Source: JETRO's e-Learning Course on "On-Line Course on Trade Practices - Exporting to China"
You have probably considered concluding agency agreements and distributorship agreements with foreign companies in order to establish sales channels overseas. Distributorships and agencies are known by various others names as well such as "agencies," "sales agents," "outlets" and "franchisees." To prevent the two from being confused, it is necessary to understand the differences in the agreements.
This time, we will take a page from the text (Only in Japanese) of JETRO's e-Learning Course on "On-Line Course on Trade Practices - Exporting to China" and explain agency agreements and distributorship agreements.
1. Agency Agreement
An agency contracts with the exporter (principal), that is, the trading company or manufacturer, to broadly publicize the products of the exporter and work to expand sales (market). However, an agent does not become a party to a sales agreement with an importer, but acts as a middleman, intermediary or representative of the exporter. Therefore, in a sales agreement which is concluded thanks to the activities of the agent, all of the profit or risk relating to the agreement falls on the exporter and importer. For example, if the importer is unable to make payment, the exporter cannot recover payment, resulting in a loss for the exporter.
An agency operates based on commissions obtained from the exporter for past work.
* What is an Agency Agreement?
An agency agreement is an agreement which is concluded with an agent or representative (agency) which acts as an intermediary when an "exporter (seller)" sells its products to an "importer (buyer)". The agency makes a profit by a commission which is paid to it for its services in finding importers.
2. Distributorship Agreement
A distributor imports products from an exporter, sells the products to a third party (resale), and makes a profit by the resale margin. The distributor sells products on its own responsibility (profit and risk burden), but can freely set the sales price.
However, sometimes the exporter and distributor will agree on special terms between them such as restrictions on the products handled, maintenance of product inventories, securing of spare parts and after-sales service and the burden of PR costs. Distributors which obtain the right of exclusive sales (monopoly) under such type of terms for prescribed terms and territories are called "sole distributors" or "exclusive distributors". On the other hand, distributors which do not have a monopoly are called "non-exclusive distributors."
* What is a Distributorship
This is an agreement by which an "importer (distributor)" imports products from an "exporter" at its own risk and cost, concludes sales agreements with its own customers in a specific country/territory or other limited range, and resells the products. It makes a profit by the "resale margin."
Source: Manufactured Imports and Investment Promotion Organization (MIPRO)
In Parts 1, 2, and 3 of this series, we explained the framework of remittance of foreign currency through the banks and post office branches. This time, we will explain the framework of settlement by credit card.
When purchasing a product from an Internet shop, payment by credit card (hereinafter referred to as "credit card settlement") is the most general form of payment. Credit card settlement is apparently also being used for direct purchases at overseas trade fairs.
1. Merits and Demerits of Credit Card Settlement
The biggest features of credit card settlements are 1) there is no need to walk around with large amounts of cash, 2) there are no remittance fees and 3) there is a grace period until settlement. Furthermore, if dividing credit cards into ones for business use and ones for personal use, this is helpful for separating personal and business expenses in accounts and enables management and storage of data of the payments (dates of use, places of use, amounts and conversion rates).
A credit card which is issued for use by employees of a company is called a "corporate credit card". Among the credit card companies, there are those which issue corporate credit cards which offer improved services to small businesses. For corporate card users, use of corporate credit cards makes it unnecessary for individual employees to claim expenses. Payments are also made all together on a monthly basis. It is possible to simplify the internal accounting procedures and reduce time required for them. On the other hand, with credit card settlement, a credit limit is set in advance. Further, at the time of use, the actual payment (settlement) and conversion rate cannot be determined. It is necessary to be very careful with management of the credit card number and personal identification number.
2. Framework of Credit Card Settlement
The credit card system is comprised of "issuers (card issuing companies)" and "acquirers." Issuers such as the five major credit card companies that have international networks (American Express, Diners Club, JCB, Master Card and VISA) issue credit cards to card holders. Acquirers ,conclude merchant agreements with vendors (merchants). The "issuers" and the "acquirers" are usually banks, stock brokerage firms and other financial companies. American Express, Diners Club and JCB are credit card companies which themselves serve as both "issuers" and "acquirers" in some respects.
Credit card companies establish their own rules for settlement to merchants through "acquirers", issue their own brand credit cards through the "issuers," total up credit card sales for each country/region, and process them for exchange purposes and settlement. The flow in the case of Japanese credit card holders utilizing overseas merchants is as shown in the following drawing:
<< Flow of Settlement in Case of Japanese Credit Card Holder Utilizing Overseas Merchant >>
A.B.: Credit card holder utilizes credit card at a merchant.
C.D.: The merchant totals up and notifies the credit card usage to the acquirer, then the acquirer
deducts a handling fee from the amount of usage and deposits the balance. This is done
about once every two weeks to one month.
E.F.: The acquirer totals up the sales of the merchant and notifies the credit card company. The
money is send by the credit card company.
G.H.: The credit card company converts the sales at different countries from the foreign currencies to
Japanese yen, totals them by issuer, and issues a bill. The issuers pay the amounts utilized to
the credit card companies.
I.J.: The issuer sends a bill for the amount of use to the credit card holder. The credit card holder
then makes payment (for example, by automatic withdrawal of the amount of usage from the
bank account on a designated date).
3. Conversion Rate and Conversion Date
Credit card charges are converted to Japanese yen based on rules of the individual credit card companies. For the applied rate, 1) the rate of the Tokyo foreign exchange market is utilized or 2) the rate agreed upon independently between the credit card company and bank plus a certain percentage (1 to 2 percent) as exchange costs is used. For the time of conversion, 1) it is made the time of transmission of data from the merchant or 2) it is made the time the actual conversion is performed by the administrative processing center.
Up to when the credit card company converts the amount of usage, various steps are undergone such as notification from the merchant to the acquirer, then notification from the acquirer to the credit card company, so in general, the time of conversion does not become the same as the date of the credit card purchase. Further, the exchange rate fluctuates with each instant, so if the exchange rate moves by a large margin, a large difference may arise in the rates at the time of use and the time of billing. Depending on the timing of processing, the rate will sometimes differ even when a card is used on the same day at the same merchant.
4. Points to Watch in Internet Transactions
Online settlement is possible for buying and selling products on the Internet, so credit card settlements are widely utilized. The rate of utilization is said to be over 70 percent of online shopping.
With credit card settlements, there are quite a few cases where the credit card number or password is stolen, the credit card is illicitly used by identity theft, and the card holder becomes involved in some fraudulent transaction. When informing a credit card number to the other side, avoiding emails and using the telephone or facsimile is said to be safer.
Further, when inputting personal information or a credit card number in an online shop, check if this page uses a secure channel (function of transmitting input information encoded). Specifically, in the case of Internet Explorer, the bottom right of the screen displays a key mark, while in the case of Netscape, the bottom left of the screen displays a key mark. The general rule of thumb is look for the address of a website starting from "https."
Some credit card companies offer "personal authentication services" where the card holders register IDs and passwords other than the credit card numbers in advance, and input these at the time of credit card settlement on the Internet thereby enabling prevention of identity theft by third parties.
5. Credit Card Settlement Utilized to Collect Payments (Merchant Agreements)
Vendors of products (stores) are also using credit card settlement as means for collecting payments. Vendors can conclude merchant agreements with credit card companies, and thereby eliminate the needs to send bills to overseas customers or to confirm remittances from them.
However, to become a credit card merchant, it is necessary to undergo an examination as to the products handled, sales history and monthly sales. Further, it is necessary to consider the following points:
1) Number of days until reception of payment: half a month to one month is required for collection of payment.
Sales are totaled up on the closing date set for each credit card company (once or twice a month) and are paid for all together. For this reason, half a month to one month is required from sales to the reception of payment.
2) Merchant fees: usually around 5 percent - higher in Internet sales
Merchant agreements themselves are basically free, but when sales are received from the credit card company, merchant fees are deducted. The rate differs according to the credit card companies. It is usually around 5 percent, but with Internet sales, the risk is higher, so the rate is set somewhat higher than this.
