9/8/2023

INTERNATIONAL
LOGISTICS

Pakistan Institute of
Management

Globalization
“Globalization is the interdependence of economies globally that
results from the growing volume and variety of international
transactions in goods, services, and capital, and also from the
spread of new technology.” (APICS Dictionary, 13th edition)

Global Supply Chains—Supply chains that include

international partners or markets.

Lowering of trade and political

barriers
+
Incredible technical advances
=
Worldwide playing field

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Entering Foreign Markets

• Companies can choose from five available modes in
order to enter a foreign market:
1. Indirect exporting
2. Direct exporting
3. Licensing
4. Joint ventures
5. Direct investments
• The levels of commitment, risk, control, and profit
potential vary in these five modes and generally
increase as we move from indirect exporting towards
direct investments (Kotler, 1997).

Issues in imports & exports

Communication problems

Currency differences

Payment

Differing legal systems

Transport

Customs

Risks

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INTERNATIONAL TRADE RISKS

Country Risks:
• Stable political climate? War? Revolution?
• Positive economic environment?
• Solid legal infrastructure?
• Foreign exchange restrictions?

Foreign Exchange Risks:

• Volatile foreign currency?

Commercial Risks:
• Reliable information concerning company’s track record?
Insolvency of your trading partner?
• Default or termination on your contract?

Export-Import Participants

Exporter Shipper and seller of the cargo

Importer The exporter’s customer, who buys the cargo and is sometimes
responsible for payment of import duties at customs
Freight forwarder Contractor responsible for getting goods from dock to dock and
who arranges transportation for the exporter’s cargo
NVOCC (non-vessel Non-vessel common carrier that arranges transport of cargo
operating common from port to importer and contracts for or purchases space on
carrier) the ocean vessel for resale or its own use
Consolidator Firm that consolidates shipments to load into empty vehicles for
return trip from importer’s dock to port
Customs house Has expertise to move a shipment through customs
broker expeditiously and to ensure complete documentation

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Export-Import Participants (continued)

EMC/ETC Company that consults with exporter on import market (EMC) or

that buys cargo and resells to importer (ETC)
Shipping Nonprofit association of smaller shippers banded together to
association negotiate better rates from carriers
Ship broker Independent contractor who brings together the exporter with a
ship operator that has a vessel available with the right services
at the right time
Ship agent Representative of a ship operator who is available to coordinate
in-port activities for the shipper with cargo to export
Export packing Specialist in packaging cargo for export so as to combine
company lightest practical weight (for reduced duties) with maximum
protection

Export-Import Flowchart
Government Insurance Bank
industry

Exporter Freight Ship agent/

An export arrives forwarder broker
with help from many friends
Domestic Export Overseas
carrier packager carrier

Customs Customs
broker

(Return to
Exporter NVOCC
port)

Exporter Foreign carrier

Consolidator

Bank
Exporter Government Importer

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Export-Import Flowchart
Insurance
Government industry

Exporter
An export arrives
relatively direct route
Domestic
carrier

Overseas
carrier

Customs

Foreign carrier

Importer Government

EXPORTS & IMPORTS

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INCOTERMS
Incoterms were first introduced in 1936 by the International Chamber of
Commerce (ICC) as different practices & legal interpretations between traders
around the world necessitated a common set of rules and guidelines for
interpreting the most commonly used terms in foreign trade.
Incoterms are an internationally recognized set of terms that define the
responsibilities & obligations of the parties involved in the transport of goods.
Incoterms are used to clearly communicate the division of the cost of carriage
& risks associated with the international transportation & delivery of goods
between the seller to the buyer.

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PAYMENT METHODS
Clean Payments:
• Characterized by trust.
• All shipping documents, including title documents, are
handled directly by the trading partners.
• The role of banks is limited to clearing funds as required.
• There are two types:
1. Open account: The importer is trusted to pay the exporter after
receipt of the goods.
2. Payment in Advance: Exporter is trusted to ship goods after
receiving payment from the importer.

