To qualify for preferential duties, exporters must meet ROO rules, but these are complex – and strict compliance is essential to avoid costly customs audits. In this article, we outline what companies need to understand about rules of origin – and highlight the key points exporters must manage to avoid failing an audit.

What rules of origin actually do

Rules of origin are fundamental to international trade because they gatekeep access to Free Trade Agreements (FTAs). ROOs determine the economic nationality of a product, i.e., where a good is truly considered “from” for tariff purposes.

Rules of origin are the laws, regulations and administrative guidelines that governments use to determine an imported product’s country of origin, not always an easy matter when the raw materials, manufacturing, processing or assembly of a product can be provided in several different countries.

For example, simply shipping a product from, say, Canada to the EU, does not automatically grant it preferential treatment under the Canada European Union Comprehensive Economic and Trade Agreement (CETA).

If the product uses inputs from outside the FTA zone, it must undergo substantial transformation in the exporting country to be deemed “originating” in that country.

Exporters must meet the strict, product-specific criteria laid out in each FTA, in order for the product to qualify as “originating” and become eligible for reduced or zero tariffs.

Two main types of rules of origin

Rules of origin are generally categorized into two distinct types, each serving a different purpose in international trade: preferential and non-preferential.

Preferential ROO

These are the rules that matter most to exporters seeking a competitive edge. Preferential ROO are applied exclusively within the framework of FTAs, such as USMCA (formerly NAFTA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), or the Regional Comprehensive Economic Partnership (RCEP).

Meeting these rules is how a product qualifies as “originating” under the terms of the agreement, which in turn grants it preferential tariff treatment. In practice, it means that importers pay either a reduced or a zero-duty rate.

Non-Preferential ROO

Non-preferential ROO determine a product’s origin for general commercial purposes and are applied unilaterally by a country (or by multilateral organizations like the WTO) in cases where no FTA benefits are being claimed.

These rules do not usually grant any special tariff advantages, but countries still impose these rules for various administrative and trade remedy reasons, for example:

• Trade statistics: Accurate recording of import and export data.
• Country-of-origin labelling: Determining the “Made In…” label required on goods.
• Trade remedies: Applying specific measures like anti-dumping or countervailing duties against goods determined to originate from a specific country.
• Government procurement: Determining the eligibility of a product for public tenders.

While both rule types are legally required, for the specific goal of maximizing profit and offering cost savings to your buyers through lower import duties, preferential ROO are the primary focus for any company using an FTA.

How to figure out the rule for your product

Determining origin starts with classification. Every product in global trade is assigned a specific harmonized system (HS) code by the World Customs Organization (WCO).

The World Customs Organization says that,

“At the heart of international trade, the harmonized system is an essential tool for harmonizing and facilitating the movement of goods around the globe.”

The HS code is the anchor for all trade rules. Once you have the correct HS codes for your exported product, you can look it up in the relevant FTAs’ annex or schedule, which will detail the product-specific rule (PSR) you need to meet. These rules fall roughly into four categories:

Wholly Obtained (WO)

This is the most straightforward rule. Here, goods must be entirely sourced or produced within the territory of one FTA member country. None of the materials used to produce the goods can be non-originating. Wholly obtained goods automatically qualify as originating.

Clear examples include minerals extracted from the ground, live animals born and raised, or fish caught by vessels registered and flagged to that country.

Change in Tariff Classification (CTC)

CTC rules are the most common method for manufactured goods that use imported components. The core principle is that non-originating inputs must undergo sufficient production or processing within the exporting country.

In other words, the finished product is classified under a different HS code than the inputs. There is a minimum shift in classification required for this rule to apply. Depending on the rule, the required “shift” can be at a high level – implying a change in the applicable chapter of the HS code.

Some rules allow more granular changes in how to find HS code, for example, a change in subheading. It depends on the specifics of the free trade agreement.

Regional Value Content (RVC)

The RVC rule dictates that a certain minimum percentage of the final product’s value must originate from within the FTA region.

According to Export Development Canada,

“The imported components must undergo significant transformation during manufacturing to be considered as originating from the trade agreement countries.”

This rule is often used for products where a tariff shift alone is not considered a sufficient transformation. Think about really complex assemblies, such as a car or industrial machinery.