3) Introduction of system: expenses for introduction of system initially borne or monthly usage fee borne.
Introduction of a credit card settlement system is both troublesome (installation of card reader and connection to system of credit card company) and costly. When utilizing a settlement agent service* or opening a store in a mall, various procedures and expense of introduction of the system are not borne individually, but system usage fees, service usage fees, and other expenses are incurred every month.
*A "settlement agent service" is a service which handles all settlement procedures on behalf of a customer which
contracts for several settlement services such as credit cards and e-money.
6. Advantages and Points to Watch
1) There is no need to walk around with cash.
2) There is no need to prepare foreign currency in the company.
3) There is a grace period after purchase until money is charged to the bank account (payment is made).
4) The handling fee is lower compared with international remittance services offered by the banks or post office.
5) In Internet transactions, credit card settlement is the most convenient method.
6) The date of payment to the other side (date of reception of payment) is unclear.
7) The conversion rate cannot be predicted.
8) The credit card number can be learned by a third party and be misused.
9) A credit limit* is set.
*When a large amount of settlement is expected, you should contact the credit card company in advance to ask about the possibility of raising the credit limit.
Source: Manufactured Imports and Investment Promotion Organization (MIPRO)
In Parts 1 and 2 of this series, we explained the framework of remittance of foreign currency through banks.
In this part, we will explain the international remittance service offered by the Japanese post office system.
In Japan, the 233 branches of the Japan Post Bank and the 7,500 or so authorized international remittance post office branches offer international remittance services. There are "remittances to addresses" where they send a postal money order to the recipient and "remittances to accounts/remittances between accounts" where they deposit funds in the account of the recipient. Remittance to about 200 countries and regions is possible, but the services able to be used, the limits on remittances and the currencies used differ, so it is necessary to check the individual terms.
1. Remittances to Addresses - Check Overseas Postal Situation in Advance
In "remittances to addresses", the amount of remittance and the remittance fee (2,500 yen per remittance) are paid in Japanese yen, then a postal money order is sent by mail. The overseas recipient can obtain cash at a post office branch in his or her country in exchange for the postal money order. However, the handling fee for the U.S. is 2,000 yen, and the postal money order is sent by the remitter.
The usual numbers of days for remittance are as follows. These are approximate due to the holidays and postal situations in the other countries, so it is necessary to provide a sufficient leeway of time until the deadline.
Source: Japan Post Bank Website (as of August 2012)
2. Remittances to Accounts/Remittances Between Accounts
- Check Fees of Remitting, Receiving and Intermediary
In both "remittances to accounts" and "remittances between accounts", funds are deposited in the bank account or post office remittance account of the recipient. In "remittances to accounts", the amount of remittance and fee are paid in cash in Japanese yen. On the other hand, in "remittances between accounts", the amount of remittance and the fee are withdrawn from the Japan Post Bank account (or remittance account) of the remitter, are converted to foreign currency, and are deposited in the account of the recipient. Note that in remittances to countries or regions where indication of the BIC code or IBAN code identifying the bank account (see Part 2 of the series) is necessary, it is required to confirm the code with the recipient in advance.
The fee paid to the Japan Post Bank is 2,500 yen per remittance, but when depositing funds in an overseas receiving account, sometimes account registration fees of the receiving institution (bank) and intermediary fees at institutions (banks) acting as intermediaries between two banks arise. These fees are deducted in the process of remittance, so it is necessary to check in advance that the finally deposited amount does not become insufficient.
3. Foreign Currency Exchange Rates in Japan and Currencies Used
The foreign currency exchange rate at the Japan Post Bank (TTS: telegraphic transfer selling rate) is updated at 11:00 am every business day for U.S. dollars and at noon for other currencies. When the currency which is used for the remittance is designated and differs from the currency of the country remitted to, with the exception of some countries, the institution (bank) at the remittance destination reconverts the remittance to the local currency and pays the converted amount to the recipient.
For example, when making payment to India in rupees, if utilizing the "remittance to account" of the Japan Post Bank, the currency of remittance is designated as U.S. dollars, so first a yen-based amount is converted to U.S. dollars at the Japan Post Bank, the domestic bank in India converts the U.S. dollar denominated amount to a rupee denominated amount, and that amount is deposited in the recipient's account. For this reason, two exchange fees are incurred along with two conversions of foreign currency. These fees are deducted from the remitted amount. That is, note that the amount to be paid to the Indian side has to be increased by the addition of these fees.
<< Example of Overseas Remittance Service by Japan Post Bank >>
Source: Japan Post Bank Website (as of August 2012)
Note: When you remit , check with the window at the Japan Post Bank or authorized international remittance post office branch on the matters to watch regarding the country remitted to.
4. Information Required for Remittances
When requesting remittance, it is necessary to declare the reason for remittance and occupation. Further, in the case of a charge for a product, the specific product name (such as clothing and toys) also is entered. Further, to confirm the identity of the remitter, presentation of ID issued by a public institution (indicating the name, address and date of birth of the remitter) at the window is sought. In the case of a company, a certificate for company registration (one issued less than six months ago) will be required for its remittance, in addition to the ID of the employee in charge of the remittance.
5. Advantages and Points to Watch
1) Funds can be sent by postal money order to recipients which cannot utilize credit card settlements or accounts of financial institutions.
2) There is a limit to the amount remitted per time.
3) The currency of remittance is limited by the country/region.
4) It is necessary to physically visit the window at the Japan Post Bank or authorized international remittance post office branch.
Source: Manufactured Imports and Investment Promotion Organization (MIPRO)
In Part 1, we explained the flow of procedures in remitting foreign currency through banks and the various fees incurred.
In this part, we will explain the points to watch when remitting foreign currency through banks and the required documentation.
3. Points to Watch When Requesting Remittance of Foreign Currency in Japan
1) Countries/Regions Transferred to: Restrictions on Remittances to Countries under Economic Sanctions and Conflict Countries
When the country/region for remittance to is under economic sanctions, funds cannot be transferred to it. Further, in the case of conflict countries, depending on the situation, services may be in flux. Remittances may therefore be restricted.
2) Days Required: Check Date of Arrival of Funds in Advance
The number of days until the money reaches the receiving side bank differs depending on the bank even when remitting the same currency to the same country. Before requesting remittance, it is necessary to check the date of arrival of funds at the receiving side bank to make sure the funds reach the bank before the payment deadline.
3) Submitted Documents: Submission of ID and Description of Purpose of Remittance
The law for prevention of transfer of profits derived from criminal activities prohibits money laundering and transactions suspected of being illegal. Therefore, at the time of remittance, presentation of ID is requested and submission of a certificate of registered matters in the case of a corporation is required. Further, description of the purpose of remittance is sought.
4. Information Required for Remittance in Japan
When requesting remittance, the following information and documents are required. There are some differences however depending on the country remitted to and the handling bank, so this should be confirmed in advance.
1) Information relating to receiving bank
Name of bank and bank number
Name of branch, branch number and branch address
BIC code, IBAN code *2, and other codes identifying bank and account at the time of international remittance
Name of recipient account, account number and recipient address
2) Remitted amount and currency
3) Information relating to remitter
Certificate of registered matters (case of corporation)
Certification of stamp
ID of remitter (CEO) and remittance manager (issued by public organization)
Occupation and lines of business
Purpose of remittance (in case of payment for products, name of product, country of origin and port of embarkation)
Materials enabling source of remitted funds to be confirmed
5. New Entrants Other Than Banks (Fund Transfer Services) in Japan
In Japan, up until just recently, businesses other than banks were not allowed to engage in foreign exchange transactions. With the April 2010 start of the law relating to financial settlements, however, businesses registered as fund transfer services became allowed to engage in foreign exchange transactions of up to 1 million yen per transaction. Large telecommunication carrier service companies have begun overseas remittance services utilizing the Internet.
The framework of remittances is basically the same as that of a bank T/T. In addition to a type where funds are transferred to the bank account of the recipient, there is a type where cash is received at a pickup point affiliated with a major overseas fund transfer service. The remittance fees are relatively low, but other fees are generated at the correspondent banks or receiving banks in the same way as banks.
