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INTERNATIONAL BUSINESS. LECTURE 4 : Tariffs, trade barrier s , global trade: managing global trade flows & Incoterms 2010 Gregor Pfajfar, MSc Faculty of Economics University of Ljubljana E-mail: gregor.pfajfar @ef.uni-lj.si March 3rd 20 11. Schedule.

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international business

INTERNATIONAL BUSINESS

LECTURE 4:

Tariffs, trade barriers, global trade: managing global trade flows &

Incoterms 2010

Gregor Pfajfar, MSc

Faculty of Economics University of Ljubljana

E-mail: gregor.pfajfar@ef.uni-lj.si

March 3rd 2011

schedule
Schedule
  • Management of global trade flows:
    • Tariffs and their importance in international business
    • Other indirect barriers to international trade
    • Quantity barriers to international trade
    • Export premiums and subventions
  • A review of legislation:
    • Customs code of European community (Commission Regulation (EC) No 1192/2008)
    • Act of European community customs regulation execution
  • Incoterms 2010
management of global trade flows1
Management of global trade flows
  • TARIFFS
  • DEFINITION: A tariff is a value in a home currency, which is collected by the government from the owner of the goods, when he/she is passing the national borders (Trošt, 1998).
  • The effects of tariffs:
    • protection effect: tariffs are protecting home economy
    • fiscal effect: tariffs have an impact on state budget (today of less importance)
management of global trade flows2
Management of global trade flows
  • TARIFFS’ VARIETIES:
  • Classification of tariffs according to the way of goods’ movement:
    • import
    • export
    • transit
  • Classification of tariffs according to the way of settlement:
    • tariffs of value - ad valorem
    • quantity tariffs - specific
    • combined
management of global trade flows3
Management of global trade flows
  • 2. QUANTITY IMPORT BARRIERS:
    • import quotas - contingents
      • VER - voluntary export restrictions
      • comparing quotas and tariffs (quotas are more effective, as they can be changed easier, directly limit the import, offer negotiation advantage, are not supposed to increase internal prices?!)
      • global and individual quotas
    • other barriers that carry the same effect as import quotas
    • import licenses and permissions
    • embargo.
management of global trade flows4
Management of global trade flows
  • 3. INDIRECT TRADE BARRIERS
    • strict customs clearance processes and their execution
    • regulations about protections against unfair competition
    • regulations about labeling country of origin
    • import control of animals and animal products
    • sanitary conditions regarding the import of plants and vegetables
    • discrimination on tenders
    • other protective measures (e.g. boycott)
barriers hindering export initiation
Insufficient finances

