly in the local market. The tariff on unassembled products or ingredients is usually lower than that on completely finished goods. The importing country employs a tariff differential to promote local employment.
Quantitative restrictions, or import quotas, are barriers to imports. They set absolute limits on the amount of goods that may enter the country. An import quota can be a more serious restriction than a tariff because the firm has less flexibility in responding to it. Price or product modifications do not get around quotas the way they might get around tariffs. The government’s goal in establishing quotas on imports is obviously not revenue. It gets none. Its goal instead is the conservation of scarce foreign exchange and/or the protection of local production in the product lines affected. About the only response a firm can make to a quota is to assure itself a share of the quota or to set up local production if the market size warrants it. Since the latter is in accord with the wishes of the government, the firm might be regarded favorably for taking such action.
The most complete tool for the regulation of foreign exchange is exchange control, a government monopoly of all dealings in foreign exchange. Exchange control means that foreign exchange is scarce and that the government is rationing it according to its own priorities. A national company earning foreign exchange from its exports must sell this foreign exchange to the control agency, usually the central bank. In turn, a company wishing to buy goods from abroad must buy its foreign exchange from the control agency.
Firms in the country have to be on the government’s favored list to get exchange for imported supplies. Alternatively, they may try to develop local suppliers, running the risk of higher costs and indifferent quality control. The firms exporting to that nation must also be on the government’s favored list. Otherwise, they will lose their market if importers can get no foreign exchange to pay them. Generally, exchange-control countries favor the import of capital goods and necessary consumer goods, but not luxuries. While the definition of “luxuries” varies from country to country, it usually includes cars, appliances, and cosmetics. If the exporter does lose its market through exchange control, about the only option is to produce within the country if the market is large enough for this to be profitable.
There are other government barriers to international trade that are hard to classify, for example, administrative protection, the invisible tariff, or non-tariff barriers. As traditional trade barriers have declined since World War II, the non-tariff barriers have taken on added significance. They include such things as customs documentation requirements, marks of origin, food and drug laws, labeling laws, anti-dumping laws, “buy-national” policies, and so on.
Terms Of Sale
International terms of sale indicate how the importer and exporter divide risks and obligations and, therefore, the costs associated with specific international transactions. When quoting prices, it is important to make them meaningful. The most commonly used international trade terms include the following:
- Currency of Settlement: Some exporters always set their prices in U.S. dollars, which results in the importer bearing the foreign exchange risk arising from the transaction.
- Shipping Terms: It is essential that both the exporter and the importer are clear as to exactly what is included in the price quotation. There are five primary alternatives with regard to shipping terms. These are (a) Delivered Duty Paid: the export price quoted includes the costs of delivery to the importers’ premises; (b) Cost, Insurance, Freight (CIF): the exporter quotes a price that includes coverage of transport and insurance charges to a named overseas point of disembarkation; (c) Free on Board (FOB): the exporter’s price quote includes coverage of all charges up to the point when the goods have been loaded onto the designated transport vehicle; (d) Free Alongside Ship (FAS): the exporter’s price quote includes coverage of all charges up to delivery of the goods alongside the vessel at the named port of shipment; and (e) Ex-Works: the price quoted by the exporter applies at a specific point of origin, usually the factory, warehouse, mine, or plantation, and the buyer is responsible for all charges from this point.
Foreign Commercial Payments
The sale of goods in foreign countries is complicated by the risks encountered when dealing with foreign customers. There are risks from inadequate credit reports on customers; problems of currency exchange controls, distance, and different legal systems; and the cost and difficulty of collecting bad debts that a require a different emphasis on payment systems. When conducting transactions in the domestic market the typical payment procedure for established customers is an open account. However, the most frequently used term of payment in foreign commercial transactions for both export and import sales is the letter of credit. The five basic payment options for both importers and exporters in decreasing order of attractiveness for foreign commercial transactions are as follows:
- Cash in Advance: The exporter receives payment before the shipment of goods. This minimizes the exporter’s risk and financial exposure since there is no collection risk and no interest cost on accounts receivable. However, importers will rarely agree to these terms since it ties up their capital and the goods may not be received.
