Incoterms 2020 Archives - Trade Ready

25 International trade terms you should know

FITT Team — Tue, 11 Nov 2025 17:03:46 +0000

In the world of global trade, effective communication is a must. Every deal depends on a mutual understanding of trade terms and practices, and each transaction contributes to the broader flow of international commerce.

As Peter Harrell of Carnegie Endowment for International Peace notes, “trade is a key element of solving global challenges that affect us all, like the green energy transition and the risks of AI and the digital economy.”

To compete and avoid costly mistakes, it’s critical for business owners, consultants, and aspiring trade professionals to learn the language of international commerce. Read on for 25 international trade terms you should know to confidently navigate global markets.

Basic international trade terms

On the most fundamental level, everyone should know these basic terms. They help to shape the foundation of cross-border trade.

Export – Sending goods or services from your country to another for sale.
Import – Bringing goods or services into your country from abroad.

Tariff – A type of tax one country places on goods coming in from other countries. It drives up the price of foreign goods for both foreign businesses and domestic shoppers. According to Michael Ligon of Forbes, tariffs may be used as a “tool to regulate trade, protect domestic industries, and generate revenue.”

Trade Balance – The difference between a country’s exports and imports. A positive balance means the country has more exports (a trade surplus). A negative one means that they have more imports (a trade deficit). To calculate trade balance, you’d use this equation: Trade Balance = Total Value of Exports – Total Value of Imports.
Exchange Rate – The value of one country’s currency compared to another. It affects how much it costs to buy and sell across borders.

Shipping and delivery terms

These shipping and delivery terms will help you clarify obligations and make the trade process more transparent for everyone:

Incoterms (International Commercial Terms) – Internationally recognized trade rules that outline seller and buyer responsibilities in an export transaction. These rules were created by the International Chamber of Commerce. The following terms are all examples of commonly used Incoterms.
EXW (Ex Works) – A situation where the seller makes the goods available at a specified location. The buyer pays all the transport and export costs.
FOB (Free on Board) – The point at which the seller no longer owns goods. It’s when ownership is transferred to the buyer. It also determines who is liable when goods are damaged during the shipping process.
CIF (Cost, Insurance, and Freight) – When the seller pays for transport and insurance to the destination port. Once the goods are shipped, the buyer becomes responsible for any further costs.
CFR (Cost and Freight) – The seller delivers the goods to the vessel at the port of shipment and then pays for transport. They do not pay for insurance. The buyer unloads the goods at the destination port and pays taxes, tariffs, import duties, and any further transportation costs. Risk transfers from seller to buyer as soon as the goods are on board.
DDP (Delivered Duty Paid) – A deal where the seller takes on all of the costs associated with the goods (transport, insurance/losses, and customs duties). Once the goods arrive at the agreed-upon destination, the buyer is typically responsible for unloading the goods and transporting them from the port to their warehouse.
CPT (Carriage Paid To) – The seller pays for shipping to a named destination (they don’t pay for insurance). The buyer takes on risk once the goods are handed to the carrier.
Group C and Group D Terms – Group C means the seller pays for transport but not risk (CIF, CFR). Group D means the seller handles delivery all the way to the destination (DDP).

How much do you know about Incoterms® 2020? Take this quiz to test your knowledge.

Payment and finance terms

Whether you’re an importer or exporter, these finance terms can help reduce risk in any trade transaction:

Letter of Credit (LC) – A guarantee from a bank stating that the seller will get paid once all delivery terms are met and the bank receives proof of shipment. Think of it as the buyer saying, “If the seller follows the rules and sends us the appropriate documents, we promise to pay them.” The letter will outline the payment amount and when the payment will be made.
Bill of Exchange – A written promise that the buyer will pay a specific amount on a set date. It’s much like an invoice, but for international trade agreements.
Open Account – A sale where the seller ships goods before the buyer pays (usually 30, 60, or 90 days before the payment due date). This type of arrangement is typically reserved for trusted, long-time buyers.
Documentary Collection – A payment method where the seller’s bank collects payment from the buyer’s bank once shipping documents are exchanged. The banks don’t verify the validity of the documents, though. This form of payment is ideal for merchandise and commodity exports.
Forfaiting – Selling future medium and long-term receivables to a bank or finance company at a discount to boost cash flow.
Export Credit Insurance – Insurance that protects sellers if the buyer doesn’t pay or if political issues interfere with the transaction.

Learn more about trade finance terms.

Trade policy and compliance terms

Trade policies and regulations shape how goods cross borders. These terms help to define the rules behind tariffs, agreements, and market access.