Insufficient knowledge

Lack of foreign market connections

Lack of export commitment

Lack of capital

Lack of productive capacity

Lack of foreign channels of distribution

Management emphasis on developing domestic markets

Cost escalation

Barriers hinderingexport initiation
a review of eu legislation in the field of international trade
A review of EU legislation in the field of international trade
  • Customs code of European community (Commission Regulation (EC) No 1192/2008)
  • Act of European community customs regulation execution
customs code of european community
Customs code of European community
  • Determines customs regulations, accepted at the EU level that are used in the trade between members of EU and third countries.
  • It is uniformly used on the whole customs territory of the Community accept if international conventions, business habits or autonomous measures of the Community does not define differently.
customs code of european community1
Customs code of European community
  • The explanation of certain terms used:
  • Persons established in the Community: any person who is normally resident there (a natural person), or any person that has in the Community its registered office, central headquarters or a permanent business establishment (a legal person or an association of persons).
  • Customs office: any office at which all or some of the formalities laid down by customs rules may be completed.
  • Supervision by the customs authorities: action taken in general by those authorities with a view to ensuring that customs rules and, where appropriate, other provisions applicable to goods subject to customs supervision are observed.
  • Customs controls: specific acts performed by the customs authorities in order to ensure the correct application of customs rules and other legislation governing the entry, exit, transit, transfer and end-use of goods (e.g. examining goods, verifying declaration data and the existence and authenticity documents, examining the accounts, inspecting means of transport, etc.)
customs code of european community2
Customs code of European community
  • Customs status: community or non-community goods
  • Community goods:
    • wholly obtained in the customs territory of the Community and not incorporating goods imported from countries or territories not forming part of the customs territory of the Community.
    • imported from countries or territories not forming part of the customs territory of the Community which have been released for free circulation.
    • obtained or produced in the customs territory of the Community, either from goods referred to in the second indent alone or from goods referred to in first and second indents.
  • Non-community goods:
    • All goods that are not community goods. Goods gain this status when they leave the customs area of the Community.
customs code of european community3
Customs code of European community
  • Customs debt: the obligation on a person to pay the amount of the import duties (customs debt on importation) or export duties (customs debt on exportation) which apply to specific goods under the Community provisions in force.
  • Import duties:
    • customs duties and charges having an effect equivalent to customs duties payable on the importation of goods,
    • agricultural import charges introduced under the common agricultural policy or under the specific arrangements applicable to certain goods resulting from the processing of agricultural products.
  • Debtor means any person liable for payment of a customs debt.
  • Customs declaration: the act whereby a person indicates in the prescribed form and manner a wish to place goods under a given customs procedure. It is usually prepared by a forwarding agency.
customs code of european community4
Customs code of European community
  • Declarant: the person making the customs declaration in his own name or the person in whose name a customs declaration is made.
  • Customs-approved treatment or use of goods:
  • (a) the placing of goods under a customs procedure;
  • (b) their entry into a free zone or free warehouse;
  • (c) their re-exportation from the customs territory of the Community;
  • (d) their destruction;
  • (e) their abandonment to the Exchequer
  • Presentation of goods to customs: means the notification to the customs authorities, in the manner laid down, of the arrival of goods at the customs office or at any other place designated or approved by the customs authorities.
  • Release of goods: the act whereby the customs authorities make goods available for the purposes stipulated by the customs procedure under which they are placed.
customs code of european community5
Customs code of European community
  • Customs procedure:
  • Presentation of goods to customs – the liable person fills out the customs declaration, which represents an act by which the customs procedure starts;
  • Customs office accepts the declaration and inspects it. Then they check also the goods and take the sample (customs controls).
  • In the case of customs debt, the declarant is obliged to settle it.
  • Release of goods – goods attain one of the customs-approved treatments or uses. Imported goods attain the status of community goods.
    • release for free circulation;
    • customs procedure with economic effect;
    • transit procedure.
    • etc.
customs code of european community6
Customs code of European community
  • Import/export duties and other provisions of international trade policy are based on:
  • Customs Tariff of the European Communities
  • Exceptionally important is the goods’ country of origin – it is a tool to execute measures of foreign trade policy. European customs regulations describe two possible origins of goods:
    • Non-preferential origin (statistical, commercial), which does not offer any customs benefits.
    • Preferential origin, which is closely connected with customs benefits. Within regulation framework, which defines preferential origin, we must distinguish between rules that define mutual preferential treatment between EU and third countries and rules that apply only for one side preferential treatment from the EU (e.g. for least developed countries).
customs code of european community7
Customs code of European community
  • Customs debt
  • The origin
  • We must be aware of customs value (transaction value): a price that needs to be paid; includes all costs and other expenses (e.g. costs of transport, insurance, packaging, discounts, etc.) connected with the sales and dispatch of goods to the place, where goods come to the customs area.
  • Customs rate. Look at TARIC!
  • Terms of payment: not longer than 10 days after the day of notifying the debtor
  • Customs debt payment delay approval:
    • It can be maximal 30 days;
    • One additional condition has to be fulfilled: the payment has to be insured (debtors obligation) by a proper insurance instrument (bank guarantee).
what is taric
What is TARIC?
  • TARIC (Tarif Integre de la Communautee):
  • is information database that is available on the internet for free;
  • contains all the data and information the company needs, when making decisions regarding import/export ;
  • there are information on tariff rates, prohibitions and restrictions, custom quotas, quantity restrictions, etc.
  • TARIC code
  • http://taric-curs.gov.si/itaric/Prog.jsp?plang=EN
customs code of european community8
Customs code of European community
  • The 8 varieties of customs procedures:
  • (a) release for free circulation;
  • (b) transit;
  • (c) customs warehousing;
  • (d) inward processing;
  • (e) processing under customs control;
  • (f) temporary admission;
  • (g) outward processing;
  • (h) exportation.