- Letter of Credit: These are widely used in international trade since they minimize the risk for both exporter and importer. A letter of credit is a document issued by the importer’s bank guaranteeing to pay the exporter so long as conditions relating to the sale, which are specified in the letter of credit, have been met. An irrevocable letter of credit, where cancellation or modification of the original terms is not possible without the mutual agreement of both importer and exporter, is usual and best. Confirmed letters of credit, which are supported by not only a foreign bank but also a bank in the exporter’s country, are often used. With a confirmed letter of credit, the exporter is guaranteed payment even if the foreign bank does not honor its commitments.
- Draft: This is an order, addressed to the importer by the exporter, specifying when a given sum of money is due from the importer or its agent. Sight drafts are payable immediately upon presentation to the importer or its agent, for example, a bank. Time drafts are payable at a specified future date. Because of the lag between acceptance and payment, they are a useful financing device.
- Open Account: The exporter ships the goods first and bills the importer later in accordance with the agreed credit terms. Since evidence of the importer’s obligations is not as well specified as with other instruments of payment, payment is often difficult to collect if the importer defaults.
- Consignment: The exporter retains title to the goods until the importer has sold them. It is a highly risky method of payment, usually restricted to dealing with affiliated companies. These terms are only offered to very trustworthy importers.
Foreign Trade Zones
The number of countries with foreign trade zones (FTZs) has increased as trade liberalization has spread throughout the developed and developing world. Most FTZs function in a similar manner regardless of the host country.
In the United States, FTZs extend their services to thousands of firms engaged in a multitude of international trade-related activities. More than 150 FTZs are located throughout the United States. Goods subject to U.S. customs duties and quota restrictions can be landed in these zones for storage or such processing as repackaging, cleaning, and grading before being brought into the United States or re-exported to another country. Merchandise can be held in an FTZ even if it is subject to U.S. quota restrictions. When a particular quota opens up, the merchandise may then be immediately shipped into the United States. Merchandise subject to quotas may also be substantially transformed within an FTZ into articles that are not covered by quotas, and then shipped into the United States free of quota restrictions.
In cases where goods are imported into the United States to be combined with locally made goods for re-export, the importer can avoid payment of U.S. import duties of the foreign portion and eliminate the complications of applying for “duty drawback,” as discussed earlier, that is, a request for a refund from the government of the duties paid on imports that are later re-exported.
Other benefits for companies using FTZs includes lower insurance costs due to greater security required in FTZs; more working capital, since duties are deferred until the goods leave the FTZ; the opportunity to stockpile products when quotas are filled; significant savings on goods or materials rejected, damaged, or scrapped for which no duties are assessed; and, exemption from paying duties on labor and overhead costs incurred in an FTZ which are excluded in determining the value of the goods.
Customs Bonded Warehouse
A customs bonded warehouse is a secure area within a customs territory where dutiable foreign merchandise may be placed for a period of up to five years without payment of duty. Only cleaning, repacking, and sorting may take place. The owner of the bonded warehouse incurs liability and must place a bond with the local customs department and abide by those regulations pertaining to control and declaration of tariffs for goods on departure. The liability is cancelled when the goods are removed.
Bibliography:
- Philip R. Cateora, Mary C. Gilly, and John L. Graham, International Marketing (McGraw-Hill Irwin, 2009);
- C. Mathur, International Marketing Management (Sage, 2009);
- A. Nelson, Import/Export: How to Get Started in International Trade, 3rd ed. (McGraw-Hill, 2000);
- Sak Onkvisit and John J. Shaw, International Marketing (Routledge, 2009);
- Jan Ramberg, Guide to Export-Import Basics: Vital Knowledge for Trading Internationally (ICC, 2008);
- Terpstra and R. Sarathy, International Marketing, 8th ed. (Dryden Press, 2000).
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