The FTA will specify the calculation method to be used, but the common ones are the transaction value method, which looks at the selling price of the product, and the net cost method, excluding costs such as marketing and royalties.

Specific Process Rules

For a limited set of international business contracts, origin is determined by requiring the completion of a specific, non-tariff-based manufacturing or chemical process.

This rule is often applied to industries like textiles, chemicals, and refined metals (steel), where the process itself is the measure of substantial transformation, regardless of the resulting HS code.

Key points exporters must manage

ROO compliance requires diligence across multiple parts of your supply chain and record-keeping system, including:

• HS code accuracy: Incorrect classification is the most common and costly mistake, as using the wrong HS code immediately leads to an inaccurate ROO determination. This can result in your buyer being denied the preferential tariff.
• Understanding the applicable rule: Different FTAs have different rules, so a product that qualifies as originating under CETA may not qualify under USMCA due to varying RVC thresholds or CTC requirements.
• Tracking inputs: For any product not wholly obtained, you must trace the origin and processing of your components. That includes where inputs are from, the relative value of each input, and its transformation status.
• Maintaining documentation: Exporters are required to keep records to back up every origin declaration, including bill of materials and supplier declarations. Cost breakdowns and production records are also critical.
• Issuing the certificate of origin: The required format depends on the FTA and can vary from self-certification (USMCA, CPTPP, and CETA) to government-authorized certificates, particularly in the case of older regional agreements.
• Importer responsibilities: The importer is the party legally responsible for claiming the preferential tariff rate and ultimately liable for any inaccuracies. Importers must retain the origin documentation provided by the exporter.

Note that under certain FTAs (like RCEP), the importer is permitted to issue the origin declaration themselves, placing the compliance burden directly on them.

Common pitfalls

Navigating rules of origin is complex, with even experienced exporters making mistakes. Common pitfalls include:

• Assuming “Made In X” means “Originating in X”: The country where a product is made is not the same as its origin according to trade rules. Something can be made in one country, but fail to qualify as originating in that country according to an FTA.
• Trusting supplier classifications: Exporters often assume the materials provided by their suppliers meet the origin criteria – but should instead verify via a formal supplier declaration or certification.
• Ignoring the De Minimis rule: The de minimis rule is a tolerance that allows a small percentage of non-originating inputs to be used without affecting the origin status, provided the product otherwise meets its ROO.
• Origin when suppliers change: A change in your supply chain, even switching suppliers within the same country, can alter the origin status of your materials.

It’s also worth noting that when a regional value content rule applies, errors in calculation, including the wrong valuation method or non-allowable costs, can invalidate the entire origin claim.

ROO knowledge is core to the correct trade declaration

Ultimately, understanding and mastering the rules of origin is just non-negotiable. Strict compliance ensures your product is correctly documented, which protects your company during customs audits.

Achieving assured originating status directly translates to financial benefits by allowing your product to access lower tariffs (often zero duties) under FTAs, which immediately helps with competitive pricing in new markets.

It’s a win-win, but the rules are complex. Close adherence is an absolute must.

The post Rules of Origin: What You Need to Know appeared first on Trade Ready.

With geopolitical tensions reshaping supply chains, unilateral tariffs disrupting established trade agreements, and regulatory complexity increasing across regions, global business decisions carry more weight and risk than ever before.

According to the World Trade Organization, global merchandise trade volumes are projected to grow in 2026, but at a slower and more volatile pace than in previous decades, driven by geopolitical fragmentation and policy uncertainty. In other words: opportunity is there, but so is risk.

Against this backdrop, the most successful organizations are not asking whether they should grow internationally. They’re asking smarter questions about how.

1. What are some of the most important steps to take before venturing into a new market?

One of the most common mistakes in global expansion is reacting to opportunity before assessing readiness.

Before venturing into a new market, organizations should conduct a situational analysis, including assessing organizational readiness and planning and analyzing the results of international market research. This is not simply a planning exercise, it is a risk filter.

As the guide explains, “Before an organization embarks on a new initiative in international trade, it is important to assess the organization’s current conditions, attitudes, and resources”. This assessment helps determine whether the initiative is feasible and whether the potential gains justify the exposure.

Companies that skip this step often become reactive exporters, responding to inquiries without clear strategy or trade expertise. In today’s environment, readiness is a competitive advantage.