Fund transfer services are sometimes limited to personal use or to remittances overseas (that is, receipt in Japan is not allowed). Even if possible to be used for commercial purposes, they cannot be used for settling charges for products which are covered by import restrictions. There are other limitations as well. It is necessary to check carefully in advance if they can handle the desired remittances.
6. Advantages and Cautions
1) No limit on amount of remittance.
2) Ability to freely select currency used. (Remittance of Japanese yen also possible.)
3) Depending on the bank, procedures able to be performed by mail or on-line.
4) Higher fees compared with post office-based international remittance services or credit card settlement.
The Manufactured Imports and Investment Promotion Organization (MIPRO) has issued a brochure entitled "Foreign Currency Settlements for Small Transactions" (Japanese edition only) which explains to small Japanese importers the different frameworks for settlement in foreign currency of 1 million yen or so size deals and the points to watch about the same.
We will explain the content of that brochure to TTPP users divided into four parts.
In the first part, we will explain the flow of foreign funds and various fees in bank telegraphic transfers.
In the second part, we will explain the points to watch and necessary documents when remitting foreign funds for bank telegraphic transfers.
In the third part, we will explain the remittance services of Japan's JP Bank and post offices handling international remittances.
In the fourth part, we will explain the framework for settlement by credit cards.
Source: Manufactured Imports and Investment Promotion Organization (MIPRO)
Settlements of import charges through general banks mainly include L/C (letter of credit) transactions*3 (for detailed explanation, see part 2 of this series) and T/T (telegraphic transfers). For settlement of small sized transactions, T/Ts are probably used more often.
T/Ts include "deposit types" where funds withdrawn from a deposit account are remitted and "transfer types" where funds are paid to the bank for each remittance. A "deposit type" enables fund withdrawals to be centrally managed, but a certain amount of funds has to be kept in the account at all times. On the other hand, a "transfer type" does not require the account to be managed and can be utilized when needed, so is easy and convenient, but incoming funds cannot be handled. The type should be selected according to the application after considering these merits and demerits.
1. Flow of Remitted Funds
Funds which are remitted from Japan through banks generally flow as shown in the following figure. The remitter requests a domestic bank to remit funds to the receiver's account. The remittance fees differ depending on the bank, but is about 2,000 to 6,000 yen per remittance.
After receiving a request for remittance, the bank remits the funds to the receiving bank through a correspondent bank*1 which it has contracted with for foreign exchange transations. At that time, sometimes a handling fee is generated between the correspondent bank and the receiving bank (generally about 2,500 yen). This fee is liable to be automatically deducted from the remitted amount and therefore the amount entering the receiver's account is liable to end up becoming insufficient, so the remitter has to confirm the total fees in advance.
Further, negotiating with the other party in advance regarding who bears these fees can prevent trouble at the time of settlement and can also reduce the costs of the remitter.
Small sized banks often do not directly remit the funds in the case of remittance to unfamiliar countries or when unfamiliar currencies are used for the remittance. They may consign the remittance procedures to a large domestic Japanese bank. If the number of banks gone through becomes greater, the fees and the days until the funds enter the account may become greater. Therefore, it would be best to investigate in advance the remittance procedures of several banks and select the bank which suits your requirements.
<< Flow of Procedure for Remittance through Banks >>
2. Foreign Currency Conversion Rates and Foreign Exchange Fees in Japan
The conversion rate which is used in banks (including JP Bank) at the time of remittance by T/T is, in the case of converting Japanese yen to a foreign currency, is the TTS (Telegraphic Transfer Selling) rate. On the other hand, in the case of converting a foreign currency to Japanese yen, the TTB (Telegraphic Transfer Buying) is used. The exchange rate which is reported in newspapers and on the television is the TTM (Telegraphic Transfer Middle) rate. This is the rate which is used in transactions between banks.
Foreign exchange rates fluctuate every day and every instant, but the TTS is set in the morning or around noon from Monday through Friday based on the rates of the Tokyo Foreign Exchange Market and is updated every business day. (However, if the exchange rate greatly fluctuates, it will sometimes be changed even in the same day.)
The spread or the difference between the TTM and TTS/TTB is the fee for exchange transactions taken by the banks from their clients. The TTS is the "TTM + exchange fee", while the TTB is the "TTM - exchange fee". In general, the spread when exchanging Japanese yen and the U.S. dollar in large commercial banks in Japan is 1 yen while the spread for the yen and Euro is 1.5 yen. Exchange fees greatly differ depending on the currency and bank, so when selecting a bank to request remittance from, not only the remittance fee, but also the exchange fees should be compared.
<< Example of Japanese Yen/U.S. Dollar Conversion Rate >>
Mr. Seiichi Yoshitomi, President CEO, PROEYES Corp.
The INCOTERMS® 2010 use a different approach for the categorization of the rules for international trades from the 2000 version and categorize them into two classes by mode of transportation. In Part 2, let me explain about the key points of the revised rules from a viewpoint of practitioners who use the INCOTERMS rules for their trade businesses.
<Point 1: How
to choose the most optimal INCOTERMS rules>
Let me start from a conclusion. There may be no rules that are optimal for any types of trade transactions. The best way to ensure the optimal use of the INCOTERMS rules is for both parties of negotiation to reach an agreement on the transaction terms and conditions based on their correct interpretation of the rules.
Today, container cargos play a dominant role as a mode of sea transportation. At the same time, airfreight is gaining its importance. In the ages when container cargos were not a mainstream mode, conventional cargo ships (bulk carriers) were used for the transportation of any types of goods. In those days, three rules including FOB, CFR and CIF were used out of the four “Class B” rules (Rules for sea and inland waterway transport).
With traditional trade practices still prevailing, I guess that FOB, CFR or CIF is mainly used in Japan even today, regardless of the mode of transportation. As trade transactions across borders are expected to continue to rise, we can say that the correct understanding of the INCOTERMS rules will be more important as basics for international trade businesses and negotiations.
<Point 2: What
INCOTERMS rules are optimal for container and airfreight transportation
Under the FOB, CFR and CIF rules, goods are regarded as being delivered when they are actually “on board” the vessel (Note 1). Today, however, containers are often delivered to the transporter in the premise of a container yard before goods are “on board” the vessel. In the case of airfreight transportation, it is a common practice to deliver goods to the transporter in the premise of an airport before the goods are “on board” the aircraft.
Note 1: In the INCOTERMS 2010, the interpretation of the point of delivery is changed regarding FOB, CFR and CIF, eliminating the use of the expression “the goods pass the ship's rail” and replacing it with the expression “goods are on board the vessel.” The revision was made to avoid troubles that may occur in the case of container cargo/air cargo transportation regarding the sharing of costs and risks involved in the delivery within the premise of container yards or airports if the INCOTERMS rules are interpreted rigidly. Anyway, the use of FCA rules is recommended in the case of container or airfreight transportation.
<Point 3: What are two new rules (DAT and DAP)?>
Under the DAT (Delivered At Terminal) rule, goods must be delivered to a named terminal (Note 2). Sellers must make arrangement for the carriage of goods to the named container yard or air cargo terminal at the destination and must bear costs and risks for the delivery until goods are transported into the terminal. Buyers must take procedures for customs clearance and pay import duties at the destination.
Note 2:Terminal means pier, warehouse or land/railway/air transportation terminal
* Click here for the outline of the DAT rule
Under the DAP rule, goods must be delivered to a named place at the destination. It is nearly same as the DAT rule, but sellers must transport goods to an inland place from a terminal in a port area and must bear costs and risks for the delivery of goods until the goods are carried to the named place.
* Click here for the outline
of the DAP rule
Under both DAT and DAP rule, sellers have an obligation for import customs clearance procedures at the destination, but they do not have any obligation to pay import duty tax. Under DDP rule, sellers must take procedures for import customs clearance and pay import duty tax.
