5/13/2015

Incoterms2010Rules:RevisitingtheCorrectUsageoftheTermsPart1

InternationalTradeBlog

Incoterms2010Rules:RevisitingtheCorrect
UsageoftheTermsPart1
11/27/116:00PM|ROBERTOBERGAMI|INCOTERMS

Internationaltradeisbothimportantand
problematic.
Important,becauseweliveinaglobally
interconnectedeconomywherewe
dependononeanotherforcommercial
activity.Attimesthisdependenceis
dangerous,astheproblemscreatedin
onecountrymayaffectothers.Agood
exampleofthisistheglobalfinancial
crisisandthecontinuingfalloutthathasspreadfarbeyondtheUS,affectingmarketsin
theEU,amongothers.
Problematic,becauseinternationaltradeisnoteasy.Asoneofmyformerstaffmembers
usedtosaywhentryingtoexplainthecomplexityofexporttransactionstoothersinthe
organisation:whenyouexport,youjustdon'twhistleforataxi.Howtruethisis.
Thepurposeofthisarticleisnottoexplorethevariouschallengesandbenefitsof
internationaltradetransactions,asthiswouldprobablyfillupaseriesofvolumes.
Rather,thisarticlerevisitsthecontinuingproblemofoneaspectofinternationaltrade
transactionsthatcontinuestocreatepotentialproblemsthatis,theincorrectapplication
ofIncoterms2010rules,basedonthemodeoftransportandcommercialpractices.
RecentresearchinAustraliahasshownthefollowingdistributionofIncoterms
internationaltradetermsusageamongexportersofmanufacturedgoodstothe
AssociationofSoutheastAsianNations(ASEAN),asshowninFigure1.Itshouldbe
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notedthatthisresearchwasconductedjustpriortotheintroductionoftheIncoterms
2010,andthetermshavebeenadjustedaccordinglytoreflectcurrentusage.

Figure1:Incoterms2010RulesUsagebyExporterstoASEAN
TherearesomeinterestingdatapatternsthatcanbeobservedfromFigure1.Theterm
ExWorks(EXW),thatistransportneutralasfarasthesellerisconcerned,isusedin
18%ofoccasions.Onfurtherenquiry,itwasdiscoveredthatthetermisnotactually
beingusedasintended,andthatindeedthereareconsiderablevariations.
Letmeprovideanexample.AsellerinAustraliahascontractedwithabuyerinJapanfor
thesupplyofcertaingoodsonanEXWbasis.Thismeansthesellerisneither
responsibleforcarriagenorborderclearance.ThebuyerinJapanhascontracteda
freightforwardertopickupthegoodsattheseller'swarehouse.Theforwarderhas
advisedthesellerthattheywillneedforwardinginstructionsfromthemandthatthey(the
seller)willbeshownastheshipperonthetransportdocument.Furthermore,theseller
discoversthatthefreightforwarderhasbeenclearingtheconsignmentsforexport,
declaringthesellerastheexporter.
"Sowhat?"somemaywellask.Sowhatisthatthesepracticesarenotcorrect.The
sellerhasbecomealarmedaboutthis,worryingabouttheirriskexposureandaskswhat
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theycando.ThesimpleanswertothisistorevisittheIncoterms2010andapplythem
correctly,andthatiswhatwearegoingtodonow.
Imaginetheconversationbetweenthesellerandtheiradviseronthisissue.Itmaygo
somethinglikethis:
Adviser:Whydidyouprovidetheforwardinginstructionstothefreightforwarder?
Seller:Becausetheyaskedforthem.
Adviser:Areyouresponsibleforthecontractofcarriage?
Seller:No,thebuyeris.
Adviser:Didyouappointthefreightforwarder?
Seller:No,thebuyerdid.
Adviser:So,ifyoudidnotengagethefreightforwarderandyouarenotapartytothe
contractofcarriage,whywouldyoucompletetheforwardinginstructionsthatusually
statethatyouareauthorisingtheforwardertodothingsonyourbehalf?
Seller:Iamnotsure.Theyaskedustodoit,andtheywerequiteemphaticthatitwas
ourresponsibility.
Adviser:Well,theshortanswertothisproblemisthatyouhavenoobligationtocontract
forcarriageormakeanyarrangementsforcarriageand,infact,youarenottheexporter.
Seller:Buttheforwarderhastoldusthatweneedtobeshownastheshipperonthe
transportdocument.
Adviser:Theforwarderhasnotbeenengagedbyyou,andtherefore,thereisno
contractuallinkbetweenyouandthem.Theyaskwhattheylike,butthatdoesnotmean
theyaregoingtogetit.Whoispayingthemtoperformthearrangementforclearance
andcarriage?
Seller:Thebuyer.
Adviser:And,therefore,youarenotresponsibleforthesecharges,correct?
Seller:No,wehavenothingtodowiththese.
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Adviser:Andyoushouldhavenothingtodowiththeseprocesses.Bytheway,doyou
getacopyoftheexportdeclarationmadetocustoms?
Seller:No.Whydoesitmatter?
Adviser:Well,Iwouldbeconcerned.Youhavenoideawhatthefreightforwarderis
declaringtocustoms,yettheyareusingyourorganisation'snameindoingso.Thisis
riskyfartooriskyforme.Iwouldnotbehappyaboutit.IfIamnotexporting,my
organisationshouldnotbenamedanywhere.
Seller:So,whatshouldIdo?
Adviser:Hereisasuggestion.Donotcompleteforwardinginstructions.Donothave
yourselfshownastheshipper.Insteadletthefreightforwarderbeshownastheshipper,
asafteralltheyareactingonbehalfofthebuyerunderinstructions.Andonemorething,
asyouaresellingEXW,atleastunderAustralianlegislation,youarenottheexporter.
Certainlythatishowthetaxationdepartmentlooksatit,sodonothavethefreight
forwarderlistyouastheselleronthecustomsexportdeclaration.Again,theycanlist
themselvesasbeingtheagentofthebuyer.
Seller:Butwillthisnotmakeitmorecomplicatedormessy?
Adviser:No,notreally,butitmaycreateproblemsforthebuyerfromataxperspective.
ButIamnotataxexpert,soyouwouldneedfurtheradvice.Thereisanotheroptionto
overcometheissueofexportclearanceandpotentialbuyertaxationliabilityatthelocal
level.SellFreeCarrier(FCA),andmakethedeliverypointyournominatedworks.
Seller:ButthismeansthatIhavetodotheexportclearanceandprovideatransport
documenttothebuyer.
Adviser:No,itdoesnotmeanallofthat.Yes,youdohavetoprovideexportcleared
goodstothebuyer'sagent(thefreightforwarder).Itmeansthattheriskintransitwill
transferfromyoutothebuyeratthenominatedpremises.Itdoesnotmeanthatyou
havetoprovideatransportdocument,unlessyouagreetodoso.Ifyoudonotwantto
enterintoacontractofcarriage,thenyoudonothaveto.Doesthismakesensetoyou
now?DoyouunderstandwhereyoustandonanEXWtransactionandthatyoucanuse
FCAinsteadtoovercomesomeofthedifficultiesthatEXWmaypresent?
Seller:Yes,Igetitnow.Thanksalot.Thiswashelpful,butIhaveonemorequestion.
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MayIask?
Adviser:Sure,goahead.
Seller:Wearesendinggoodsincontainersbysea,asyouknow,sowhynotuseFOB?
Adviser:Ohdear,thisrequiresanothersession....
StaytunedforPart2.

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