2. What international market research do you need to do before expanding into a new market?

International expansion demands structured research, not guesswork.

The guide outlines a seven-stage approach to international market research, beginning with defining the research objectives and progressing through stages such as screening potential markets, selecting the research design and data sources, and ultimately presenting conclusions to then apply the research. Each stage reinforces disciplined decision-making.

Beyond methodology, macroeconomic indicators play a critical role. The guide highlights key data points including Gross Domestic Product (GDP), GDP per capita, Household Disposable Income, market size, unemployment rate, population, and inflation rate. These metrics help businesses evaluate market suitability and purchasing power before committing resources.

In other words, expansion decisions should be evidence-based—not optimism-based.

3. How do tariffs introduced unilaterally by the U.S. government affect trade between Canada, the United States, and Mexico, even with CUSMA in force?

North America illustrates how quickly trade conditions can shift.

While CUSMA is designed to facilitate trade, recent unilateral tariff actions by the U.S. government (2025) have disrupted this predictability. Businesses that once relied on stable, tariff-free access have faced sudden cost increases and regulatory uncertainty.

As a result, companies must assume volatility. The guide notes that businesses must assume the possibility of future, unexpected tariffs and plan accordingly. Practical strategies include diversifying supply chains, strengthening trade expertise and maintaining contingency plans.

The broader lesson extends beyond North America: formal agreements do not eliminate political risk. Professionals must remain agile and informed.

4. What integrative export and FDI approaches can businesses employ when expanding into Asia?

International growth is not limited to exporting finished goods.

Organizations can expand through export, international transfer, international partnering, or through FDI. Within these pathways are multiple approaches: indirect export, direct export, licensing, franchising, strategic alliances, representative offices, greenfield investments and mergers and acquisitions.

Each model carries different levels of investment, control and exposure. For example, the guide explains that Greenfield/Brownfield investing is the riskiest and most expensive market expansion option. Conversely, indirect export may limit risk but also reduce market visibility and control.

Selecting the right strategy requires alignment between organizational capacity and long-term objectives. There is no universal blueprint, only informed decision-making.

5. When a company expands into a new market, how important are cross-cultural considerations?

Market entry is not only about economics and logistics. Cultural alignment can determine success or failure.

The guide emphasizes that understanding and adapting to cross-cultural differences is critical for success. Communication styles, consumer behaviour, marketing imagery and negotiation practices can differ significantly between markets. Ignoring these nuances risks damaging relationships before they begin.

Cultural intelligence reduces friction, accelerates trust-building and strengthens long-term positioning.

6. How are tariffs determined on products that are being exported?

Amid strategic discussions, technical fundamentals remain essential.

A tariff is the rate that is used to determine the amount of duty that will need to be paid to the government of the importing country when goods are shipped internationally. Tariffs are determined using the Harmonized System (HS) of nomenclature, an internationally standardized coding system. Many governments have online tools for importers and exporters to determine and obtain a HS code for their materials and products.

Accurate classification directly affects cost, compliance and clearance timelines. Errors can lead to delays, penalties or reputational damage. For international professionals, understanding these mechanisms is not optional, it is operational risk management.

A more disciplined approach to global growth

Across regions, from the United States to China, the Middle East and the Caribbean, the opportunities are real. So are the risks. Regulatory unpredictability, infrastructure differences and currency considerations all influence outcomes.

As the guide concludes, a well-informed and adaptable approach is central to long-term success.

For professionals navigating global markets today, the essential questions are not simply “Where can we grow?” but:

• Are we prepared internally?
• Do the macroeconomic fundamentals support entry?
• What risks exist within the regulatory and political landscape?
• Which market entry model aligns with our capabilities?
• Do we understand the cultural and compliance dimensions well enough to execute effectively?

Exploring these questions in greater depth, along with region-specific insights and practitioner perspectives, can help organizations move from reactive expansion to structured global strategy.

For readers interested in examining these issues further, the Essential International Trade Questions Answered guide offers additional context and practical insight drawn from experienced international trade professionals.

The post 6 Essential questions every international business professional should be asking before they go global appeared first on Trade Ready.