Security regulations have been enhanced for sea and air transportation of goods since the 9/11 simultaneous terrorism in the United States. The INCOTERMS rules define not only the scope of costs and risks of cargos to be shared between sellers and buyers, but also obligations to be shared by the parties of transactions, particularly for the sharing of security information about cargos. The rules also include defined interpretation about terminal handling charges (Note 3).
Note 3:In a case where a seller must pay sea transportation costs, the seller pays the costs to its sea transporter at the place where goods are loaded and charges the costs in a bill to the buyer. In this case, however, troubles with double billing sometimes happen as the transporter charges the buyer for the costs for terminal handling charges at the destination terminal. The new INCOTERMS include defined interpretation about the cost sharing in a case like this.
Mr. Seiichi Yoshitomi, President CEO, PROEYES Corp.
The INCOTERMS® 2000 were revised after ten years’ interval from the previous revision. The INCOTERMS 2010 came into effect January 1, 2011, replacing the INCOTERMS 2000 that had been used until the end of 2010. Let me introduce the outline of the revised INCOTERMS rules in two-part series. Part 1 is to review main points of the revisions in addition to the history of INCOTERMS and its backgrounds.
<Point 1: What are INCOTERMS?>
Trades are international commercial transactions involving people in countries with different languages. People tend to unconsciously interpret everything in their favorite ways. With different languages and business practices, troubles with interpretations of contracts often triggered disputes between sellers and buyers, which sometimes went into litigation.
INCOTERMS were established by the International Chamber of Commerce as an international standard for globally common terms of trades (Note 1). Current forms of international trade transactions originated in the Medieval Age, but no international rules were available until 1936 when INCOTERMS were worked out for the first time. The INCOTERMS rules define the scopes of responsibilities and obligations for exporters and importers, particularly the scopes of sharing (1) cost and (2) risk involved in the delivery goods (Note 2).
Earlier, sea transport was a main mode of trade transactions. Along with changes of the times, transportation modes have shifted away from conventional vessels, with the emergence of container cargos, and further international intermodal transportation and airfreight. So, the INCOTERMS rules have been revised many times to meet new requirements.
Note 1:INCOTERMS (International Commercial Terms)
The INCOTERMS rules were established by the International Chamber of Commerce (ICC), headquartered in Paris, France, in 1936 as a standard for the terms of trade transactions. Since then, the rules have been used most frequently in the world. (INCOTERMS are not an international treaty but rules for trade transactions defined by the ICC.)
Note 2:The INCOTERMS rules only define the scope of sharing costs and risks involved in the delivery of goods, so they are supplemented by Vienna Sales Convention that defines rules for the completion of a contract and legal remedy for the breach of a contract.
<Point 2: Where do the INCOTERMS 2010 differ from the INCOTERMS 2000?>
INCOTERMS are represented by three capital letters of English. Under the INCOTERMS 2000, a total of 13 rules are grouped into four term categories based on the initial capital letters (E, F, C and D).
1. Group E: Term for shipment--- EXW
2. Group F: Responsibilities of buyers for main transportation costs--- FCA, FAS, FOB
3. Group C: Responsibilities of sellers for main transportation costs--- CFR, CIF, CPT, CIP
4. Group D: Term for the destination of delivery--- DAF, DES, DEQ, DDU, DDP
The revised rules are classified according to a new concept. Under the INCOTERMS 2010, rules are categorized into two classes by modes of transportation to meet the demands of changes in a global transportation that have been progressing along with the growth of regional common markets such as EU.
Class A: Seven rules for any mode or modes of
- EXW, FCA, CPT, CIP, DAT, DAP, DDP
Class B: Four
Rules for Sea and Inland Waterway Transport:
- FAS, FOB, CFR, CIF
Four terms for the Group D (the destination of delivery) in the INCOTERMS 2000 including DAF, DES, DEQ and DDU were eliminated and two new rules (DAT and DAP) were added. As a result, the number of the rules was reduced from 13 to 11. At the same time, a terminology was changed, replacing “term” in the earlier version with “rule” in the new version.
Mr. Seiichi Yoshitomi, President CEO, PROEYES Corp.
In the previous issue, I discussed the relationship between the terms of trade and burden of costs for building the optimum logistics systems for imports.
I am often consulted by clients about arrangements for international logistics during which they tell me then cannot understand the estimates presented to them by logistics companies or that the estimates list "at cost" and therefore the total costs cannot be determined.
1. Three Steps for Approach for Building Optimum Logistics
To determine the most efficient logistics meeting the needs of the importer and build the optimum logistics system, I recommend you investigate the following three matters in advance and collect and organize material for comparison.
Step 1: Investigate compliance and investigate tariffs
First, you should start by investigating the legal restrictions relating to your imports, that is, compliance with the laws.
In Japan, for example, imports are governed by the "Foreign Exchange and Foreign Trade Act" but are in principle unrestricted. However, there are certain products for which advance permission or approval is required for import or sale and products which contravene international treaties on the protection of the environment (Note 1). You must investigate this in advance.
Examples of international agreements relating to imports
- Washington Convention on International Trade in Endangered Species of Wild Fauna and Flora
- Vienna Convention for the freon gas and halon carbon Protection of the Ozone Layer
- Basel Convention on the Control of Transboundary Movements of Hazardous Wastes Disposal
At the same time, to clarify import costs, you must investigate how much duties will be slapped on the imported products. When importing products, it is necessary to make an import declaration to the customs authorities and obtain permission for import (customs clearance). The declaration has to clearly indicate the HS code of the global harmonized coding system of commodities. Under this system, all commodities are classified by their ingredients or applications. Import duties are set based on these. Imports of samples are also subject to tariffs, so it is important to investigate the tariff rates in advance.
Step 2: Build and Select the optimum logistics system
Teach yourself about the terms of trade of import contracts, in particular the responsibilities of the buyers and sellers for costs. This has a bearing on how far you should be responsible for logistics when requesting an estimate from a logistics company and on the scope and terms of the estimate you will be presented with. Further, calculating all costs numerically would be of great help in building and selecting the optimum logistics system.
As for exchange rates, international shipping costs, and other items of a fluctuating nature, you can judge what kind of logistics system would be best by using a numerical method for the calculation of total import costs under the terms foreseeable at the current point of time. For example, calculate the exchange rate by a rate 5 percent more than the actual rate at the current point of time, calculate "at cost" for an inspection in an estimate as the cost assumed when commissioning an inspection, and calculate all other numerically so as to get a grasp of the total costs.
**Key Point: By making a trial calculation of the total import costs, it is possible to learn how much funds you will require at the time of import. Logistics costs for imports are generally paid simultaneously with the handover of the cargo. This is important to note in money management.
Step 3: Provide required information to agent as early as possible
After receiving a notification of shipment of cargo from the exporter, be sure to request the documentation required for customs clearance procedures (Note 2). In the case of international courier delivery or air cargo, the transport time is short, so the documents arrive together with the cargo, but if you can obtain the required documents from the exporter at the stage of export clearance at the country of origin, you can speed up the customs clearance procedures at the import side.
Note 2: Documents required
- Commercial invoice
- Packing list
- BL, AWB
- Insurance policy
- Other trade certification documents such as certificates of origin
Further, if catalog information on the imported products or sets of documents from a previous customs clearance procedure for the imports are available, you should submit them as reference material. Information such as advance permission or approval prepared at step 1 can also be submitted to the logistics and customs clearance agents. This will all help speed up the customs clearance procedures. If such information is not available, there is a higher probability of the cargo being inspected. This will not only increase the expenses for covering the inspection costs but will also delay customs clearance approval. It may also result in a higher tariff rate being applied.
2. Four Points for
Judgment for Building Optimum Logistics System
After confirming which of the exporter or importer will be arranging for the logistics and bearing the costs, the following four points should be judged for building the optimum logistics system. For the terms of trade, see the summary of Incoterms in the previous issue.
Point 1: Check the terms of trade in the import
The scopes of responsibility for expenses between the buyer and seller differ with the different terms of trade. In the case of EXW terms and FOB terms, the importer arranges for all of the logistics. On the other hand, in the case of CFR terms, the exporter arranges for the logistics, so the importer need only make arrangements for the process after clearance of the imports through customs.