Free Trade Agreement (FTA) – A deal between two countries that want to trade freely. As part of the agreement, tariffs are usually reduced or removed for certain goods and services. Other trade barriers may be eliminated as well (quotas, subsidies, etc.).
Non-Tariff Barrier (NTB) – Anything that makes it harder for two countries to trade with each other. Some of the most common NTBs are quotas, special standards, and licensing rules.
Customs Duty – A tax charged for any goods coming into the country. It is expressed as a percentage and is based on the item’s total value.
Harmonized System (HS) Code – The Harmonized System (HS) is a global system used to classify goods. This system is managed by the World Customs Organization. These codes have 6 digits, but individual countries may add more to allow for deeper classification.
Most-Favored-Nation (MFN) – A World Trade Organization clause stating that countries must treat all of their trading partners equally when it comes to tariffs and trade rules.

Logistics and documentation terms

Trade runs heavily on paperwork. These documents prove ownership, describe goods, and keep shipments moving forward without delays.

Bill of Lading (B/L) – This is a legal document that serves as proof that goods were shipped. It also acts as a title document and a shipping contract. Here’s an example of a B/L.
Certificate of Origin – A certificate that confirms where a given product was made. It’s used in the U.S., Canada, and Mexico. Although it’s not always required, a Free Trade Agreement (FTA) Certificate of Origin helps to determine whether a product qualifies for tariff benefits (low or no tariffs).
Commercial Invoice – The official document issued by the exporter to the buyer. It lists information about the goods, the buyer, the seller, and the shipment. It’s the main document used by the customs authorities in the importing country.
Proforma Invoice – A preliminary invoice is very much like a quote; it shows the buyer what a shipment will include and how much it will cost. It is sent to the buyer before the goods are shipped.
Packing List – A list of what’s inside each package. It includes quantities, weights, and measurements, and more. It’s used for customs checks and warehouse organization.

Mastering the language of global trade

Knowing the above terms can help you “speak trade” more confidently when negotiating contracts, shipping goods overseas, or reviewing customs documents. The more fluent you are, the smoother your deals and deliveries will be.

To dig deeper, explore more trade glossaries:

The post 25 International trade terms you should know appeared first on Trade Ready.

10 effective techniques for managing requests for discounts in international trade

Rahim Mohtaram — Wed, 27 Oct 2021 19:30:46 +0000

All exporters, international trade professionals, international sales experts, and business development professionals receive requests from new and current customers for discounts on a daily basis.

In fact, bargaining or requests for discounts are integrated parts of some cultures around the globe, and it is crucial to effectively manage this challenge. We have to keep the customers satisfied while selling the product without compromising a large proportion of our export benefits.

I have been involved in many face-to-face, online, and written negotiations that have included a request for a discount and have learned some excellent strategies over the years. Here are my 10 effective techniques for managing requests for discounts in international trade:

1. Do not accept and confirm requests for discounts immediately

When you receive a letter containing a request for a discount, reply to the letter quickly, but let your customer know that you will assess the possibility and inform them of the result at a later time. Even if you are willing to accept the request, do not announce your acceptance immediately. It’s better to answer the request at the end of the day and state that, having analyzed the current situation, or considering facts including the quantity, payment conditions, and history of your relationship, (or other reasons), you agree to accept the request. If you can’t answer at the end of the day, the following morning is equally acceptable. Those who do immediately accept and grant the requested discount run the risk of their customer requesting further discounts in the future.

2. Do not offer round numbers (like 5% or 10% / $500 or $1000) for your discount

Compare these two statements:

I agree to decrease the price by 5%.
I agree to decrease the price by 4.7%.

A round percentage or amount as a discount means that you are answering without exact analysis, so your customer may request even more. When you propose a non-rounded number with some decimals, it usually means that you have done some calculation and this suggestion is a firm and fixed one. By using a non-rounded number, your prospect will understand that you’ve done the analysis and have calculated the best possible discount.

3. Quick, large discounts can devalue your product brand and image

A quick and high discount is detrimental to trust in professional negotiations, so offer a logical price from the get-go to avoid this situation.

If you offer a very high price and then decide to grant a considerable discount, your brand image will be devalued in the mind of your customer and may make them think that you are not reliable and trustworthy.