International customs have to deal with an increasingly complex network of international movement—from shipping to travel customs—without incurring any new security risks. This is a lot for any system to handle. But without effective technology to help, customs compliance can be a nightmare.

Fortunately, there’s a potential solution: implementing AI in customs processes.

Algorithmic processes for scanning and determining HS codes, handling eCommerce customs declaration, and international trade facilitation are potential game changers.

If AI is helping the customs industry streamline a process like determining HS codes, for example, it can reduce processing time and human error. The result: more accuracy, faster cross-border movement, and smoother world trade.

But how are customs officials using AI, and is it having an impact? Let’s start with one of the most vexing challenges for customs officials: HS codes.

Streamlining HS classification with AI

Harmonized System codes are vital for classifying goods for customs. They identify product categories, help countries accurately apply their tariffs, and track trade data. However, they also add potential wrenches to the system, which can make customs processing more complicated.

The sheer volume and complexity of these products can be difficult to deal with. Yet according to Aleksei Bondarenko, Ph.D., an international trade consultant, implementing AI can drastically simplify HS classification and processing.

With AI assistance, customs officials could potentially reduce the time they spend on determining HS codes by up to 80%.

If possible, this would help eliminate customs logjams and make customs much easier to handle for large-scale trade.

It’s also a benefit for e-commerce. An e-commerce company might ship thousands of products worldwide. In many cases, businesses assign HS codes themselves and are responsible for doing so accurately. Repeating this process manually can be a hassle for companies that could otherwise spend time thinking about fulfillment and getting their orders shipped on time.

Tools like Traide and eClear offer AI-enabled support for identifying products for international shipping, taxation, and more. With the right offering, AI can help lower the barrier to entry for up-and-coming e-commerce businesses. 

AI in customs declarations and documents

If every country had similar rules, customs declarations wouldn’t be a problem. But it’s a big world. And every country has its own set of rules. 

A lot of elements can impact how shipping works between multiple countries. A country might set especially stringent customs laws, requiring multiple parties to approve certain types of products. Another country might have higher tariffs on specific industries or products from particular countries, increasing the financial burden on anyone doing the importing/exporting. And if there’s a mistake with any of the above, it can throw a wrench into just about any customs processing system and create all sorts of headaches

But there’s hope.

“AI can streamline the preparation of customs documents, particularly customs declarations,” notes Aleksei Bondarenko.

“AI systems autonomously extract necessary information from provided documents such as invoices, bills of lading, and certificates, as well as from ERP systems, and automatically draft the declarations.”

In other words, AI cuts the busywork out of customs declarations and documents—cumbersome, error-prone work that might be full of difficulties if handled the traditional way. 

AI is also comprehensive. It doesn’t get tired and its vision doesn’t get blurry when it’s close to the end of the day. For example, AI systems might receive different styles of documents related to customs processes—invoices, bills of lading, certificates of origin. Too many documents from too many sources might overwhelm someone who’s looking forward to lunch. But with algorithms and trained models, AI can quickly disseminate disparate information and consolidate it for easier processing.

Information extraction works the same way. Thanks to the sophistication of modern AI, it’s capable of scanning documents and extracting relevant data on its own. Product descriptions, quantities, HS codes—AI can handle them all. And it’s capable of detecting what type of information it might be looking at in a specific context. 

AI models can then structure this data into an organized, preformatted output, making it easier for customs officials to process. This streamlines their ability to work, saves time, and ultimately, helps ensure more accuracy. 

One potential output: customs declarations. Professionals can look over customs declarations for accuracy, of course—and they should. But the drafting of the declarations can sometimes be tedious work. And it’s work that AI can easily fill. Even with some time spent reviewing the facts of the customs declarations, the overall time spent creating these declarations would be a fraction of the time it took to create and edit them.

Services like icustoms and Descartes Systems Group are helping companies fill in the difficulties of customs processes with machine-based support. 

Using AI to recognize patterns and analyze risk

If facilitating trade were as easy as stamping the receipts, there wouldn’t be any risks involved. But customs authorities also have to balance their facilitation of quick, seamless trade with the risks. Smuggling, fraud, and customs compliance issues make it difficult to achieve faster customs processing.

But AI does have some promising solutions. It can analyze a vast amount of historical data to look for patterns. Once it has those patterns, it can even predict potential risks with accuracy.