Customs procedures with an economic effect

customs code of european community9
Customs code of European community
  • Transit procedure:
  • NCTS (New Computerized Transit System):
    • Is a computer transit system of members of EU and EFTA;
    • Settles the permissions for simplification of trade between EU members and third countries.
  • Basic rules of NCTS:
    • Data on temporary transit are filled in the system at the departure office (the entry is manual or the data are acquired electronically from the declarant).
    • Dispatch (departure) office sends the declarant the number of the customs declaration (MNR) and a message, which enables the declarant to dispatch the goods.
    • When the shipment arrives at the arrival office, they perform the goods control and sends message back to dispatch office.
    • Dispatch office then notifies the declarant of the completion of the transit procedure.
what is intrastat
What is INTRASTAT?
  • It is a system of collecting statistical data on goods exchange between countries that are members of EU.
  • A company has to report its trade within EU borders:
    • DISPATCH: if the total annual value exceeds 200,000 EUR
    • ARRIVAL: if the total annual value exceeds 120,000 EUR
  • At the state level the responsibility for INTRASTAT lies in hands of national statistical office that cooperates with the national customs office.
  • Available at:
  • http://www.stat.si/intrastat.asp
  • http://carina.gov.si/slov/intrastat/intrastat.htm#1
relevant resources in the field of trade barriers
Relevant resources in the field of trade barriers
  • Customs office of Slovenia
  • http://www.carina.gov.si/en/
  • Intrastat
  • http://www.stat.si/intrastat.asp
  • Market access database:
  • http://mkaccdb.eu.int/mkaccdb2/indexPubli.htm
  • European legislation:
  • http://www.europa.eu.int/eur-lex/en/index.html
  • http://eur-lex.europa.eu/en/legis/index.htm
  • World’s customs organization
  • http://www.wcoomd.org/
what are incoterms clauses
What are Incoterms clauses?
  • INCOTERMS= International Commercial Terms
  • First published in 1936 (revisions in 1953, 1967, 1976, 1980, 1990, 2000, 2010)
  • International Chamber of Commerce (ICC)
  • Purpose of Incoterms (according to ICC):
  • “THE PURPOSE OF INCOTERMS IS TO PROVIDE A SET OF INTERNATIONAL RULES FOR THE INTERPRETATION OF THE MOST COMMONLY USED TRADE TERMS IN FOREIGN TRADE.”
  • 2 key aspects of Incoterms 2010:
    • Define responsibilities for carriage and clearance of goods
    • Define COSTS and RISKS for exporter and importer
  • What Incoterms 2010 are NOT:
    • Part of the contract for carriage
    • Not used to transfer property rights or title of goods
    • Not used to name a carrier
    • Not used to determine the effect of breach of contract cases
structure of incoterms 2010
Structure of Incoterms 2010
  • 2 parts:
    • NAME (3-letter abbreviation) + specified place (or carrier)
    • CONTENT (rights and responsibilities of both parties)
  • 2 groups, 11 clauses:
    • Rules for any mode or modes of transport (7)
    • Rules for sea and inland waterway transport (4)
  • Obligations (A-seller, B-buyer):
  • A1/B1General obligations of the seller/buyer
  • A/B 2 Licenses, Authorizations and Formalities
  • A/B 3 Contracts of carriage and insurance
  • A4 Delivery / B4 Taking Delivery
  • A/B 5 Transfer of risks
  • A/B 6Allocation of costs
  • A7 Notice to the buyer / B7 Notice to the seller
  • A/B 8 Proof of delivery, transport document or equivalent electronic message
  • A9 Checking – packaging – marking / B9 Inspection of goods
  • A/B 10Assistance with information and related costs
classification of incoterms 2010 rules
Classification of Incoterms 2010 rules
  • Rules for any mode or modes of transport:
    • EXW - Ex Works (named place of delivery)
    • FCA - Free Carrier (named place of delivery)
    • CPT - Carriage Paid To (named place of destination)
    • CIP - Carriage and Insurance Paid to (named place of destination)
    • DAT- Delivered At Terminal(named terminal at port or place of destination)
    • DAP - Delivered At Place (named place of destination)
    • DDP - Delivered Duty Paid (named place of destination)
  • Rules for sea and inland waterway transport:
    • FAS - Free Alongside Ship (named port of shipment)
    • FOB - Free On Board (named port of shipment)
    • CFR - Cost and Freight (named port of destination)
    • CIF - Cost, Insurance and Freight (named port of destination)
incoterms put simply generally speaking if the abbreviation begins with
Incoterms put simply. Generally speaking – if the abbreviation begins with…