PAYMENT METHODS
Documentary Collections:
• Exporter entrusts the handling of commercial & often
financial documents to banks & gives the banks instructions
concerning release of these documents to the importer.
• Banks involved do not provide any guarantee of payment.
• There are two types:
1. Documents Against Payment: Documents are released to the
importer only against payment. Also known as Sight Collection or
Cash Against Documents.
2. Documents Against Acceptance: Documents are released to the
importer only against acceptance of a draft (bill of exchange). Also
known as a Term Collection.

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PAYMENT METHODS
Letters Of Credit:
• It is a written undertaking by the importer’s bank, known as
issuing bank, on behalf of its customer, the importer, promising
to effect payment in favor of the exporter up to a stated sum of
money.
Exporter Importer
Bank US Payments Bank UK
XYZ Co. ABC Co.
Goods
USA Bill of UK
lading
Draft L/C

• ABC requests a letter of credit from UK bank.

• UK bank grants letter of credit based on ABC’s credit standing.
• XYZ, working through the US bank, requests to verify the ABC’s UK bank is trustworthy.
• XYZ ships the goods.
• XYZ issues a draft against the US bank and gets paid for the exported goods.
• The exporter’s US bank sends the draft to the importer’s UK bank.
• The importer’s UK bank pays the exporter’s US bank.
• The importer’s UK bank receives payment from ABC at the arrival and receipt of goods.

THE SEQUENCE OF EVENTS:

L/C is issued: After agreeing to the terms of the sale, the
buyer/importer goes to its bank and gets a L/C.

Seller’s bank is notified: The buyer’s bank notifies the seller’s

bank that the L/C has been issued. This assures seller’s bank
that it can honor drafts from the seller up to the amount of the
purchase price (in the seller’s currency) as long as the bank
receives the proper documentation. This locks the exchange
rate, removing the risk of currency rate fluctuation for the
seller.

Seller ships cargo: The carrier sends a bill of lading (or airway
bill for air carriage) to the seller’s bank.

Seller asks its banker for money: The seller sends a draft for the
purchase price to its banker, who now have has the seller’s
draft plus the carrier’s bill of lading (B/L)

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Seller’s bank asks buyer’s banker for money: The seller’s bank
forwards the documents to the buyer’s bank. The B/L usually
assigns ownership of the goods to the buyer’s bank, not
directly to the buyer. This provides the bank some security
since it can wait to release the ownership documents to the
buyer untill it is sure of being repaid.

Buyer’s bank waits for cargo (perhaps): The cargo may still be
enroute - if it has been shipped by marine carrier. Therefore
the drafts may be payable at some future date rather than
immediately. Payment may or may not depend upon the
buyer’s officially taking delivery of the cargo.

Everyone gets paid: At the time specified – say, when the buyer
approves the cargo and accepts delivery – all outstanding
drafts are honored. The buyer pays its banker; its banker pays
the seller’s banker; the seller’s banker pays the seller.

L/C TYPES
1. Revocable vs Irrevocable: Revocable LC can be revoked
without the consent of the exporter, meaning it may be
cancelled or changed up to the time the documents are
presented. Irrevocable LC cannot be revoked without the
consent of all parties.
2. Confirmed vs Non-Confirmed: Under confirmed LC, a bank
called confirming bank, adds its commitment to that of the
issuing bank to pay the exporter under the LC provided all
terms & conditions of the LC are met. Confirming bank is
usually located in the same country as the exporter.
3. Sight vs Acceptance: In Sight LC, payment is to be made at
the time that documents are presented. If payment is to be
made at a future fixed time from the presentation of
documents, this is referred to as a Acceptance LC.

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PAYMENTS RISK SPECTRUM

Highest Lowest
Risk for Risk for
Exporter Open Account Importer

Documentary Collections
– Documents Against Acceptance
– Documents Against Payment

Letters Of Credit
– Documents Against Acceptance
– Documents Against Payment (Sight LC)

Lowest Payment In Advance Highest

Risk for Risk for
Exporter Importer

BANK GUARANTEES
• A Guarantee is issued by a bank on behalf of its customer, the
Exporter, as financial assurance to the importer to be
collected in the event that the Exporter defaults on certain
specified contractual obligations.
• The bank will pay the named beneficiary the amount specified
on presentation of a written demand as outlined in the
Guarantee.
• Guarantee types:
1. Bid Guarantee
2. Advance Payment Guarantee
3. Performance Guarantee

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Harmonized Tariff Schedule (HTS)

An HS or HTS code stands for Harmonized System or Harmonized
Tariff Schedule. Developed by the World Customs Organization
(WCO), the codes are used to classify and define internationally
traded goods.