AI won’t wipe out the need for human supervisors—but it can flag high-risk shipments based on factors like product types, compliance issues throughout the product’s commercial history, and more.

The result is that customs officials achieve a more thorough grasp of everything that’s moving underneath them.

Automating regulatory verification

Finally, trade regulations are there for a reason. Ensuring commerce meets the needs of these regulations can get complex, however. Customs officials have to verify their shipments adhere to the laws and standards of the country that enforces them. The more countries get involved, the more complex compliance inspection becomes—which slows down commerce.

AI can help with compliance inspections by automating regulatory verifications. For example, an AI tool might cross-reference shipment data with any applicable regulations. If it spots a discrepancy, it can flag it for supervisors to review.

Everything from accurate HS codes to proper documentation can fall under the watchful eye of AI.

Integrating AI into customs processes can be transformative. Global trade is increasingly complex. New regulations pass all the time. Situations change, nations modify trade agreements, and new products enter the marketplace. Thanks to the speed of comprehensive reviews of AI, that doesn’t have to be a problem.

In the future, customs processing will likely be a hybrid of AI-enabled tools and human supervisors double-checking the work. AI won’t replace humans, but it will make them faster—and that could make customs processing a much more efficient process across multiple borders.

The post How AI is being used to streamline customs processes—now and in the future appeared first on Trade Ready.

COVID-19 is continuing to influence international trade. The supply chains of small and medium-sized enterprises (SMEs) are facing all kinds of disruption due to the current fast-moving and ever-changing situation. The reality is that many SMEs are struggling to continue their businesses, an element of which has been conflicts or disputes with their suppliers.

The Incoterms® rules are an internationally recognized standard and are used worldwide in international and domestic contracts for the sale of goods. Incoterms® help businesses operating internationally avoid costly misunderstandings by defining the costs, risk and obligations in each international trade transaction, protecting both parties.

Incoterms are one element of many in building strong, clear contracts that can protect both SMEs and their vendors, ensuring proper communication, expectations, and clear procedures in the case of disruptions. For SMEs especially, this is critical to their success, and even survival in challenging times.

To help get some answers on how SMEs can protect their supply chains and their businesses during this time of disruption we brought together experts in supply chain management, contracts, customs and the Incoterms® 2020 rules to answer key questions on how SMEs can protect themselves and have confidence in their international transactions.

The conversation was led by moderator Emiliano Introcaso, CITP – Export Advisor, Export Development Canada, EDC

Emiliano has close to two decades of experience working with manufacturers and exporters looking to increase their global growth by providing them with support and guidance in all things export.

His work focuses on navigating companies through the complexities of global supply chains, but also in the small details that can make or break an international trade transaction. Emiliano is an Export Advisor at Export Development Canada (EDC), a Certified International Trade Professional (CITP) with the Forum For International Trade Training (FITT) and an International Chamber of Commerce (ICC) Registered Trainer on Incoterms® 2020.

Incoterms rules are key to mitigating risk with your suppliers

Floyd Simpkins, CITP – Founder Simcor Solutions Inc., Incoterms^® 2020 Trainer

Floyd Simpkins has over 35 years of international business experience in both the private and public sectors. He’s worked as a senior trade consultant with the government of Ontario, led multiple private sector companies to success in their international ventures as Founder of Simcor Solutions and is a certified Incoterms^® 2020 trainer.

Emiliano: How can Incoterms rules be used to ensure contracts have covered all the different key areas of risk and provided proper instruction for any disruptive scenario of the deliveries?

It’s a very important question in today’s environment, and what it comes down to depends on the risk tolerance of both parties. How much risk is a seller willing to take given its size and capabilities, and correspondingly, how much risk is the buyer willing to assume, and how will this affect the prospective sale?

Using Incoterms in a COVID environment requires first and foremost, a whole lot of upfront discussion between sellers and buyers about that risk tolerance before the contract is established, and then the acceptable Incoterm can be applied to the shipment, because if we don’t have that, we’re not going to have any agreement on the contract.

Deciding which Incoterm to use is also more important now for sellers and buyers to access certain practical capabilities of their carriage partners, because we’re moving goods from seller to buyer.