E

F

All transport charges

are forward to collect at

destination from the buyer

Cost to loading are prepaid by seller, from that point on the main freight charge is paid by buyer

C

D

Costs to main port/airport

of destination are prepaid

by seller remainder paid by

buyer

All charges prepaid to named destination by seller this may or may not include taxes

e group

Cost and risk transfer

E group:
  • EXW: Ex Works

IMPORTER (BUYER)

Buyer bears all costs and risks

from the moment that goods are

made available at the named place.

He /she has to confirm the date

of pick-up.

Loading costs and risk, as well as

export duty procedures are buyer’s

responsibility.

EXPORTER (SELLER)

The seller’s obligation is to make the

goods available at his premises or

another named place, and to

inform the buyer in appropriate time.

Seller not in charge for uploading

goodsor export duty procedures.

Seller must prepare invoice and

all documentation / proof from the

contract.

f group fca free carrier
F group: FCA (free carrier)

EXPORTER (SELLER)

The seller’s obligation is to transport

the goods to the beginning of the

main transport and carrier specified

by the buyer, with all appropriate

export duty procedures.

If goods are made available in seller’s

premises, the seller is also in charge

of uploading the goods on the buyer’s

transport mode.

Seller must also provide proof of

delivery.

IMPORTER (BUYER)

Buyer bears all costs and risks from

the moment the goods are made

available to his carrier at the

designated place. He is in charge

of re-loading the goods!

Cost and risk transfer

f group fas free alongside ship
F group: FAS (free alongside ship)

IMPORTER (BUYER)

Buyer bears all costs and risks from

the moment the goods are placed

alongside the specified ship.

EXPORTER (SELLER)

Seller’s obligations end, when he

places the goods alongside the ship

of the buyer.

He is not in charge of uploading the

goods on to the ship!

Cost and risk transfer

f group fob free on board
F group: FOB (free on board)

IMPORTER (BUYER)

Buyer bears all costs and risks from

the moment the goods are placed

on board the ship.

EXPORTER (SELLER)

Seller’s obligations end, when he

places the goods on board the ship

of the buyer.

He is in charge of uploading the

goods on to the ship and bears all the

risk during this upload!

Cost and risk transfer

question
Question?
  • Seller Gorenje from Slovenia sells 1.000 washing machines to Tesco in United Kingdom.
  • If the arranged Incoterms clause is FCA (seller’s factory):
    • Who bears the costs and risks of uploading the goods on to the buyer’s truck in Slovenia?
    • Who bears the costs and risks on the transport from Slovenia to the UK?
  • If the arranged Incoterms clause is FAS (Port of Koper):
    • Who bears the costs and risks of transport from factory to the Port of Koper?
    • Who bears the costs and risks of uploading the goods on to the ship?
    • Who bears the costs and risks during the main transport at sea?
  • If the arranged Incoterms clause is FOB (Port of Koper):
    • Who bears the costs and risks of transport from factory to the Port of Koper?
    • Who bears the costs and risks of uploading the goods on to the ship?
    • Who bears the costs and risks during the main transport at sea?
c group cfr cost and freight

Transfer of costs

Transfer of risks

C group: CFR (cost and freight)

IMPORTER (BUYER)

The main ship transport is paid by

the seller under “usual ship

transport terms”, however the buyer

bears the risk on the main ship

transport route.

The buyer is in charge of insurance!

