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close this bookExport Marketing for a Small Handicraft Business (Oxfam, 1996, 192 p.)
close this folder9 Despatching export consignments
View the document9.1 Exporting and importing formalities
View the document9.2 International transportation
View the document9.3 Methods of payment
View the documentSummary

9.1 Exporting and importing formalities

In order to protect the interests of both exporter and importer, and also to fulfil legal requirements in the exporting and importing countries, certain procedures and controls regulate international trade. The interests of the various parties are:

Exporter: to ensure that the consignment reaches the importer safely and promptly; to get paid.

Exporting country's government: to ensure that goods exported may legally be sent out of the country and are of exportable quality; that there is no mix-statement of value for the purpose of avoiding price controls or currency regulations; perhaps to raise revenues through export taxes; to record export data.

Importing country's government: to ensure that goods imported may legally enter the country and that they comply with import controls and quality standards; to raise revenues through duties or taxes; to record import data.

Importer: to receive the consignment safely and promptly.

The main government authority responsible for monitoring and controlling international trade is the customs. Export consignments must pass through the customs of their country, and they are liable to be inspected. In some countries consignments must also be approved by other government departments, responsible for controlling certain types of exports. For example, antiques or works of art might be restricted or liable to tax. There are no restrictions anywhere on the export of new handicrafts—unless they are made of a prohibited material, such as ivory; but several countries levy taxes on handicraft exports.

When the consignment reaches the importer's country, it requires clearance by the government authorities before it can be received by the importer. It must similarly pass through customs, with certain types of product subject to control by specialist agencies. For example, in the USA, the Department of Agriculture reserves the right to inspect plant products; and cosmetics could fall within the jurisdiction of the Food and Drug Administration. Between the exporting and importing countries the consignment is carried by a transportation company, by road or sea or air. For reasons of security it will need insurance.

The physical movement and governmental control of goods in international trade is based on the completion and transfer of certain essential documents. They are:

Invoice: This is the document of sale, which provides the specification of goods. It is raised by the exporter, and is required by all parties.

Packing list This provides details of which products are contained in which package. It is raised by the exporter, and is required by the customs of the importing country.

Transportation document: This is a receipt of the road transporter or postal authority; or airway bill or bill of lading. It is raised by the transportation company as a receipt for the consignment, and an undertaking to deliver it in the same condition as received. A bill of lading acts additionally as a document of title to the goods, and as such is required by the importer.

Certificate of origin: This document is combined with a certificate of preferential trade agreement. There are two forms: the combined Generalised System of Preferences (GSP) (see Chapter 5.1) and Certificate of Origin Form A; and the EUR.1 Movement (certificate, within the Lomonvention. Either form is authorised by the government of the exporting country, and required by customs in the importing country in order to assess, together with the product type, liability for-or exemption from-duties.

Certificate of insurance: This is not always raised separately for each shipment. Many exporters or importers have open cover policies which last for a fixed period, usually a year.

Special import documents: For the movement of certain types of goods to certain countries, further documents must be supplied by the exporting country in order to fulfil customs requirements of the importing country, or perhaps to enable the importer to obtain preferential treatment in respect of duties. For example, health or phytosanitary certificates are required for some products to guarantee that they are free of infestation. A handloom certificate would enable an importer to obtain exemption from duty on hand-woven textiles.


Fig 24: Combined GSP and Certificate of Origin


Fig. 25 EUR. 1 Movement Certificate

Special export licenses: Some goods are covered by international agreements, such as the Multi-Fibre Arrangement. These may be traded internationally only under licence. The exporter must procure an export licence and send this to the importer for procurement of an import licence.

The above documents pass from the exporting to the importing country. Only originals, not copies, of certification documents are acceptable. In addition there is a separate series of procedures and documents between the exporter and its government, and between the importer and its government. In other words, the exporter has to get authorisation for the despatch, and the importer for the receipt. Exact procedures vary from country to country. In most cases, it will be necessary for an exporter to be registered. In some countries, this is sufficient to be able to make an export shipment. In others, it will be necessary to apply for a licence on each occasion.

The main responsibility of the importer is to make the declaration to the customs of the type of goods being imported. Importation works on a system of product classification. Each product type, as established by the Customs Co-operation Council, carries a customs classification code. When an invoice is submitted to the importing country's customs, each product must bear a customs classification number. This is the basis for determining whether the products may enter freely or not, and whether or not they are liable to duty.