Point 2: Think of the time constraints,
that is, how much of a rush you are in
In general, when urgent delivery is not required, shipment by sea is sufficient, but when a deadline is fast approaching, due to time constraints, rather than general air cargo, use of international courier delivery services may also be considered.
When urgent delivery is required, you might have to consider using “hand carry services.”
Point 3: Obtain a grasp of the weight and size of the
cargo to be imported
In international shipping, the larger of the actual weight or the volume weight (Note 3) becomes the weight for calculation of the shipping charge. Both in air cargo and sea cargo, the space for cargo is fixed, so to eliminate the unfairness between bulky light goods and compact heavy goods, the volume of the length x width x height of the packaging is calculated and the charge calculated by a comparison of the volume weight and actual weight.
Note 3: Method of calculation of shipping charge
A volume weight of 1 kg equals 6,000 cubic centimeters, so in the case of a one-meter square box, 100 × 100 × 100 ÷ 6,000 = 167 kg. When the actual weight is 167 kg or less, the shipping charge is calculated by the volume weight.
Point 4: Confirm the type of the cargo to be transported
In the case of cargo classified as hazardous (Note 4), to secure safety during transport, designated packaging and submission of a declaration of hazardous materials are required The shipping company able to handle the hazardous cargo will also be limited by the route. It is necessary to investigate this in advance.
Note 4: Classification and sample items
of dangerous goods (hazardous materials)
- Flammable gas materials: Aerosol, etc.
- Flammable liquids materials: Alcohol, gasoline (petrol), etc
- Flammable solids materials: Safety matches, naphthalene, etc.
- Spontaneously combustible materials: Sodium oxide, etc.
- Explosives materials: Fireworks, etc.
- Toxic (poison) materials: Pesticides, etc.
- Oxidizing agent materials: Calcium hypochlorite, etc.
- Miscellaneous materials: Formalin, dry ice, etc.
- Magnetic materials: Magnets, etc.
- Radioactive materials: Uranium, plutonium, etc.
*Source: United Nations Recommendations on the Transport of Dangerous Goods
To build the optimal logistics system, when requesting an estimate, it is important to clearly set forth the needs of the client. Specifically, you have to clarify what kind of cargo is to be delivered from where to where by when. In addition, information about the size and weight of the cargo is important to calculate the shipping charge. I recommend that you consult with the logistics company as to the best form of transport based on all of this.
Mr. Seiichi Yoshitomi, President CEO, PROEYES Corp.
Setting up a logistics system means devising the method for transporting goods from a point A to a point B as fast, safely, and economically as possible. Depending on the transported distance and the weight and size of the cargo, various logistics systems may be considered. However, these cannot all be called the "optimum logistics system."
The most efficient logistics system has to be selected by the importer transporting the cargo. Determination of the most efficient logistics system for a specific need is the objective of construction of the "optimum logistics system."
As a precondition for constructing the optimal logistics system for imports, it is important to understand the terms of trade in the import contract, in particular, the scope of responsibility for logistics costs between the buyer and seller.
In this article, I will explain the scope of responsibility of the buyer and seller for expenses for each type of trade terms.
Each country differs in legal systems and business practices. There is no standardized international commercial code. In trade, in logistics, if not clarifying up to how far the exporter is responsible for expenses and from where the importer is responsible, trouble will be caused. Therefore, the International Chamber of Commerce has established a set of common global commercial terms called "Incoterms" (Note 1).
Note 1: Incoterms (International Commercial Terms)
International standards relating to the interpretation of terms of trade first established by the International Chamber of Commerce (ICC) in 1936. Originally, trade was only by sea, but with the changing times, the old ocean cargo grew to container transport and on to international multimodal transport and air cargo. Therefore, the international standards have been revised several times to reflect the actual situation. The latest revision will come into effect on and after January, 2011 and is commonly known as the “Incoterms 2010”.
Incoterms defines 13 types of terms of trade. Here, I will explain the four types commonly used in Japan: EXW terms, FOB terms, CFR terms, and DDP terms.
1. EXW Terms (Ex Works)
In the case of Ex Works terms, the seller hands over the cargo at the time of shipment from the factory, so the buyer is responsible for the expenses over the entire distance from the shipment factory in the exporting country to the importing country. The buyer (importer) therefore must bear all expenses at the exporting country, international shipping costs, and import expenses.
The expenses at the exporting country include the costs for pickup of the cargo, terminal fees, export declaration costs, and export packaging expenses. International shipping costs include basic shipping costs, fuel surcharges, foreign exchange surcharges, and security surcharges. The import expenses after arrival of the cargo (goods) at the importing country include import customs clearance charges, cargo inspection fees, terminal fees, delivery fees, import duties, and import consumption taxes.
Under these terms, the buyer has to build a complete logistics system starting from when the goods leave the factory. Making arrangements in the exporting country is tremendously difficult due to the distant location, so it is essential to consult with a logistics company with an international network.
2. FOB Terms (Free on Board)
In the case of FOB terms, the exporter is responsible for the export cargo up until being loaded on the ship. In this case, the seller bears the costs at the exporting country, while the buyer bears the international shipping costs and the import expenses.
**Key Point: In the U.S., almost all goods are "exported" not from locations near the harbor, but from inland locations. Under the FOB terms defined by Incoterms, the seller bears all costs up to loading on board a ship, but in the U.S., "loading" is interpreted as meaning "handover to a designated firm" at an inland location. That is, in many cases an importer will be billed for the terminal fees incurred at airports or harbors. When doing business with the U.S., I recommend you reconfirm the terms of trade.
3. CFR Terms (Cost and Freight) and CIF Terms (Cost, Insurance, and
Under CFR terms, all of the expenses until reaching the importing country (expenses at exporting country and international shipping costs) are borne by the seller except for the insurance. CIF terms include the insurance as well.
These terms free the buyer from the trouble of constructing a logistics system and might appear to be convenient, however, this amounts to dumping everything on the lap of the seller. It is necessary to verify if the billed expenses at the exporting country and international shipping costs are appropriate in level. I recommend that the buyer study constructing a logistics system the same as the EXW terms and compare the result with the price offer from the seller.
Some caution is required about cargo insurance. Under CIF terms, the seller also arranges for the insurance, so the buyer is saved some trouble, but only naturally the contract is with a foreign insurance underwriter. I recommend you investigate where the local agent is located in your country. Sometimes there will be no local agent. This means additional time would be taken for processing insurance claims. If possible, I recommend CFR terms where the importer itself contracts with a local insurance underwriter.
Terms (Delivered Duty Paid) and DDU Terms (Delivered Duty Unpaid)
These terms are not that generally used, but are the rule in the case of door-to-door international courier delivery. The costs at the exporting country, international shipping costs, import expenses, and all other logistics costs are borne by the seller. The import duties are either included or not - which determines whether the terms are DDP or DDU. In this case, the buyer does not have to build a logistics system. Any consumption tax on the imports is a local tax, so is borne by the buyer.
The terms of trade are determined by negotiations between the buyer and seller.
For someone importing for the first time, I would recommend you start with CFR terms or CIF terms where you leave the logistics to the seller. When you get used to things, you could then switch to EXW terms where you deal with all of the logistics on your own.
Mr. Seiichi Yoshitomi, President CEO, PROEYES Corp.
Mr. Masaaki Nagamitsu, President & CEO, Pacific Bussan Co., Ltd.
I am based in Okayama prefecture. From there, I provide local businesses with advice and consultation services relating to international trade. In the "One- Point Lesson" in the March 2009 issue, I found an article on how to deal with claims in business with China. I would like to explain about the points to watch in international conventions, governing laws (domestic laws of individual countries), and arbitration provisions in contracts from the viewpoint of dealing with such claims.
First, let me discuss a past case I was involved in. During sales negotiations between a Japanese manufacturer and a Korean buyer, the Japanese side drew up and proposed a draft contract stipulating the governing law and arbitration in order to help avoid claims. In response, the Korean side sent the following draft counterproposal:
This Agreement shall be governed by and construed in accordance with the laws of Singapore, without reference to its conflicts of laws or its choice of law rules.