EXPORTER (SELLER)

The seller must place the goods on

board the ship, and contract and

pay for the main ship transport.

As soon as the goods are on board,

his risks and obligations end.

Contract for main ship transport must

be made and paid under “usual

ship transport terms”. Not in charge

for insurance!

Must provide B/L to the customer.

c group cif cost insurance and freight

Transfer of costs

Transfer of risks

C group: CIF (cost, insurance and freight)

IMPORTER (BUYER)

Same as with CFR +

buyer NOT in charge of insurance,

which is on seller’s part!

EXPORTER (SELLER)

Same as with CFR + seller in charge

of ship transport insurance!

Insurance under “usual terms”.

Minimal coverage 110%!

c group cpt carriage paid to

Transfer of costs

Transfer of risks

C group: CPT (carriage paid to)

IMPORTER (BUYER)

Buyer bears all risk from the time the

goods are made available to the first

carrier.

Buyer in charge of insurance!

EXPORTER (SELLER)

Seller’s obligations end, when the

goods are made available by the

contracted carrier to the named place

or destination. No insurance!

Seller bears all risks until the goods

have been made available to the

first carrier.

Useful for multimodal transport!

c group cip cost and insurance paid to

Transfer of costs

Transfer of risks

C group: CIP (cost and insurance paid to

IMPORTER (BUYER)

Same as with CPT +

buyer NOT in charge of insurance!

EXPORTER (SELLER)

Same as with CPT + seller in charge

of transport insurance!

Insurance under “usual terms”.

question1
Question?
  • Seller Gorenje from Slovenia sells 1.000 washing machines to Tesco in United Kingdom.
  • If the arranged Incoterms clause is CIF (Port of Blackpool):
    • Who bears the costs and risks of uploading the goods on to the ship in Port of Koper?
    • Does the ship transport have to be insured?
    • If so, by whom does the ship transport have to be insured?
    • Who bears the risk on the main ship transport between Koper and Blackpool?
    • Who pays for the potential damages, if something happens at sea?
    • Who bears the cost and risks of loading the goods from the ship in Port of Blackpool on to the pier?
d group da t delivered at terminal
D group: DAT (delivered at terminal)

IMPORTER (BUYER)

The buyer must unload and take

hold of the delivery on the

specified means of transport, at

the named place of delivery at the

terminal.

EXPORTER (SELLER)

Seller’s obligations end, when the

goods are made available unloaded,

on the specified means of transport,

at the named place of delivery

at the terminal.

Transfer of cost and risks

d group d ap delivered at place
D group: DAP (delivered at place)

IMPORTER (BUYER)

Buyer only has to take care of

import duty charges.

EXPORTER (SELLER)

Simply put, the seller does everything

and brings the goods to the customer’s

door, but he doesn’t pay for

the import duty charges.

Transfer of cost and risks

d group dd p delivered duty paid
D group: DDP (delivered duty paid)

IMPORTER (BUYER)

Buyer only has to receive the

Shipment (and of course

pay the bill).

EXPORTER (SELLER)

Simply put, the seller does everything

and brings the goods to the customer’s

door,and also pays for the import duty

charges!

Transfer of cost and risks

question2
Question?
  • Gorenje from Slovenia buys 1.000 tons of steel from Croatia.
  • If the arranged Incoterms clause is DAP (Border Pass Bregana)
    • Who bears the costs and risks of unloading the goods before the border pass?
    • Who pays for the import duty charges?
  • If the arranged Incoterms clause is DAT (Port of Koper):
    • Who bears the costs and risks of unloading from the ship in Koper?
    • Who bears the costs and risks of uploading the goods on to a truck for Ljubljana?
    • Who pays for the import duty charges?
  • If the arranged Incoterms clause is DDP (Ljubljana)
    • Who bears the costs and risks of unloading from the ship in Koper?
    • Who bears the costs and risks of uploading the goods on to a truck for Ljubljana?
    • Who pays for the import duty charges?
example 2 accident
Example 2: Accident
  • Car falls into the water, when being uploaded on the ship…
an overview
An overview

Source: DSV, 2011.