The majority of handicrafts enter freely into most countries. Certain products will be allowed into a country only if the importer obtains a licence. Others will be passed by customs only on payment of the applicable rate of duty. In the case of handicrafts, duty is always paid on the invoice value plus the cost of freight and insurance, in other words the value at which the goods land in the country of importation.

It is the responsibility of the importer to present all the necessary documents to the customs, and request them to clear the goods. Until that is done, the consignment will remain in the customs shed. Figure 26 shows the documents required to send a consignment of handwoven cushion covers from India to Britain by sea freight:


Fig. 26: Documents required in the export of handicraft.

Not surprisingly, there is quite a lot of paperwork involved in international trade. It would take an enormous amount of time for exporters and importers to obtain and present all the necessary documents for each shipment. If they were not located in their capital cities it would be almost impossible. This is why each of them normally employs an agent in order to process all the documentary requirements. Oxfam Trading imports all its consignments by using an agent, except the ones which arrive by parcel post. Agencies are specialist companies who obtain the documents and liaise with the customs authorities.

Export agents will normally also offer to arrange the international transportation. This can be a valuable service, as they often have good contacts with the various companies and can negotiate favourable rates. Those who do this are known as clearing and forwarding agents —or freight forwarders—because they clear the consignment through customs, and forward it to the importer. The services of the agent will be billed to the exporter. If the exporter has sold to the importer on an FOB basis, then those costs are the exporter's responsibility. If, however, it is an ex works contract, then the exporter may subsequently invoice the importer for the same amount. Import agents offer the additional service of making payments on the importer's behalf. If the freight bill is being paid by the importer, as in FOB contracts, then in practice the importer's agent will pay it to the transportation company, and subsequently pass the bill on to the importer.

By using an agent, exporting becomes a great deal simpler. The exporter must prepare the invoice and the packing list, but the rest can be passed over. In summary, the process is not so forbidding:


Fig. 27: Using agents for exporting

Of course, the services of agents have to be paid for. Some exporters use them only to clear a consignment through customs, preferring to manage the documentation and negotiating of shipping for themselves. In this case, it is their responsibility to forward the documents to the customer. Any small handicraft business can undertake an export. All it has to do is:

· Register for export with its government, if this is required.
· Find a reliable agent: some agents are more efficient and cheaper than others. The agent will confirm all the procedures required.

Because the importer may clear the goods only by presenting the documents to the customs, it is essential that these arrive either before, or together with, the consignment. If the goods arrive without documents, the customs authorities will not release them. The consignment then incurs a storage charge, known as demurrage, which varies according to the size of the consignment and the number of days it is stored. This is a frustrating expense and regrettably occurs quite often, in Oxfam Trading's experience.

Depending on the system of payments (see Chapter 9.3) documents may be sent directly from the exporter to the importer, or may alternatively be handled by the banks of both parties. Either way, if a consignment is sent by sea, there is usually plenty of time for the importer to receive the documents. If it is sent by air, there is not. One solution in that case is for the exporter to send the documents together with the consignment. They can travel in a waterproof envelope attached to one of the packets. On arrival, the importer's agent will collect them, prepare the other importing documents required, and clear the consignment. An alternative is to send the documents by courier. This would be necessary if, for some reason, the documents are not ready to accompany the consignment, or not allowed to do so by the exporting country, which sometimes happens. If documents are sent through the exporter's bank, the exporter cannot directly control their speed of arrival. The important thing from the importer's point of view is that there is no delay between the receipt of the consignment and the receipt of the documents, for each day costs money in the form of demurrage charges as well as possible loss of sales.

The importer's agent must be advised about the arrival of a consignment. There is a section in the transportation document with an instruction to 'Notify Party'. The exporter—or agent—will inform the transporter of the name, address, and telephone number of the importer's agent. It might also be marked on the actual packets, if it is not a containerized consignment. When a consignment arrives, the transporter will notify the agent. This means that the importer must ensure that the exporter is sent details of its agent, so that this information can be passed to the transporter. Oxfam Trading sends out with orders a 'guide for exporters' giving details of our agents and our bank, and general instructions about fulfilment of the order. This shortens the procedure by which the transporter would otherwise have to notify the importer who then instructs the agent. The importer must forward to its agent without delay the documents sent by the exporter.

