Documents needed in international trade and incoterms

An import/export transaction usually requires a lot of complicated documentation.

Many different arrangements have to be made and this can be difficult when one firm is dealing with another firm on the other side of the world.

Firstly, there should be a shipping agent and/or a freight forwarder (forwarding agent) who takes responsibility for the documentation and arranges for the goods to be shipped by air, sea, rail or road. Moreover, these services may also be carried out by the supplier's own export department, if they have the expertise.

Also there are airlines, shipping lines, railway or road haulage firms to transport the goods.

Both the importer's and exporter's banks will be involved in arranging payments if a letter of credit or a bill of exchange is used. We should also consider that the goods can be examined, import and export licenses can be checked and charge duty and/or VAT can be charged by customs officers.

The manufacturer may have to issue a chamber of commerce's Certificate of Origin if this required by the importer's country.

Many import or export deals are arranged through an exporter's agent or distributor abroad - in this aces the importer buys from a company in hi own country and this company imports the goods. Alternatively, the deal may be arranged through an importer's buying agent or a buying house acting for the importer, or through an export house based in the exporter's country. In this situation, the exporter sells directly to a company in his own country, who will then export the goods.

Prices for exports may be quoted in the buyer's currency, the seller's currency or in a third "hard" currency (e.g. US dollars, euros an yens). The price quoted always indicates the terms of delivery, which conform to the international standard Incoterms. The terms of delivery that are most common depend on the kind of goods being trade and the countries between which the trade is taking place.

Methods of payment may be on a cash with order basis (or cash deposit with order), on open account (as in most domestic trade, where the buyer pays the supplier soon after receiving the goods), by irrevocable letter of credit or by bill of exchange. Exporters and importers often prefer the security of payment by confirmed irrevocable letter of credit when dealing with unknown firms in distant countries.

Trade between countries within a free trade area and within the European Union is simpler, and many firms pay for goods by cheque and use their own transport to deliver goods across frontiers. No special customs documentation is required for trade between firms in different parts of the EU, but VAT rates vary from country to country.

Companies exporting or importing goods use standard arrangements called Incoterms - short for International Commercial Terms, established by the international Chamber of Commerce (ICC) - that state the responsibilities of the buyer and the seller. They determine whether the buyer or the seller will pay additional costs - the costs on top of the costs of the goods. These include transportation or shipment, documentation - preparing all the necessary documents, customs clearance - completing import document and paying any import duties or taxes and transport insurance.

There are 13 different Incoterms that can be divided into 4 different groups: an E Term (Departure), the F Term (Free, Main Carriage Unpaid), the C Term (Main carriage Paid) and the D term (Delivered/Arrival). Each group of terms adds more responsibilities to the seller and gives fewer to the buyer.

The E term is EXW or Ex Works. This means that the buyer collects the goods at the seller's own premises - place of business - and arranges insurance against loss or damage to the goods in transit.

In the second group, the F terms, the seller delivers the goods to a carrier appointed by the buyer and located in the seller's country. The buyer arranges insurance.

FCA or Free Carrier means that the goods are delivered to a named place where the carriers can load them onto a truck, train or aeroplane.

FAS - Free Alongside Ship means that seller delivers the goods to the quay next to the ship in the post.

FOB - Free on board means that the seller pay for loading the goods onto the ships.

In the third group the C terms, the seller arranges and pays for the carriage or transportation of the goods, but not for the payment of customs duties and taxes. Transportation of goods is also known as freight.

In CFR - Cost and Freight (used for ocean freight) and CPT - Carriage to paid (used for air and land freight) the buyer is responsible for insurance.

In the terms CIF - Cost, Insurance and Freight (used for ocean freight) and CIP - Carriage and Insurance Paid To... (used for air freight and land freight), the seller arranges and pays for insurance.

In the group D, the seller pays all the costs involved in transporting the goods to the country of destination, including insurance.

In DAF - Delivered at Frontier, the importer is responsible for preparing the documentation and getting the goods through customs.

If the goods are delivered by ship to a port, the two parties can choose who pays for unloading the goods onto the quay. The two possibilities are:

DES - Delivered Ex Ship - the buyer pays for the goods from the ship.

DEQ - Delivered EX Quay - the seller pays for unloading the goods from the ship to the quay, and for the payment of customs duties and taxes.

If the goods go through customs and are delivered to the buyer, there are 2 possibilities:

DDU Delivered Duty Unpaid - the buyer pays any import taxes

DDP - Delivered Duty Paid - the seller pays any import taxes.

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