All disputes, controversies or differences which may arise between the parties hereto, out of or in relation to this Agreement, which cannot be settled amicably by the parties hereto without undue delay, shall be finally settled by arbitration at Osaka in Japan or at Seoul in Korea in accordance with the Japan-Korea Trade Arbitration Agreement of October 23, 1973. The award rendered by arbitrator(s) shall be final and binding upon both parties. The parties shall waive their right to any form of appeal, review or recourse to any state court or other judicial authority.
The Japanese side proposed the governing law be Japan's and the arbitration authority be the Japan Commercial Arbitration Association, while the Korean side proposed Singapore law and the Japan-Korea Trade Arbitration Agreement.
The Korean side probably did not like the idea of making the governing law the law of the opposing side, that is, Japan, and thought that stipulating its own law would just delay negotiations, so suggested Singaporean law. Further, it probably did not like the idea of the Japan Commercial Arbitration Association and didn't think that the Korean Commercial Arbitration Board would go over well either, so from the viewpoint of fairness suggested the Japan-Korea Trade Arbitration Agreement. The last sentence in the arbitration provision, that is, "The parties shall waive their right to any form of appeal, review or recourse to any state court or other judicial authority", is believed designed to prevent a party dissatisfied with the results of arbitration from appealing to the courts.
Agreeing to the Korean proposal means agreeing to the substantive laws of Singapore (CISG*, Commercial Code and Civil Code) and its procedural laws (Civil Procedure Code and Arbitration Law) as the governing law regardless of the rules of international law in conflicts. Further, the arbitration agreement is based on the Japan-Korea Trade Arbitration Agreement, but which place of arbitration to be held is not designated, so if the Japanese side demands arbitration, the commercial arbitration rules of the Korean Commercial Arbitration Board shall be applied and the place of arbitration shall be Seoul, Korea. On the other hand, if the Korean side demands arbitration, the commercial arbitration rules of the Japan Commercial Arbitration Association shall be applied and the place of arbitration shall be Osaka, Japan. Further, in the court of arbitration, the arbitrator shall examine the facts and make an award, based on the body of laws of Singapore which the two sides agreed on as the governing law.
*CISG: Vienna Sales Convention (United Nations Convention on Contracts for the International Sale of Goods)
By stipulating the "governing law" in a contract, the arbitration laws of that country apply. The procedures for determining the governing law in the arbitration agreement and arbitration proceedings would be eliminated. Everything would be based on the governing law already agreed on by the parties. In this case, the governing law became a third country law (Singaporean law), so the court of arbitration would have to investigate the third country law (Singaporean law). This would entail additional expense compared with one of the countries of the two parties.
The CISG will take effect in Japan on August 1, 2009. There is a debate going on that since the CISG will be applied even if not stipulating the governing law, there should not be a need to provide a provision on the governing law anymore, but this is mistake. This is because there are also matters which the CISG does not stipulate (get involved in). The matters which the CISG stipulates and matters which it does not are shown below:
1.Matters which CISG stipulates (is involved with)
1) Formation of the contract
2) Rights and obligations of the seller and buyer
3) Time of passing of riskbr
4) Remedies for breach of contract
2.Matters which CISG does not stipulate (is not involved with)
1)Validity of contract or practices ("validity of contract" means cases where
whether contract is valid is contested due to legal capacities of parties, mistake, false manifestation, fraud, intimidation, etc.)
2) Effect of contract on property of the goods sold
3)Other matters which the CISG is not involved in (method of dispute resolution etc. and further sale of ships, sale to consumers and consignment processing to which the CISG does not apply)
Provisions on the governing law therefore concern matters not covered by the CISG. It is here that provisions on the governing law have meaning. It goes without saying that contracts have to be drawn up. The provisions on the governing law and arbitration should always be considered in international transactions. These are key points in avoiding claims.
Ms.Yuka Jojima, Director, Saitoku International Inc.
Since 2003, I have been frequently traveling back and forth between Japan and China to lend a hand in business between the two countries (trade and setting up companies). Based on my experience, I would like to discuss some of the matters that foreign companies, in particular Japanese companies, should watch in view of the recent business environment in China.
1. Business Environment in China In recent years, the Chinese government has been eliminating distinctions between domestic companies and foreign companies and easing regulations on foreign businesses so as to construct a free competitive market. At the same time, in the Chinese market, Japan made digital cameras, home electric appliances, cosmetics and other consumer goods are proving very popular. In technologies and products in the fields of the environment and energy savings, the Chinese are strongly interested in working with Japan and Germany.
If looking for Chinese companies as potential business partners, first, ones with some foreign involvement are faster in response and more reliable, but are limited in both their customer base and market in China. Note in this regard that mainland Chinese nationals can easily set up companies in Hong Kong, so it is important to differentiate between these "foreign" companies and others.
Most privately run small businesses, which are estimated to make up 90 percent of the market, do not have foreign trading rights and are not allowed to directly engage in foreign trade. For this reason, to avoid trouble, be sure to check if your potential partner has foreign trading rights. You can check this by examining the business license and seeing if " foreign trade" is listed or by asking for the foreign currency account number. If your partner does not have foreign trading rights, all deals will have to go through a trading company with such rights.
In state-run companies, all facilities costing over 500,000 rmb have to be procured through public tender. To build contacts with personnel in state-run enterprises and exchange opinions with them, companies in the U.S. and Europe invite them for inspection tours of their countries. Such advance activities probably have some impact in the bidding process.
2. Points to Watch in Exports to China First, let me mention some points to watch in customs clearance procedures and collecting payments in exports to China.
1) Customs Clearance Procedures
 Submission of Certificate of Origin
The tariffs collected in China come in two types: general tariffs and most favored nation preferential tariffs. The preferential tariffs apply to imports from Japan. To get these preferential rates applied, it is necessary to submit a certificate of origin at the time of clearing customs. If cargo is left in the port for over 14 days due to late submission of the certificate of origin, late fees will be charged.
 Confirmation of HS Tariff Code
China's tariff schedules are based on the standard world "Harmonized Commodity Description and Coding System". The first six digits of the HS Tariff Code are the same throughout the world, but the tariff rate is determined by the officer in charge at the Customs Office. Further, changes in the import and export system are notified on the Customs Office Bulletin Board, so I recommend that you visit the Customs Office frequently so as to obtain information on changes to the system and ensure smooth customs procedures.
Note that to collect information at Customs and make inquiries, from the viewpoint of eliminating language problems and making contacts, I recommend that you use Chinese staff with a certain degree of knowledge regarding customs clearance matters.
Confirmation of Shipments
Bills of lading are sometimes issued without the cargo actually being loaded,so I recommend that you yourself investigate and check this on site. At that time, be careful about the following:
A. Prepare explanatory documents for Customs
Before loading, prepare specifications, instruction manuals and operating manuals as explanatory documentation for Customs. These materials are used by Customs when checking the CIF prices and will help smooth the customs clearance procedures.
B. Packing List of Export Packaging
When packaging a product disassembled, describe details of all of the parts, without omission, in the packing list for each package. Omissions in the packing lists can cause trouble in the later receipt inspections.
 Method of Calculation of Import Tariffs
The tariffs are based on the CIF price. In the case of imports based on the FOB, Customs adds a margin on its own to determine the assessed tax. As explained earlier, the tariff rate is set by the Customs Office, so be sure to check it in advance.
Note that regardless whether being destined for sale domestically in China or
not, imports are subject to value added taxes (purchasing tax*1). The CIF price
plus the tariff is the base value on which the tax are assessed. The value
added tax was 17 percent as of December 2008.
Further, a consumption tax is levied on 14 specific products (*2). Different rates are set for each.
*1 Value added taxes include purchasing taxes and sales taxes. In China, both purchases and sales are taxed. Basically, the taxes are collected by the tax bureau. However, imports are covered by the purchase tax as well. This is collected by Customs. Exports are excluded from the sales tax.