The procedure for consignments sent by parcel post are simpler. Agents are not normally involved. An exporter may deposit the parcel at a post office, together with a description of the contents. It will be cleared by the post offices of the exporting and importing countries through their customs, and delivered to the importer. The exporter has the same responsibility to send appropriate documents to the importer: an invoice, certificate of origin and transportation document (postal receipt), plus a packing list if there is more than one parcel.

Some small handicraft businesses are under the misunderstanding that post parcel packages may be sent overseas without documents. This is not the case. The only time it is ever possible is when sending a very small consignment of samples, by marking the parcel 'Samples. No Commercial Value'. This is because any duty payable on just a few items would be so small that customs would not consider it worth the cost of collection. So they would usually let a small parcel of samples through without the import papers required in all other cases.

Preparation of the invoice should not be difficult, even for an inexperienced exporter. An invoice must contain:

· consignor name and address;
· consignee name and address;
· purchase order number;
· a full description of the goods;
· the shipping marks (i.e. what is written on the packets);
· the price of the goods;
· the terms of the contract (e.g FOB Mbabane);
· total value of the consignment;
· country of origin of the goods;
· details of any freight and insurance costs payable;
· details of any special licences or forms required.

It is very important indeed that the invoice is correct and complete. Remember that it is the importer's responsibility to present documents to the customs. If customs decide to open a consignment and find items incorrectly described or not included, they invariably treat this as a serious matter. The importer can be prosecuted. Customs generally operate a system of random checks. This is why they insist on receiving a packing list, so they can spot-check any part of a consignment. They will also test any suspicious product for conformity with safety standards, and refuse it entry if it does not meet the required standard.

Fig 28: Invoice

Handicraft Co-operative Export Ltd
(Handcoopex)
P.O. Box 385
Mbabane
Swaziland
Telephone and Fax: 48326
Invoice no: EX/72/9

To: Oxfam Trading
Murdock Road
Bicester
Oxon OX6 7RF UK

Country of Origin: Swaziland
Purchase Order no. OT5200
Country d Destination: UK

Notify Party/Address:
Herbert Watson Freight
Services Ltd
Furness House
Trafford Road
Manchester M5 2RJ

Terms d Delivery and Payment: FOB
Mbabane. Cash against documents.
Vessel: African Queen
AWB/B/L No: MB 64251-4

Product Code No

Quantity

Article

Unit price US$

Total price US$

SW 6834

149

Round basket, 10"

5.25

782.25

SW 6835

100

Nesting s/2 baskets

8.50

850.00

SW 6839

145

Oblong basket, 10"

6.00

870.00

SW 4160

30

Royal Swazi necklace

8.50

255.00

SW 4161

50

Royal Swazi bracelet

4.50

225.00

SW 4162

50

Royal Swazi earring

3.50

175.00

Total FOB Mbabane US$ 3157.25
Shipping merits OXFAM UK
Total no of packages 3
Authorized Signature.......................

Fig 29: Packing list

Handicraft Co operative Export Ltd
(Handcoopex)
P.O. Box 385
Mbabane
Swaziland
Telephone and Fax: 48326

Packing list

Involce no: EX/72/9
Yessel: African Queen
AWB/B/L No: MB 64251-4
Total no of packages: 3
Shipping marks: OXFAM UK

Box No. 1

SW 6834

149 round baskets


SW 6835

30 nesting s/2 baskets

Box No. 2

SW 6835

30 nesting s/2 baskets, 10"


SW 6839

145 oblong baskets, 10"

Box no. 3

SW 6835

40 nesting s/2 baskets


SW 4160

30 Royal Swazi necklace


SW 4161

50 Royal Swazi bracelet


SW 4162

50 Royal Swazi earring

Inspection by customs bears a cost which is charged to the importer. While exporters cannot control whether or not a consignment will be inspected, full and clear documentation will make it less likely. We once paid over $400 demurrage charge on a container from Thailand which customs decided to search. They found a discrepancy between the invoice and the contents, because the supplier had omit ted to list a sample, which was being sent free of charge. They refused to release the container until we had obtained a new invoice from the supplier, which took nearly three weeks (it was before the introduction of the fax machine). The sample turned out to be rather expensive!