Importer pays the import duty, but

exporter labels the goods using HTS.
• HTS administered by World Customs
Organization in Brussels.
• Each export item has a six-digit identifier,
expandable by countries up to 10 digits.
• Required for businesses selling
merchandise internationally.
Excerpt from U.S.
Harmonized Tariff Schedule
HTS for “ornamental fish”:
6-digit WTO code = 0301.10
10-digit U.S. code = 0301.10.00 00

Export Documentation
Bill of lading (B/L)
• All international shipments
initiated by a B/L
• Constitutes carrier’s contract and
receipt for goods in shipment
• Used to document damage and
theft claims
Air waybill
• Standard form used for all air
shipments; constitutes a receipt
only, not title to the goods in
shipment
Certificate of insurance
• Attests that either buyer or seller
(according to Incoterms®) has a
policy covering the cargo
Certificate of origin
• Often accompanies goods
exported into a country that
grants favorable import duty
rates to the exporting country
• States that goods actually
originated in the exporting
country and are not being
reshipped from there to benefit
from the lower duty
Packing list
• An export packing list is a detailed
document that states all of the
product and packaging details
contained in each shipment.

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Export Documentation
Proforma Invoice
• Sent prior to sale
• Both a price quote and
documentation for L/C
Commercial Invoice
• Value of commodities constituting
seller’s and buyer’s invoice
Consular invoice
• Countries may require for
incoming shipments
• Customs information and native
language for importer’s country
ATA Carnet or Carnet
• An international customs &
temporary export-import
document used to clear customs in
87 countries & territories without
paying duties and import taxes on
merchandise that will be re-
exported within 12 months

Import Considerations
Declared value/duty drawbacks

Declared value
• Exporter identifies cargo by HTS.
• Importer responsible for declaring value of cargo.
• WTO: ideally declared value is actual price paid (to be
paid) by importer.
• Transfer price for subsidiaries.

Duty drawback
• Refund on all or part of duty on imported and re-exported
goods.

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Import Considerations (continued)

Calculating import Import licensing/
Export licensing
costs government
Calculating import • Governments • General export
duty generally look with license
• Import duties as % less favor on • Validation export
of CIF or FOB importing than on
(cost of goods plus license
exporter’s exporting.
expenses to load • They create
on ship). requirements and
regulations that
Calculating VAT
pose problems for
• Value-added
taxes, if any, importers and
assessed on CIF exporters.
or FOB plus import
duties.

Free Trade Zones (FTZs)

Free-trade zone, also called foreign-trade zone, formerly free
port, an area within which goods may be landed, handled,
manufactured or reconfigured, and re-exported without the
intervention of the customs authorities.

Benefits:
• Deferral of all duties and federal excise taxes until goods leave
the FTZ for customs—a chance to repack, reprocess, etc., for
compliance
• Chance to inspect (and reject) cargo before paying duties
• Avoidance of quotas
• Indefinite cost-effective storage
• Manufacture and assembly without “inverted duties”

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Export Packaging Concerns

Will the packaged cargo Are perishables properly

survive a rough ride? insulated and cushioned?

Can packaging be reused? Is it light enough for a

Recycled? Any wasted? lower duty rate?

Can containers be loaded Does the packaging meet

onto multiple modes? customs requirements?

Are all labels, instructions,

warnings, etc., in place?

TRADING BLOCS
• A trading bloc is a preferential trade agreement
between a group of countries designed to reduce or
remove trade barriers between the members.
• According to Edward D. Mansfield and Helen V. Milner
in their book ‘The political economy of regionalization’,
there are different types of trading blocs:

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Free Trade Agreements

• Faster and more transactions
• Opens trade in communities
• Increases international freight demand
• Removes trade barriers and transport permit restrictions
• Frees movement of capital and reduces or eliminates duties
• Standardizes and simplifies documentation
• Enables testing standards

Module 6, Section B, Topic 1

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