International Trade Terms
The process of international trade is complex, and it involves multiple participants, including the exporter, importer, the country or region where the goods and services are provided, and the various agencies and individuals involved in the process. In order to ensure that the involved parties understand each other and their respective duties, it is important to clearly understand the various international trade terms that are used in international trade.
Incoterms: Incoterms, also known as international commercial terms, are a set of 11 trade terms developed by the International Chamber of Commerce that provide abbreviated terms for the delivery and acceptance of goods between buyers and sellers for international trade. Each Incoterm defines the responsibilities of both the buyer and seller for delivery, clearance, and insurance costs related to the goods. Additionally, the Incoterms provide detailed guidance on the location of delivery, legal rights and obligations of the seller and buyer, and the point at which the risk of loss or damage transfers from seller to buyer.
Incoterms are essential to good communication between buyers and sellers, and they help to reduce ambiguity when negotiating international business deals. Furthermore, Incoterms are used by both logistical services providers and customs authorities in order to facilitate the movement of goods.
International Contracts: When international trade agreements are made, the parties must create an international contract in order to clearly outline their obligations and rights with respect to the transaction. Generally speaking, international contracts are more detailed and complex than domestic contracts, as they must consider various elements, such as the payment terms, the governing law, and the dispute resolution mechanism. Furthermore, international contracts often include a provision on currency conversion.
The terms and conditions covered in an international contract are highly dependent on the specific parties involved, the type of goods being exchanged, and the type of contract selected (sale, lease, supply, etc.). As such, it is important to have an experienced attorney review and draft any international contracts in order to ensure that all of the obligations and rights of the parties are clearly stated, and to limit the potential for legal disputes.
Tariffs and Duties: Tariffs and duties are taxes imposed on goods imported and exported, respectively. Tariffs are generally imposed by the importing country and are assessed on the value of the goods being imported. Duties, on the other hand, are imposed by the exporting country, and they can be assessed on the value of the goods being exported as well as the value of the services involved in the production and delivery of the goods.
Tariffs and duties are subject to change, both in amount and form, depending on the specifics of the international trade agreement. As such, it is important to understand all applicable tariffs and duties in order to accurately calculate the real cost of goods being imported or exported.
Exchange Rate Risk: Exchange rate risk is the risk that changes in exchange rates will affect the profitability of a given transaction by decreasing the value of one of the currencies. This risk is present in all international trade, as fluctuations in exchange rates can cause goods and services to become more or less expensive in a given currency.
In order to mitigate exchange rate risk, companies can enter into forward currency exchange contracts, which will lock in a given exchange rate. Alternatively, companies may choose to hedge their exposure to exchange rate risk by investing in financial products such as currency options and futures.
Export/Import Regulations: Export/import regulations are laws and regulations that outline the requirements necessary to legally move goods across international borders. Generally speaking, export/import regulations have been created to protect domestic industries by ensuring that goods are safe for use, and ensuring that certain goods are not imported or exported in certain amounts.
In order to remain compliant, companies must understand both the regulations of the country from where goods are being exported, as well as the regulations of the country into which goods are being imported. Furthermore, companies should be aware of international trade laws, such as the WTO, as well as any preferential trade agreements between the importing and exporting countries.
Insurance: International trade is inherently risky, as goods must travel long distances and be transported via various means of transportation. In order to ensure that goods reach their destination without being damaged or stolen, the involved parties can purchase trade insurance. Trade insurance is a type of insurance policy that pays out in the event that goods or services do not reach the buyer in the prescribed condition.
In addition to paying out in the event of damage or loss, trade insurance may also cover various aspects of the transaction, such as customs costs and other fees. While it is not essential to purchase trade insurance, it is one of the most effective ways to limit the risk of financial loss due to damaged or stolen goods.
By understanding the various international trade terms, companies can make well informed decisions when engaging in international trade, and can actively reduce the potential for complications and disputes. Additionally, the knowledge of international trade terms will make navigating the complexities of international trade smoother.