4. Do not offer the same percentage or amount for all items if you have more than one

If you have more than one item on your quote, do not offer the same percentage or amount for all your items or a fixed amount of discount on the total value. You should offer a lower percentage for the item that has a higher price and, if it makes sense, a higher percentage for the item that has a lower price. This looks like you are giving a greater discount on the overall order but actually can work out to a cheaper price than a lump-sum discount for all the items. Take, for example, this scenario:

You sell two products: A and B. A’s unit price is FOB $27 and B’s unit price is FOB $4.5. Your quotation is for 10000 pieces of A and 1000 pieces of B. So, your total amount is equal to $270000 plus $4500 which is equal to $274,500. You can either accept a 3% discount on the whole quotation, or you can offer a 1.2% discount for the first item and a 6.5% discount for the second item. The total amount in the first scenario (a 3% discount on $274,500) would be equal to $8235. In the second scenario, (a 1.2% discount on $270,000 and 6.5% on $4,500) would be $3532.5 (3240+ 292.5). In the first scenario, the discount doesn’t sound like much (but it is quite substantial). In the second scenario, it sounds like you are offering a larger discount, but the actual discount is significantly lower.

5. Discount as a percentage or a given amount?

You can offer your discount in the form of a percentage on the value (for example 3.5%) or a given amount of money. Let’s assume that you have two customers and grant both of them a 3.5% discount. The first customer’s quotation is equal to $80,000 and the second is $1, 800 000. The amount of discount for the first customer is $2,800 and the amount of the second customer is equal to $63,000. The second customer will be more satisfied if you tell them that the discount is equal to $63, 000 because it is a larger number. However, the first customer might be more excited to hear that you will reduce the price by 3.5% because, in this case, the percentage sounds larger than the dollar amount. Think and select the method that elicits more excitement from your customer and always ask yourself, which number will be perceived as larger and more enticing by your customer.

6. Involve a third party in difficult situations

Do you have customers who bargain a lot and tire you out? Just tell them that this is the maximum possible amount that you are authorized to grant, but you will talk to your manager (or any superior) and will inform them later of the decision. By using this technique, you can quickly decrease the resistance from your customers who usually will stop bargaining because they know that you did your best.

7. Remember, your discount is not just in the form of a financial concession

Be creative and increase value for the customer through other avenues instead of decreasing your price consistently. You can provide services that do not increase your costs, yet generate value for your customer.

For example, you can train the customer or modify the packaging based on their instructions without increasing your costs. Furthermore, you can send free-of-charge products for marketing or promotion. You can also provide them with some free spare parts to support their warranty and product quality for the end-user.

In some situations, you might be able to change the Incoterms® rule instead of granting a discount. For example, let’s say you issued a quotation on the base of FOB any departure port, and your customer asks for a $9000 discount. You can reject the request for a discount but offer a CFR port of destination price instead of FOB port of departure, as long as the cost of freight to the port of destination is less than the discount requested. Or, you can offer CIF instead of CFR, you’ll just need to add insurance, but this creates better value in the mind of your customer and gives them peace of mind. You might even be able to modify the product based on the requirements of the customer instead of giving a financial discount.

Learn more about Incoterms® 2020 with the Incoterms®2020 online course, presented by FITT and the Canadian Chamber of Commerce (CCC).

8. Explain the reason, applicability, and limitations of the discount

Study and learn about the different types of discounts in international sales and procurement. Some kinds are quantity, cash, and seasonal discounts. Let your customer know why you are granting a discount, and in case it is a one-time concession for this specific transaction, tell them clearly not to expect it on their next order. You might need to say, “this discount is a seasonal one and is solely applicable to order number 123 when submitted before Oct 15th.” Make sure, if there are any deadlines or limitations, they are clear to your customer.

Learn how to market and sell your products and services with the online FITTskills International Sales & Marketing Course.

9. Manage expectations and keep something for a rainy day

Do not announce all your discount policies at the beginning of the negotiation or at the time that your customer asks for a discount. Keep something for closing the transaction. In most situations, you will need to be generous at the end of the meeting.

10. Pay attention to your body language or the tone of your letter

You should be serious and firm at the time of accepting or rejecting a request for a discount. In a face-to-face meeting, your body language and vocal tone should assure your partner that this is the highest possible discount. On the other hand, when you communicate in writing, your written tone should be firm yet respectful. Your writing’s tone, structure, and expressions shouldn’t signal any hesitancy or room for flexibility in the future. When your customer reads the letter, she or he should believe that this is the final offer and there is no more room for a discount. Pay attention to the following sentences:

As a valued customer, I agree to at least a 5% discount on the price. Please let us know if it works for you.
As a valued customer, I have decided to grant you the maximum possible discount which is equal to 4.7%. Please confirm and send your advance payment to let us start the production process.

Conclusion

Requests for discounts in international trade are great opportunities for closing lucrative partner and customer deals. Many international customers ask for discounts on different occasions and, by using the above techniques, you can manage their expectations well. This lets you continue business in a satisfactory manner for both parties.

Disclaimer: The opinions expressed in this article are those of the contributing author, and do not necessarily reflect those of the Forum for International Trade Training.