For example: protocols that our providers have in place to manage COVID risk on delivery. Does a carrier now use some form of digital confirmation that delivery has taken place like a “no-touch” solution? An example of a possible solution to this matter is  what Conestoga College is doing – they are building a mobile software application that will help supply chain workers maintain physical distancing, and still obtain the necessary signatures to complete their delivery documentation.

For delivery drivers, typically when they arrive, they have to go into a building and get a physical signature, but this application will use geo-fencing to get a reading on where the trucks are, how they can be monitored to travel within that range to their destination, and then be routed to the correct door to deliver, and then stay in their truck and complete their documentation digitally. Those kinds of innovations might help us with a critical element, which is ensuring delivery has taken place.

Emiliano: What are some of the specific Incoterms that are particularly important for contracts in this type of environment?

If we look at it from the seller’s perspective, any term where the seller takes more responsibility for getting the shipment closer to the customer before officially transferring risks is particularly important. We can also think of Incoterms as a marketing and sales tool to keep our customers satisfied that delivery is going to be in their hands where, and when they want them. Using Incoterms to clarify risk where risk actually transfers in the contracts of carriage is the most critical at this time, especially where many different carriers are being used to deliver contracted product to buyers.

So we want to use the terms that get the product closer to the customer:

• CPT “Carried To Pay”
• CIP “Carriage and Insurance Paid”
• DAP “Delivery At Place”
• DPU “Delivered At Place Unloaded”
• DDP “Delivery Paid”

Those are terms that are particularly important in this environment to make sure that, above all, we’ve got the delivery point clearly identified because we’re trying to get it in the buyer’s hand safely and securely, and ensure that delivery is in the right place at the right time.

Learn more about the latest edition of Incoterms® and learn how to properly incorporate them into sales contracts and invoices

Emiliano: Since Incoterms® 2020 was just updated in January, what are some of the changes that importers and exporters should know about? Are there any specific resources that you would recommend?

There are a few technical terms that have changed. And one of the big ones was FCA where the buyer selects the means of transport. This is one to look at because FCA was clarified to make it very clear that when the goods are handed over to the buyer’s means of transport, that’s when delivery takes place. There are a lot of resources out there, both public and private.

I would suggest that FITT’s Incoterms training, now delivered online, is as good as any resource out there because it’s based directly on the partnership that they have with the International Chamber of Commerce – ICC, who defines the Incoterms in trading guides and materials.

Customs issues can quickly eat up profits and damage your reputation with customers. Avoid them by doing due diligence and working with experts.

Audrey Ross, CITP – Logistics & Customs Specialist, Orchard Custom Beauty

Audrey is the in-house expert on global shipping, supply chain operations, customs and international tax for Orchard Custom Beauty, a cosmetics and private labeling global project management specialist where she also manages the logistics coordinator position.

Emiliano: What are some of the problems that people are dealing with at the border with international shipments right now? And what are some of the tips you could provide to businesses on how to prevent those common issues?

The current situation specifically around COVID is just an increased scrutiny, which a lot of businesses weren’t prepared for. Depending on your product line, if your business had made pivots into making hand sanitizer or making fabric face masks, for example, there will be increased scrutiny because these are highly regulated health and safety products.

For most businesses it was a great idea to pivot, but at the same time when there were some regulatory concerns that they may not have been aware of.

So for those kind of the hot items, anything around PPE fabric, face masks, even hand sanitizer pivots in general, the most common custom problems are around HS codes.

Make sure that your businesses is using the tariff tools, there’s a number of resources on TariffFinder.ca. The World Customs Organization can also help you out there. If you’re going into different countries, the World Trade Organization has lists as well. In terms of customs, HS codes are really the most important kind of descriptor. The next problem you might encounter is that your descriptions are too vague. Along with your HS code, customs authorities have to see what the description of your product is because they want to ensure that matches. So if you say that it’s say a bag, you need to specify what kind of bag, because as it turns out in chapter 42, there’s something like 50 different types of bags. Is it made of leather? Is it made a PVC? Is it a handbag? Those kinds of key descriptor words on your commercial invoice and even on your bill of lading are very important to helping match that HS code.

When you’re dealing with free trade agreements and cross border trade, there’s country of origin versus country of transit. I know here in house there can be some confusion from my teammates around this. If you see that a product or component is coming from this country and it’s going to the U.S., where was it made? Was it actually made in Canada? Was it made somewhere else? Because that’s going to have a big impact on the usability of those free trade agreements.