*2 The 14 specific products are tobacco; alcoholic beverages; cosmetics; precious metal accessories, pearls, jewelry; fireworks; gasoline; automobile tires; motorcycles; compact cars; golf balls/equipment; luxury watches; sailboats; wooden disposable chopsticks; and solid wood flooring.
2) Collection of Payments
 Installment Payments
In China, bills are generally settled by payment of 1/3 upon signing, 1/3 upon shipment, and 1/3 on receipt. The L/C will describe all of this, so caution is required. If seeking lump-sum payment, the Chinese side will have to be negotiated with and specific agreement obtained. My experience is that the Chinese side will always be coming up with one excuse or another, so no matter how well you handle things, you should be prepared not to be able to collect on 10 percent of your bills.
Further, due to tougher foreign exchange controls ( No. 56), with the exception of large-sized plant equipment, there is a limit on amounts of advance payments of, in principle, 10 percent of the actual foreign currency payments made by an importing company in the immediately preceding 12 months. For this reason, cases may arise where payments cannot be made as contracted.
 Overseas Remittances of Companies without Foreign Trading Rights
Companies without foreign trading rights do not have foreign currency accounts, so when paying bills by overseas remittance have to go through some Chinese firm with foreign trading rights.
 Overseas Remittances of Companies without Foreign Currency In order to change rmb into foreign currency for paying for imports, it is necessary to obtain confirmation from Customs and the banks that the cargo has cleared customs. Note that if the contract includes an advance payment clause, rmb may be converted to foreign currency for the advance payment even without confirmation of customs clearance of the cargo.
3. Points to Watch in Doing Business With China
1) Check Chinese Export Controls in Advance
China also frequently changes its export controls. For exporting products made under consignment processing arrangements from China, it is necessary to check in advance if any export controls are touched upon. If touching upon controls, the products may have to be disposed of. This also can cost money. To keep abreast of changes in procedures relating to institutional changes, as explained above, it is important to constantly check the Customs Office Bulletin Board.
2) Contract Language
There are fine differences in nuance between Chinese and Japanese. For example, when drafting a contract, it is important to thoroughly compare the contract contents in the two languages. Alternatively, for fairness, it might be wise to draft the contract in English. In transactions involving large-sized machinery, English language contracts are often employed.
3) Selection of Bank
In China, up until now, the Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China and Construction Bank of China have dominated the financial sector as the "big four national banks" or "big four commercial banks". With the advent of the Postal Savings Bank of China, the Chinese financial sector is now dominated by five big commercial banks. Deals are generally handled using L/Cs of these banks. It might be wise for the Japanese side to designate the bank issuing the L/C.
4) Negotiate Contracts Persistently without Haste and without Anger
No matter what the circumstance, it is important to negotiate contracts persistently without haste and without anger.
5) Impact of Vienna Sales Convention
The Vienna Sales Convention is scheduled to be enforced in Japan from August 1, 2009. The Convention sets two years as the warranty period for products in Part 3, Section 39. If a contract does not clearly stipulate a warranty period, a two-year warranty will automatically take effect. For this reason, in Japan, the period during which claims may be submitted as stipulated in general international sales contracts is being changed from one year to two years from handover of the product. In China's case, many customers do not bother to carefully read instruction manuals. Due in part to this, they can mistakenly operate and break the products. Further, an increase in claims submitted due to deliberate breakage after close to two years of use is expected. Sellers have to be very careful.
Mr. Tatsuya Oishi, President, Focus Business Produce, Inc..
The TTPP Newsletter of September 2008 reported the frequent occurrence of trouble in transactions involving recycled materials, metal materials and other resources through the TTPP. To help keep you out of trouble over resource transactions and avoid unnecessary risks, I will explain the general flow of transactions in the resource trade and the main abbreviations used at that time.
International transactions in metal/mineral resources and food resources are characterized by the following three points: First, the sums involved are huge. For example, in term contracts (long term contracts continuing for a fixed period such as several months), sums of tens to hundreds of millions of yen are often seen. Second, specialized brokers or agents often act as intermediaries. Third, due to the large volumes, at the time of FOB contracts, space in specialized ships is sometimes arranged.
Resource transactions used to be generally conducted by specialized businesses. In recent years, due to the increase in demand, easing of regulations, establishment of infrastructure and spread of the Internet, the environment is being laid enabling more traders to participate in resource transactions. Along with the increased opportunities, beginners in the resource trade are exposed to greater risk of scams and other dangers.
Therefore, both the seller and the buyer have to reduce the risks by exercising greater caution in procedures compared with general container-based transactions. Seen from another perspective, it means that the seller determines how reliable the buyer is based on the buyer's familiarity with the complicated procedures of the resource trade. Let us introduce an example of the flow of a resource transaction.
<Example of Flow of Transaction in Term Contract>
 Buyer : Sends an LOI and BCL.
 Seller: Sends an FCO.
 Buyer : Signs the FCO and returns it to the Seller.
 Seller: Sends a draft contract to the Buyer.
 Buyer : Signs the draft contract and returns it to the Seller.
 Buyer : Requests a POP from the Seller.
 Buyer : Opens an SBLC or BG.
 Seller: Sets a PB.
 Seller: Loads and ships the product in accordance with the contract terms.
(Sometimes allows Buyer to witness shipment.)
 Buyer: Sends payment in accordance with the contract terms.
The hardest things for beginners to understand are abbreviated terms such as LOI, BCL and FCO. Let us explain them next.
1) LOI = Letter of Intent
This is a letter by which the Buyer expresses its intent to buy the product.
It describes the name of the product, the product specifications and country of origin, quantity, term of the purchasing contract, desired price, terms of transaction (FOB, CFR, CIF, etc.), desired shipment date, method of payment and valid period of LOI.
On the other hand, the Seller's side will sometimes ask for disclosure of the Buyer's bank's name, bank account number, etc. and for its understanding of a "soft probe" so as to investigate the Buyer's ability to pay. A "soft probe" means the procedure of contacting the Buyer's bank through the Seller's bank to briefly investigate the Buyer's ability to pay.
2) BCL=Bank Comfort Letter (Bank Capability Letter)
This is a letter issued by the Buyer's bank to the Seller and certifies that the Buyer has sufficient ability to pay for the transaction in question. The BCL may be demanded by the Seller at the stage of the LOI, the time of signing the contract, etc. Several cases are possible.
3) FCO=Firm Corporate Offer (Full Corporate Offer)
This is a formal offer by which the Seller proposes details of the transaction and the final price. If the Buyer accepts these terms, it signs the offer and returns it to the Seller. Next, the Seller sends a draft of the contract. Depending on the transaction, the two parties will sometimes enter negotiations on concluding the contract directly without going through the FCO process.
4) POP=Proof of Product
In the same way as the Seller thinks the Buyer's ability to pay is important, the Buyer finds it important to determine if the Seller really owns the products in question or has the right to deal in them. A document proving the ownership or right of trade of the product is called a "POP".
Specifically, this includes an export license issued by an official organization, a warehouse receipt and certification of results of inspection by an independent third party certification organization. However, it is essential to determine if the documents are genuine.
Further, as a method to ensure a more reliable progress in the process, sometimes a POF (Proof of Funds/document proving the Buyer's ability to pay) and POP are exchanged between the Seller's and the Buyer's banks.
5) BG=Bank Guarantee, SBLC=Stand By Letter of Credit, PB=Performance Bond
- A BG is, as the name implies, a bank guarantee. The bank guarantees that the
Buyer will pay the debt to the Seller.
- An SBLC differs from a usual L/C (Letter of Credit) in that it is a special letter of credit with no terms requiring attachment of a bill of lading (type of clean letter of credit) and is considered a bank guarantee issued in the form of a letter of credit.
- In the event the Buyer defaults on its debt, in both a BG or SBLC, the issuing bank guarantees payment to the Seller.