The post 10 effective techniques for managing requests for discounts in international trade appeared first on Trade Ready.

Incoterms 2020 & COVID-19 – Protecting your business and supply chain through diligent contracts

Pamela Hyatt — Thu, 05 Nov 2020 21:52:28 +0000

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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Guide: How COVID-19 delays could affect your supply chain from contracts to insurance and custom clearance

Rahim Mohtaram — Thu, 12 Mar 2020 20:25:50 +0000

We usually write contracts based on good faith and mutual understanding, but we read the contract just two times, once, when we sign it, and the second time, when we encounter a dispute.

The contract should help us settle our disputes cases where amicable negotiation does not work. Unfortunately, COVID-19 will increase trade disputes around the globe.

General effects of COVID-19 on international trade and supply chains

Coronavirus will continue to be a proximate cause for delay and non-delivery of goods and services from previous months to the next few months.

The delays in the supply chain are mainly because of:

Factory shutdowns and production with low capacity
Governmental prohibitions and restrictions on export and import
Drastically increased prices for certain goods
Transportation and logistics companies’ limitations; and
Order cancellations by the customers

Companies have responsibility toward societies, employees, suppliers, and customers while still being profitable. This is an exceedingly difficult balance for business owners to handle all of these issues together.

Since the first main consequence of COVID-19 to businesses worldwide is delays in the supply chain, how will these delays effect international trade processes?

Delays in sales and purchase contract

COVID-19 seems to be a case of “Force Majeure”. Force Majeure generally means unavoidable, uncontrollable, and unforeseeable events. And much like some travel insurance providers, insurance companies have the ability to alter the dates around known and unknown hazards. This is why it is so important for companies to fully understand the details of their contracts and coverage.

When a party is encountered with a Force Majeure case, it should be deemed relieved of its duties and obligations, and, therefore, the contract may become suspended or, in some situations, terminated when the Force Majeure case endures over weeks and months, rather than a more limited time period.

Parties should have defined the consequences of termination and suspension in the contracts. What happens to advance payments, consignments, delays, and non-deliveries?

Some parties may abuse the current situation and increase the prices or not deliver the sold goods. In a situation where a party claims that has encountered a Force Majeure, it is expected to mitigate the consequences, notify the counterparty, and provide proving documents indicating that its business is affected by the case.

Delays and Incoterms

Based on the EXW rule, the Seller is not responsible for export and import clearance, but the Seller is expected to deliver the product at the named place. In DDP rule, the Seller is responsible for both export and import clearance. In the other rules, the Seller is just accountable for export clearance. What happens if a government prohibits the exportation of a product, which is highly crucial for a supply chain in the Buyer’s country? What if the Seller is not able to deliver because of the factory shutdown?

Delays and cargo shipping insurance

If the delay is because of the seller’s activity and the product is not delivered to the shipping company or has not left the warehouse or place of storage that is named in the insurance policy, the underwriter or insurance company has no obligation because the insurance contract is not effective yet. See Section 8 Duration of the Maritime Cargo Clauses.

In case the delay occurs after starting the transportation, and such delay is the proximate cause of loss, it might not be covered by the insurer based on the Exclusions section.

Delays and international transport

Many international conventions govern carriage contracts, which are usually mentioned on the Bill of Lading. We can name Hague-Visby, Hamburg, Rotterdam (for marine transport), Warsaw and Guadalajara (for air transport), CMR, and Vienna convention (for road transport), COTIF and OTIF (for rail transport).

These conventions govern the transportation relations between the Shipper, Consignee, and Carrier. Each convention indicates unique responsibilities and liabilities for delay, and in most situations, carriers assume limited liability based on the weight or quantity of packages.

The important point that many companies neglect, is that the carriers’ liability is limited and not always equal to the actual value of the product in most situations.

There are too many articles in different conventions about delay and its consequences. This issue should be investigated based on the nature of the consignment, the governing convention, and the specific agreement of transportation. For example, in article 5.7, 6.1.b and 19.5 of Hamburg convention, it is mentioned:

5.7. Where fault or neglect on the part of the carrier, his servants or agents combines with another cause to produce loss, damage or delay in delivery the carrier is liable only to the extent that the loss, damage or delay in delivery is attributable to such fault or neglect, provided that the carrier proves the amount of the loss, damage or delay in delivery not attributable thereto.

6.1.b The limit of liability of the carriers for the delay in delivery, according to the provisions of article 5, is limited to an amount equivalent to two and a half times the freight payable for the goods delayed, but not exceeding the total freight payable under the contract of carriage of goods by sea.