Nothing must be omitted from the invoice. It is perfectly acceptable to include a few samples listed 'free of charge', but they must always appear on the invoice. If you are selling on an ex works basis, it is helpful to the importer to include the transportation and clearing charges on the same invoice. It may not be possible if ycur clearing agent is slow in advising you of these, or if the consignment has to go by air freight and the documents leave immediately. In that case, you must send a separate invoice. You should not include requests for payments in a subsequent letter. Any claim for payment must be made by a formal invoice. The importer needs this for accounting purposes.

Before despatching a consignment, an exporter needs to be clear whose responsibility it is to insure it. It is a detail to be clarified if necessary at the time of confirming an order. If the exporter arranges insurance, this must be for at least the invoiced value of the goods. The risks to be covered must include the transport of the goods from the warehouse to the port or airport, storage while awaiting loading, actual transportation, offloading and storage on arrival, and final transport to the importer's warehouse.

9.2 International transportation

There are four main methods of international transportation: air freight, sea freight, air parcel post, and sea parcel post. Each has advantages and disadvantages.

Sea freight

This is the most common method used in the international handicraft trade. The cost of the ocean journey is almost always cheaper than the equivalent journey by air freight. A consignment sent by sea is charged according to its volume, or measurement. There might be a minimum charge, so that very small consignments would actually pay as much as larger ones. Increasingly, sea freight has become containerized. This means that a consignment is sent in a sealed metal container. If an exporter books a container, the same rate is paid whether it is filled or not. Containers have the advantages of offering better protection against pilferage or loss, requiring the contents to be less extensively packed, and charging less per cubic metre than general cargo. A great deal of Oxfam Trading's imports are containerized. The method also makes unpacking easier in our warehouse. There are two sizes of container: 20 feet long (26 cubic metres volume) and 40 feet long (55 cubic metros).

Nevertheless, sea freight has certain disadvantages. Consider these comments from our supplier in Cameroon:

'Quite a good number of our big partners in USA and Europe are now turning to sea freight. Of course, this can be understood because the lower the landing charges, the better the chances are of selling our products. We can already see that shipping light items like baskets, calabash rattles, etc. by sea can equally be expensive. Sea-worthy cases are expensive to make. The shipping agents are not flexible. The processing of documents for sea freight is slow and time consuming. Several trips have to be made to Douala, the sea port, before a consignment leaves the port. Charges from forwarding companies are equally high. Quite some money has to be invested in wooden cases. This ties up capital. Sea freight and other handling charges must be paid to the agent before the consignment is taken on board. This situation needs an increase in working capital. It takes quite some time for a customer to get his consignment by sea before making arrangements to send us money. How cost effective is this method?

Cameroon is a country with a sea port. Clearly the situation is worse for a landlocked country, from which freight must travel a long way by road to the port of another country. In some countries, this is logistically so difficult that sea freight is not a viable option.

These additional packing and internal transport costs may make sea freight less competitive than air freight. Where an exporter is situated closer to the international airport than the port, then even within the same country, the relative cost needs to be looked at carefully. For example, Oxfam Trading imports a number of products by air freight from Kenya. This is because the air freight rates from Nairobi to London are quite low, and packing and internal transport costs for despatch from the capital to the seaport of Mombasa quite high. However, in general, more than three-quarters of our freight arrives by sea, and we save several thousand pounds each month by using sea rather than air. Of course, sea freight is slower than air freight. Sometimes it is important to receive a consignment quickly, even if this will incur a higher freight cost. But it is the importer who must decide. For example, an importer would be annoyed to receive a consignment by air freight two months earlier than the delivery date, when it could have been sent more cheaply by sea freight. As always, the exporter must follow the customer's instructions on the order, unless there is a good reason to suggest a change.

Importers generally appreciate containerized consignments being sent on pallets. These are wooden platforms on to which the goods are placed. They can be easily unloaded by fork-lift trucks, which saves warehouse time and therefore cost. Most freight is palletised for overland transport. The standard pallet size is 40" by 48" and about 6" high. A pallet has small legs in each corner, allowing access by the forks of the truck to any of its four sides.

Sea freight was, of course, in existence for centuries before the invention of the aeroplane. The system of documentation employed today in sea freight is based on traditional methods. The bill of lading was formerly kept by the ship's captain, who was responsible to the exporter for collecting payment from the importer. Only when payment was made did the captain release the cargo. In exactly the same way today, the bill of lading acts as a deed of title to the goods. Without the original copy of it, the importer cannot rceive the consignment. The difference between tradition and modern practice is that payments are now handled by banks, not shipping line,, and that the original bill of lading is given to the exporter when the shipping line issues it. It is now the exporter's responsibility to ensure that it is forwarded to the importer in good time for the arrival of the ship.