Another thing I’ve noticed is that the parties who were involved in the transaction are unclear. Now your business might be a bit more straight forward and you are a seller and you have a buyer. But for some of us, it’s much more complicated and we have a manufacturing partner. You might have an agent involved and you yourself are the overseeing party, which is sort of what Orchard does. We call these contracts triangulation. And then we have a buyer and we also have the party we are delivering to, and that might be five different addresses. How do you fill out that paperwork?

It’s important to be really clear on who’s doing what and show in your Incoterms who’s responsible at each point.

If you are doing importing, depending on what your Incoterm is and what you’ve set up, if you are the importer of record, you should be aware that in some countries you can’t have a foreign importer. For example if you’re making Canadian exports and you’re shipping down to Mexico, Mexico, doesn’t have a non-resident importer program. You need to rely on the person who’s buying the goods or another party to be able to import on your behalf because they have to be Mexican resident. And if you are the importer of record, the key from a customs department’s perspective is who’s making the payment of these duties and taxes? CBSA here in Canada wants to know who they’re getting the money from and that they’re going to get it.

Supply chain management has never been more complicated for SMEs. In today’s environment, it’s all about risk management.

Bruno Morin, CITP – Global Market Manager, Axens

Bruno has been working in international trade for 25 years. During that tenure he has been to more than 60 countries negotiating contracts. He has experience and expertise in all aspects of international trade, including shipping, customs, and finance. He also served on the FITT Board of Directors.

Emiliano: What are some of the main issues that suppliers and shippers are facing in terms of delivering the products and how can the SMEs work with their vendors to prevent them?

As an SME or a buyer, it’s perfectly normal to be nervous these days. So many things can go wrong.

And it’s not always the fault of the buyer or the supplier. We saw the strike at the Montreal port earlier this year, and all the COVID related problems and shut downs around the world at the ports. A common problem historically, is when a container gets damaged at the transshipment port, while in transit. That wouldn’t be the fault of the supplier or the buyer. It just happens.

So for me, it’s really important as a buyer, and as an SME, that you make sure your supplier has a good insurance policy, and that when you make a list of the required shipping documents, that the insurance certificate is included in that list. This you know your supplier is serious, and that if there’s a problem you have an insurance company that’s going to help both the supplier and buyer to resolve the problem, because the problem in international trade is the costs go up.

If you have a problem in transshipment or at arrival at the seaport, and you don’t have your documents done properly, your goods will get stuck at customs. The fees you have to pay will be on a per day basis. And if you are small, it won’t be long before the buyer is going to abandon this cargo because the fees are more than the value of the goods. So as a supplier, you’re stuck. Right now, again, it’s perfectly normal to be nervous, to ask for extra time. As an SME you probably can’t afford to go for just in time delivery. In my opinion, you need to plan for extra time for delays from A to Z. Your trucking company might not have a driver, because there was an explosion of COVID cases in that specific city. It’s better to receive the goods a little bit earlier than to wait until the last minute and risk having problems.

Emiliano: So what happens in the inverse situation where the buyer is dealing with a supplier delinquency? How would you address that?

The main point is as a buyer, you need to document each step. Before you signed the contract, you should have made sure the supplier had a good insurance contract. So with that assumption as a buyer, you need to document everything you did. As soon as you have a problem with the supplier, you need to file an “intent to claim” letter and send it to the freight forwarder and the buyer. Then, six months down the road after you went back and forth with the supplier and the insurance company, it’s documented that your intention was to get your money’s back either from the supplier or the insurance company.

Emiliano: Where should you position your suppliers and manufacturers to prevent disruptions and/or build in redundancy in case of emergency? Should you go closer to your customer base?

This is the whole other aspect of risk management.

In general, it’s recommended to have more than one supplier, because particularly these days with COVID, it’s quite risky to put all your eggs in one supplier.

For example, you might have a local supplier that has higher costs and the product that they sell is not perfect. But as a backup plan, it’s really important that you keep a good relationship with that local supplier, because your international supplier, that may have a better product at a lower price is physically very far away and therefore riskier in times of disruption.