19.5 No compensation shall be payable for loss resulting from delay in delivery unless a notice has been given in writing to the carrier within 60 consecutive days after the day when the goods were handed over to the consignee.

In some situations, like bulk cargoes and charter contracts, the delay may occur due to quarantine regulations at departure and destination. This issue may cause demurrage charges in charter contracts when the carrier has properly issued the NOR (Notice of Readiness), and the port authorities may not allow berthing.

In case the laytime is over a certain period, the importer may be liable for demurrage and any related charges. The details of the demurrage and dispatch (DEM/DES) article of the charter contract are essential for analyzing this issue. We should also pay attention to the 4W acronyms in the DEM/DES article (WIPON, WIBON, WIFPON, WICCON).

Delays and international payment

Based on Incoterms 2020, the first primary obligation of the buyer is the payment of the price as provided in the contract of sale. Considering the current situation, delay in payment may happen because of problems on the Buyers’ end, banks working days, country of origin or limitations in governmental departments.

The payment terms article in the sales agreement and Force Majeure should be accurately analysed and investigated.

Delay and customs clearance

Governments and customs administrations may take special measures for health and sanitary controls at the border. This issue may be more affected by the country of origin and departure. On the one hand, the controls may decrease to make the delivery process faster for some necessary products, such as food and produce. On the other hand, some products may get stuck at the border for customs care for necessary products. Therefore, warehousing charges in border/port holding facilities and freight surcharges may increase.

Customs administrations and other government departments may start to request health or quarantine certificates for the products that has never previously required this type of documentation. In some bulk cargoes, fumigation, health, sanitary, and phytosanitary certificates may be added to necessary shipment documents.

Resources and advisors who can help

We are experiencing a Force Majeure and emergency for all players in the supply chain, especially for exporters and importers. The first and most applicable solution is mutual understanding of exact and on-time coordination of shipping and delivery.

Understandably, companies try to make a profit for their owners and shareholders while respecting the interests of society, employees, suppliers, and customers.

For a while, the goal of business owners should change from singularly making a profit to broader social purposes such as survival.

And higher levels of mutual understanding should be established between importers and exporters to avoid disputes. More prominent companies are expected to protect their suppliers and customers as much as possible.

We interact based on the good faith principle, but business owners should be prepared for disputes. Consultation and cooperation with professional teams in the following areas help to mitigate the effect of this specific situation:

Government trade agencies

These experts can provide insight and advice on the ever-changing landscape regarding any country restrictions/bans.

In house legal, trade, and finance compliance team

This team is responsible for taking protective measures and foreseeing probable issues in the company’s supply chain.

Insurance companies

Consult with your insurer and check for all the solutions they may offer you. It’s not just about cargo transportation insurance.

Transport and shipping companies

Transport companies do not necessarily have control over the process. Most of them are a type of intermediary. Study your contracts carefully and consult with your shipping company for the right time, route, and shipping details such as stuffing, packaging, and documentation.

Banks and Financial institutions

Consult with your bank’s experts. When we encounter discrepancy in a documentary credit, the applicant (Buyer) and banks may treat it on an approval or collection basis. In some situations, there are national restricting rules by central banks or other government departments in which the buyer is not permitted to approve the discrepancy. In other words, the buyer may decide to accept delays or other discrepancies, but the governmental organizations do not respect such a decision.

Get a customs broker to help with customs clearance process

The final and most important governmental physical controls on the product happens during the customs clearance process. Companies should hire professional, experienced, and knowledgeable customs brokers.

The first contact with the customs broker should be before finalizing the order, and brokers should search and transmit the most updated information to their customers. This information includes rules and regulations about prohibitions, quotas, documents, HS codes, valuation, and in one phrase, comprehensive trade compliance.

Customs brokers are expected to act proactively and inform traders about the most recent decisions of governmental departments. As a customer, companies deserve to have dedicated teams to support their business and products which are responsive to the unique needs and questions whenever required.

24/7 service is crucial because of time differences between countries and customer service expectations.

Most companies love win-win cooperation, but we might not win too much in the current situation. Survive-survive is a more reasonable and logical strategy for some businesses these days. Those companies who like to gain more by employing the Win-lose strategy will be accused by society for neglecting social and corporate responsibilities. It’s not a good time to pursue profit over social well-being.

It is a good time to position your company as a pioneer in respecting human values.

Sources:

https://iccwbo.org/

https://www.admiraltylaw.com/statutes/hamburg.php

https://www.letterofcredit.biz/index.php/2018/10/05/mt-700-swift-message-field-specifications/

https://www.marrisk.com/pdf/clauses/INSTITUTE%20CARGO%20CLAUSES.pdf