The cost of sea freight varies among shipping lines. Many of them belong to an association known as Conference, and charge the same rate per volume. Even so, because of frequency of sailings, or amount of cargo, some Conference lines can offer a better rate on some routes by consolidating different consignments into containers. The cost of containers on the same route can be different among different companies. There are shipping lines who are not members of Conference, and who tend to undercut the rates. It is important to consider not just rates but also service. Exporters and importers need reliable shipping lines, who offer frequent sailings, and comply with their timetables. Conference lines publish schedules which enable exporters to plan despatches. An exporter or its freight forwarder has to keep in touch with the different lines to be sure that it is up to date with the best service for any particular destination.

Air freight

The airway bill is not as important as the bill of lading. It does not act as a deed of title to a consignment. An importer does not need the original copy in order to be able to claim the goods. But at least one copy is required as a record of the details of the consignment and the charges made for transporting it.

Unless a contract is made whereby the exporter is responsible for the freight cost, such as CIF, then the cost of international transport is the importer's responsibility. However, it is the exporter who arranges the actual despatch. A potentially difficult situation results, in which the party which negotiates the rates does not actually pay the bills. The first information the importer will have about the freight rate is on the bill of lading or airway bill. The rates for air freight are generally more variable than those for sea freight. There are more opportunities for getting special rates. It is therefore especially important that these are carefully investigated and negotiated. Oxfam Trading has often paid a certain rate, only to find when visiting the exporting country that a better rate was available. It cannot be assumed that an agent will automatically locate the best rate, although a good one will. An exporter needs to make its agent aware that it, too, is keeping a check on rates charged by other agents. The threat of competition for business is always a good motivator for more efficient performance.

As with shipping lines, airlines have an association, the International Air Transport Association (IATA). This has standard cargo rates. Air freight is charged according to weight, unlike sea freight. The higher the weight, the lower the rate per kilogram. The highest rate is charged for consignments less than 45 kg. There is a second rate for weights between 45 kg and 100 kg, a third for 100 kg - 500 kg, and a fourth for more than half a ton. The rates vary according to destination, of course. However, as in sea freight, the rate might be the same over quite a large range of destinations, for example, all western Europe.


Fig. 30: A bill of lading

The scope for reductions from the standard rates come in four ways. First, as in sea freight, certain airlines can consolidate cargo on some busy routes and offer more favourable rates. Second, just as there are non-Conference shipping lines, so some airlines do not belong to IATA and can offer cheaper rates. Third, and most importantly, there is a system of commodity rates in airfreight. These are special rates negotiated by governments for exports of particular importance. These can often include certain types of handicrafts. Finally, there are, in addition to scheduled services, chartered cargo flights. These are flights booked by companies especially for the transportation of goods, because it might be more efficient for them to do this than to send the goods on scheduled services. Sometimes additional space can be available on such flights, at low cost, for handicrafts.

Although air freight rates are levied according to weight, there are maximum volumes that are accepted against these weights. If the volume is greater, then a volumetric surcharge is added. For example, a consignment of large bulky baskets weighing just 50kg might be charged as if they weighed twice that amount. This surcharge would not always apply on charter air freight.

Handicraft consignments which are not volumetrically large, and which can obtain a favourable rate, perhaps a commodity rate, can often be sent economically by air freight. There are other advantages. As the supplier in Cameroon points out, the payment should be made more quickly; although that depends on the method of payment agreed. There is not normally a need to pack as protectively. For example, a manufacturer of ceramics in Peru charged 10 per cent on top of the ex works price for air freight packing, and 20 per cent for sea freight packing. An exporter should try to make available an economic air freight option if at all possible. There may be times when an importer needs the speed it offers, without wanting the penalty of removing the profit from the consignment because of high freight costs.

Parcel post

When a consignment is sent by air or sea post, the formalities are simpler. Only small packages may be sent by post. There are limitations in two respects:

Weight: parcels may not exceed a certain weight. This is normally 10 kg for air post, 20 kg for sea post; but it might be different in certain countries. If a consignment is heavier, it must be split up into different parcels.


Fig. 31 An airway bill


Fig. 32: Measuring and addressing a parcel for export

Size: there is usually a restriction on both length and length plus girth for any parcel. These are measured as shown in Figure 32.