Negotiating and signing a contract that clearly defines risk and responsibility is key to protecting your business, and even more important during times of disruption.

Clarecia Christie, CITP – Founder, Global Compass Consulting

With over a decade of experience, Clarecia’s professional focus is the intersection of international market access and women’s economic empowerment. She has managed projects commissioned by regional and international development agencies such as Global Affairs Canada, in various sectors in the Caribbean region, Central and South America.

Emiliano: Before the contract is written, what should SMEs be asking for from their suppliers/manufacturers to ensure that they cover their bases? As a buyer, what can you expect the suppliers to ask for during negotiations?

From an SME perspective, it’s always good to have an understanding of your supply chain from end to end.

And you need to know the rules of the game – the trade rules. If you’re going to be supplying to a country where you have a trade agreement, understand what you can capitalize on within that trade agreement and what you’d have to do to that product to make sure that it can enter that country. 

Capitalize on different trade rules or different provisions that are in a trade agreement that you can utilize. You may have to modify your product to adhere to the rules of that trade agreement which will have associated costs, so it’s extremely important to be aware of these considerations. Another thing that you’d have to look at is your suppliers to produce the goods, or if you’re manufacturing the goods offsite from out of your country, will they be able to deliver and what are their costs? Do you expect any change in the cost to produce that modified product? When you’re doing the costing of your product, you’re going to have to include that in it, to come to your final price.

So the questions you’re going to be asking that supplier include the cost to deliver time, and the capacity to deliver. You should also know before going into negotiations, are you going into a country where the culture is different from yours? Do you have to look at language changes? These are some of the many aspects that you have to take into consideration before the contract is written. And even before going to negotiate, you have to pull your costs together. Then, think about how you’re going to get the goods from one place to the next. Are there any problems or anticipated risks along the way? These are some of the things that an SME will be asking their suppliers and manufacturers, to ensure that they can actually deliver on the promise that they’ve made to their potential buyer.

Emiliano: What are some red flags that may come up during contract negotiations?

There are many red flags that can come up during a contract negotiation. Let’s take a look at something that’s a creative product. During your negotiations the other party may ask for transfer of your IP. You have to be diligent to understand why they would want that. Will that restrict you, your IP, or your product from selling to another company? So that is a red flag to look for. Another thing that we could look at is non-competition. Why would you ask for a non-competition clause for a product? Maybe you have plans to go into that field. And eventually the person who is your first supplier will be pushed out. Look out for payment. If someone is asking for payment upfront, from a buyer perspective that’s a red flag.

If you have a lead, you have to do your due diligence to learn more about who your buyer is and what their performance has been with other suppliers.

Emiliano: What are the most common contract errors SMEs make and how can they fix them/ prevent them? And when should an SME engage lawyers, or contract experts to help?

A common error I see is that a business gets an order and they’re really excited about it. It’s just a verbal agreement, and because the seller may be inexperienced and excited to fulfill this opportunity, they go ahead and start making preparations without due diligence. They haven’t thought about risk. Who’s going to take on the risk at what point of the logistics chain? A verbal contract is not a sound contract.

Another common error is also is flip-flopping on price.

You have to do your costing analysis and pricing analysis so that you know that the price that your contract is proposing is the price that will give you your profit will cover your costs and cover your risk.

I have seen instances where a price was quoted and the seller was very happy about that price, but inflation, foreign exchange, fluctuation rates have eaten away that profit. You don’t want to come back to a buyer who you have signed a contract with to say, I can’t supply these goods at that price.

Another thing that you have to be clear about is in which jurisdiction will any sort of dispute settlement occur and which method of dispute settlement. Make sure you have all your I’s dotted and your T’s crossed before going into a contract negotiation. It’s always good to pull together a team so that you have the expertise to cover all your bases. You’re covering most favored nation. You’re covering certificate of origin. Making sure you have the right HS code because you don’t want to be a burden on the buyer, but you also don’t want to be losing anything on your end.

And yes, you have to have legal counsel, whether you’re a seasoned exporter or a new exporter, because laws change. Even if you have a revolving contract, there are instances when laws change and whether you have a revolving contract or not, you’re going to have to make amendments to those contracts to go with the law of the land, especially if you’re using a third party jurisdiction for dispute settlement.

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