Parcels for export are despatched at main post offices. They must be marked with the importer's name and address, and also the exporter's. If there is more than one parcel in the same consignment, it must be marked accordingly. The exporter will be required to make a declaration of contents and value. Parcels are subject to random inspection by customs. In a number of countries, a post office official inspects the contents before sealing the parcel.

Parcels may be sent by sea or air. The former is considerably cheaper, but the slowest of all the freight methods. Air parcel post is usually quick. It is a convenient method for importers to receive a small consignment. However, it is much less convenient for larger consignments, broken up into several parcels. These can often get separated in transit. Also, it is expensive. The rate per kilogram is invariably higher than that for air freight.

Small consignments can usually be transported more cheaply by post than by freight. Even if the postage cost itself appears higher, the overall cost would be lower because it does not incur customs and agency charges. However, the larger the consignment, the less those charges are relative to the invoice value and the more important is the actual rate for transporting the goods. So larger consignments may be less economical by post. Parcel post is also less secure. In some countries, the postal system is so bad that exporters simply will not use it.

Unlike freight, parcels cannot be sent on the basis that the importer pays the postage. This must be paid at the time the exporter hands over the parcel. If a consignment is being sent on an ex works or FOB basis, the charge for the postage should simply be added to the invoice, or invoiced separately. Figure 33 illustrates the costs of the various options, in an example produced by the Kenyan government.

Two points emerge clearly:

· for larger consignments, air parcel post is not economical;
· sea freight becomes more advantageous as the consignment gets larger, but for smaller consignments air freight or air parcel post is cheaper.

These conclusions would be generally valid for most international freight. However, the circumstances will be different in particular countries. In the interests of offering the most efficient and cost effective service to your customer, you must take the trouble to research the freight options. The price which the importer works with is the price into its warehouse. Freight and clearing charges are part of the buying price. If these costs can be reduced, the importer can sell more profitably, or reduce its own selling price. Either way, the possibility of the exporter receiving more orders is improved.

Fig. 33: Comparative cost of options for international freight

Estimated comparative cost (Kenyan shillings) of shipping a mixed order of handicrafts from Nairobi to New York
(Mixed goods are wood carvings, Kisii stone items, leather items and sisal baskets)

Gross Weight

Air Parcel

Sea Parcel

Air Freight

Sea Freight

of order

Post

Post



1

2

2

3

4

20kg

785.5

205.0

1096.0

2595.0

100kg

3927.5

1025.0

2390.0

2595.0

450kg

17673.0

4612.5

8800.0

2595.0

1000kg

-

-

17600.0

2595.0

Notes:

1 Does not include packing costs.
2 Order is divided into separate parcels, none exceeding 10kg.
3 Cost of air freight only: does not include agency fees or local transport charges.
4 Based on 1000kg/cubic metre crate with handling charges between Nairobi and Mombasa.
(Insurance not included in calculations.)

9.3 Methods of payment

Receiving payment fully and promptly is the final objective of all the effort that has been made to obtain and supply an export order. It is not only the exporter who has an interest in it. Governments, too, require evidence that export consignments have been paid for and that payment has been made in foreign currency. The significance of foreign currency is that it can be converted internationally for the payment of imports. The currencies of most countries which produce handicrafts cannot be; they are what is called 'non-convertible' currencies. The government of the exporting country, through its national bank, converts the receipt from the overseas customer into local currency, which is what the exporter receives. In some countries exporters are allowed to keep a certain proportion of the payment in the currency in which the importer has made the payments. This is usually either to enable them to buy imported components of their export product, or to allow them to convert a percentage of the payment at a higher rate than the official one. Governments sometimes allow this in order to assist exporters in periods of high inflation when the official and street values of their currencies are widely different.

Failure to receive payment within the stipulated time—which varies from country to country—can cause considerable problems for an exporter, on whom the responsibility lies to collect it from the customer. Exporters can and do receive fines, or lose their export registration. This is all the more reason to establish a secure method of payment.

An exporter can consign goods and send the documents to the importer directly. This removes any form of guarantee that payment will be made. It is a system to be used only with well-established customers in whom you have complete trust; or, of course, if a full pre-payment has been made. It should never be used with new customers, and especially not in countries where you are not otherwise trading. Sadly, there are many small handicraft businesses which have had bad experiences after sending consignments overseas on misplaced trust without taking payment guarantees; sometimes they have never been paid. There is risk in all business. If you are going to seek new customers, you inevitably risk meeting a dishonest one. If an importer has your goods and will not pay, you are in an extremely weak negotiating position. Legal proceedings would probably be unrealistic. You cannot, on the other hand, ask all customers to pay fully in advance. You will not get many orders that way. So you need to take precautions.

There are two main ways of protecting yourself. One is to insist that, when the order is confirmed, the importer makes a legally binding commitment to pay at the time of shipment. This can be drawn up so that the exporter automatically obtains the payment from a bank on presentation of the export documents. This is the documentary credit (better known as letter of credit) system. The other method is to consign the documents or goods or both not to the importer, but to the importer's bank, under instruction that the goods be released only against payment or a binding promise to pay. This is the system of documentary collection. The first method is fairly safe for the exporter. The second one could fail if the importer goes out of business or refuses to accept the consignment. Both methods rely on the integrity of banks.

Documentary credit

The letter of credit system is 'a written undertaking given by a bank on behalf of the buyer to pay the seller an amount of money within a specific time, provided the seller presents documents strictly in accordance with the terms laid down in the Letter of Credit On receipt of the order confirmation, the importer instructs its bank to open a credit for the required amount in favour of the exporter's bank. After shipment, the exporter presents all the documents to its bank, and provided the terms of the letter of credit have been adhered to, the bank pays immediately. The exporter, therefore, receives payment upon making shipment, irrespective of when the goods arrive with the importer. There can be further advantage to the exporter, in that in some countries credit facilities are made available at favourable rates of interest to exporters holding letters of credit.

A documentary credit can be revocable (which means that the importer can cancel or amend it at any time until the payment to the exporter has been effected), or irrevocable (which means that the exporter and importer must both agree to any amendment). It can also be confirmed (which means a guarantee is given to the exporter by its bank that payment will be made even if the importer's bank should fail to pay) or unconfirmed (in which there is no such guarantee). Hence, a confirmed, irrevocable letter of credit is a guaranteed system of payment. Many exporters insist on it for that reason.

Importers like it less. In the first place, it is an expensive means of payment. An administrative charge is made to set it up; and the importer has also to pay interest to the bank for the reserve on the bank's funds before payment. Second, there is more work and expense if the letter of credit has to be altered at any time. This is quite common, especially if an exporter is delivering late, as the letter of credit states a time limit. Oxfam Trading has had several experiences of needing to alter letters of credit to suppliers, sometimes just because a vessel did not sail on the due date, not through any fault of the exporter. While we always pay our suppliers by the method they prefer, we do not encourage them to choose the letter of credit system, which represents the lowest form of trust between seller and buyer.

Documentary collection

In this system the exporter similarly makes the claim for payment through its bank by presenting the documents to it after shipment. In this case, the credit has not already been set up by the importer, so that the exporter's bank does not make an immediate payment. Instead, it sends the documents to the importer's bank, which either makes the payment before releasing the documents to the importer, or releases them against a legally enforceable promise to pay.

When a documentary collection system is employed, the claim for payment is made on what is called a bill of exchange. The exporter, who raises this, may request immediate payment, or may alternatively agree to offer a period of credit to the customer. Immediate payment is claimed by a bill of exchange payable at sight. This system is commonly called 'cash against documents'. In this case, the importer's bank makes the payment before releasing the documents. Credit for a fixed period can be offered by a term bill of exchange, which defines a date in the future when payment is due. The importer is required in that case to sign an acceptance of the bill in order to obtain the documents. In this way, the provision of credit to an overseas customer does not necessarily entail risk of non-payment. The signed acceptance is legally enforceable in the courts of the importing country, and the bank will make the payment at the due date.

Documentary collection is an effective method of payment for consignments sent by sea freight. It suits the exporter because it offers the security of bank guarantees. Because the bill of lading gives legal title to the goods, the importer must either pay or promise to pay before the goods can be obtained. It suits the importer as well, because payment is made near the time of receiving the shipment.

The system is less suitable for other transportation methods. When a consignment is sent by air freight, the importer needs the documents very quickly, because the goods will arrive in a few days. If they are sent via the exporter's bank to the importer's bank, the delay may well lead to demurrage bills for the importer. If the exporter sends them directly to the importer, either attached to the consignment or separately by courier, then the importer will be happy, but the exporter loses any security that payment will be made. The way around this difficulty is to despatch the documents together with the goods, but to consign both goods and documents to the importer's bank, with a bill of exchange. There will be no delay in clearing the consignment, but the importer may obtain the documents to do this only on payment or promise to pay. Some countries will only permit exporters to despatch documents with the consignment if this system is being used. What happens is that, in effect, the despatch is delayed a few days in order to prepare the bill of exchange which accompanies the goods. A parcel sent by post can be consigned to the importer's bank in exactly the same way.

Payments in advance

It is common practice for Oxfam Trading's suppliers to request some proportion of the total payment in advance. This is not so much for reasons of security, but in order to obtain working capital. Money is needed to buy raw materials or pay wages during production of the order. If importers are willing to pay something in advance, then so much the better. The payment of the balance can still be claimed by documentary collection if required. If an advance has been paid, it is important to delete this amount from the final invoice.

Oxfam Trading offers to pay in advance for sample consignments from new contacts. It is cheaper and easier to do this than to administer documentary collection for very small amounts of money. If a potential new customer orders samples, it is reasonable for an exporter to request prepayment. For this purpose a proforma invoice needs to be sent, preferably adding the transportation cost.

Open account

This means trusting the customer! Goods and documents are consigned directly to the importer, and payment is awaited. Oxfam Trading conducts a lot of its business in this way. It is the method which suits us best, but we do not encourage exporters to use it for all their exports, for they might extend the trust unjustifiably to a less reputable importer.

With documentary credit or collection, money is transferred from the importer's bank to the exporter's. Advance or open account payments may also be handled in this way. It is by far the safest means of sending money overseas. Transfers may be effected by mail or by telex. The latter is quicker, and it is Oxfam Trading's normal method. In order to make transfers, an importer must, of course, have the full bank account details of the exporter. This information should be provided to any new customer at the time of confirming an order.

Banks have their own system of transferring money, through correspondent banks. The process can take a long time. We have received complaints from suppliers that payments have been delayed for several weeks after instructions have been given to our bank. It is a regular conversation topic between our payments office and our bank, but in practice we cannot control the route by which the money is transferred between banks.

Another method by which importers can pay exporters is by purchase of a draft. This is an international postal order in the currency of the exporter's invoice. It is only as reliable as the postal system. Drafts can get lost in the post, or even fall into the wrong hands and be cashed. They are not available in all currencies. It can also take time for a draft to be credited after presentation to the exporter's account. Oxfam Trading prefers not to use this method.

Payments for export consignments can be made only to the exporter, who raises the invoice. This is because it is the exporter who is liable to prove receipt of foreign currency payment. If a production unit is sending its goods through an exporter, then it is dependent on that exporter for settlement. The importer cannot bypass the exporter and pay directly to the producer.

It is possible to export handicrafts not against payment but under a countertrade arrangement. This is where an importer sends goods of part or wholly equivalent value to the exporter. It can be useful to exporters who need to import equipment for their production.

Summary

1 International trade is regulated by procedures by which countries monitor and control their exports and imports. Products are identified by a classification code, by which they will be assessed for any restriction or liability for duty. The customs authority in each country controls exports and imports. There are essential documents which must pass from the exporting to the importing country. In order to obtain all the necessary documents and to clear consignments through customs quickly, most exporters and importers use specialist agents. Parcels sent by post also require standard documentation, unless they contain only samples of very small value.

2 There are four main methods of international transportation: air freight, sea freight, air post and sea post. Each has advantages and disadvantages, which need to be understood. Exporters should comply with instructions given by the importer unless there is a good reason to propose a change. Freight rates are often negotiable. Consignments are usually sent on the basis that the importer pays the freight bill. This facility is not available for post parcels. A freight consignment cannot be delivered until the importer or its agent has cleared it through customs.

3 Not only exporters, but also the government of the country of sale, want prompt and full payment for their exports. There are two main methods which offer security to the exporter that the importer will make proper payment, the letter of credit and documentary collection. It is not advisable to send documents to an importer without setting up a guaranteed payment system, unless it is a completely trustworthy customer. Importers will sometimes pay a proportion of the value of the order in advance. Money may be transferred internationally in several ways. A transfer between the importer's and exporter's bank account is the safest method, and it can be accomplished quickly by telex.