- A PB is a proof of performance. It guarantees payment to the Buyer of a fixed percentage of the export price (for example, 2%) in the event of the Seller defaulting on the contract to export to the Buyer as contracted for. Due to this, if the Seller defaults on the contract, the Buyer can be compensated for the expenses required up to that point. Specifically, this is set by the Seller for the Buyer in the form of a BG or SBLC.
<Most Important Point to
There may be various other variations in the flow of transactions. Further, technical terms and other specialized terminology unique to the industry/resource will also be used. Therefore, the most important point in resource transactions is sufficient understanding of the products. Can you completely understand the processes involved in a transaction proposed by a seller and do you really have a grasp over the potential risks behind the transaction? Ifyou find this difficult, I recommend you should not let yourself get involved in such a transaction or you leave it to experts such as specialized trading companies.
Above, I explained part of the basic knowledge required for resource transactions. In actual transactions, be sure to check by yourself the flow of transactions and terminology unique to the individual industry and remember that only you are responsible for the transaction.
Mr. Seiichi Yoshitomi, President CEO, PROEYES Corp.
Nontreated wood packaging materials of imported cargo (*note 1) may carry the mountain pine beetle and other harmful insects. To protect the importing country's agriculture and natural environment from such foreign insects, many countries of the world have adopted the International Plant Protection Convention (IPPC) (*note 2).
*Note 1: Nontreated wood packaging This covers wood crates, pallets and other shipping materials of cargo, and dunnage. "Dunnage" is wood materials used for shock absorbing materials, supports, and reinforcement for fixing cargo in a container to prevent movement. On the other hand, wood materials made artificially or treated by heat or pressure, plywood, plasterboard and fiberboard are not covered.
*Note 2: International Plant Protection Convention (IPPC)
The UN Food and Agriculture Organization (FAO) has established the International Standard ISPM (International Standard for Phytosanitary Measures) No.15 regarding pytosanitary measures (Guidelines for regulating wood packaging material in international trade) for quarantine of nontreated wood packaging materials adopted under the IPPC.
The International Plant Protection Convention sets disinfection guidelines for packaging materials used for international shipping and mandates methods of display of marks showing completion of disinfection. In particular, it requires that packaging materials made from coniferous trees, which are considered easily invaded by harmful insects, be heat treated or fumigated by methyl bromide and that certificates of treatment be submitted at the time of import.
The EU, U.S., Australia, China, South Korea, and numerous other countries are enforcing the plant quarantine regulations.
For reference, case studies of trouble frequently occurring in the case of exports or imports will be introduced.
[Case Study 1] Export by packaging using non-disinfected wood to country with
plant protection regulations
Not only does this make customs clearance at the export destination extremely troublesome, but in some cases the shipment will be returned to Japan as it is due to import bans.
People tend to think that because their export products are packaged in carton boxes, these regulations do not apply, but care is required in that the pallets and skids used for shipping materials for carrying the cartons are also covered by plant quarantine regulations. In particular, when packaging products for export at the production plant, we recommend that you sufficiently survey the local regulations of the export destination.
[Case Study 2] Import by wood packaging materials not labeled as having been
Japan has also adopted International Standard No.15 for plant quarantine for wood packaging materials, so when packaging does not meet the requirements for disinfection, the importer is obliged to undergo an import quarantine inspection and obey any orders for disposal, fumigation, or other disinfection. If refusing the import quarantine inspection, clearance through customs is not possible.
If an import quarantine inspection finds harmful insects and a disposal or disinfection order is violated, the guilty party may be imprisoned for up to one year or fined up to 500,000 yen in Japan.
When concluding an import contract, we recommend that you negotiate with the exporter in advance to stipulate the use of the unregulated plywood for packaging in the contract.
Ms.Yuka JOJIMA, Director, Saitoku International Inc.
At the time of the press conference announcing the "List of Products for Which Processing Trade is Restricted" (Announcement No. 17 of 2007) (April 10, 2007), the Chinese Ministry of Commerce stated that in the future, we will work with the related sectors to establish a rational system of classification and control of products in the processing trade from the viewpoint of macroeconomic policies, industrial policies, and environmental protection and will update the 'List of Products for Which Processing Trade is Restricted' at the start of every year based on macroeconomic trends and changes in the HS code.
Japanese ventures are more high tech than their Hong Kong and Taiwanese counterparts and can produce higher added value products. The Chinese Government is continuing to offer preferential treatment to companies with the latest sophisticated technology incorporating energy saving, resource conservation, and environmental protection so as to promote a rapid transformation of the industrial structure.
1. Management Difficulties and Bankruptcies Seen in Foreign Ventures
The clampdown on the processing trade is hitting Hong Kong and Taiwanese companies in the Pearl River Delta the hardest. Among these, most are labor- intensive firms making chemical fiber products and plastic products.
On July 17, 2007, an advisory organ of the Hong Kong Government, the Greater Pearl River Delta Commerce Commission, released a report on the effects of China's inland processing trade policy on Hong Kong in which it stated that of the 57,500 Hong Kong companies investing in the Pearl River Delta, over 10,000 are currently suspending operations or scaling back their operations.
According to Mr. Huang Mingzhi, Chairman of the Taiwan Chamber of Commerce in Shenzhen, the approximately 4,000 Taiwanese ventures in Shenzhen currently cannot handle such rapid changes. He believes that about 30 percent of the companies will either go bankrupt or will be forced to move to another region in the next year or two.
Japanese ventures as well in the paper products, electrical products, auto parts, electronic component, chemical fiber, and other processing industries are also being affected. In particular, small businesses may find their local ventures facing increasing management difficulties due to the increased costs and resultant smaller profits.
There are 30 to 40 million Chinese workers employed in the processing trade. This corresponds to 20 percent of the number of workers employed in the secondary industries in China. If including affiliated firms, the figure rises to 50 to 60 million. The bankruptcy and movement of companies is creating a major problem in the dismissal of workers. To prevent this, a new labor contract law started being enforced in January of this year. Tough restrictions were established on firing employees.
2. Approach by processing trade companies
The following approaches are being taken by processing trade companies to deal with this.
1) Sharing costs with consigning companies and mitigating losses by exports.
2) Reduction of cost by improvement of asset management and physical distribution management.
3) Development of new products and establishment of own brands to raise added value of products.
4) Use of inexpensive alternate parts made in China.
5) Movement from East China to West China or Vietnam or other lower cost regions.
Ms.Yuka JOJIMA, Director, Saitoku International Inc.
When engaging in the processing trade in China, the tax authorities compare the imported materials and parts and the export products to manage them as a whole. In the case of products for which processing trade is restricted, the receiver sometimes has to reserve (pay) a deposit to the tax authorities, to get exemption from paying import duties and value added taxes on the imported materials and parts. To lighten the burden on the cash flow, instead of paying such a deposit, it has been possible to arrange for a branch of the Bank of China designated by the tax authorities to act as a guarantor of this deposit based on the credit of the processing trading company and submit a bank deposit statement instead. This system is called the "cash deposit account for the estimated amount of the duty/VAT liability".
As part of the recent measures for clamping down on the processing trade, the tax authorities have changed this benefit of the cash deposit account system. Here, the changes in the system and their effects will be explained.
1. Strengthening of Collection of Deposits
In the cash deposit account system, the tax authorities classify companies by rank(*1) or industrial field to determine whether they have to pay a deposit corresponding to the actual duties and VAT at the time of the import declaration or can merely handle it through book keeping. Certain companies can avoid payment of a deposit entirely using the cash deposit account system. Others have to pay a deposit even if using the cash deposit account system.
*1 Classification of Companies by Tax Authorities
Along with the release of the "List of Products For Which Processing Trade is Restricted" (July 2007), even class A and class B companies with experience in the processing trade and with no administrative actions are required to pay a deposit for restricted products. Up until this, good class A companies were able to perform processing work without a deposit.
The deposit may be calculated by the following three methods:
1) Restricted imports: deposit = (import duties + import VAT) x 50% for class A and class B companies or 100% for class C companies
2) Restricted exports: deposit = registered total volume of bonded imported materials and parts x (registered value of exports of restricted products / registered total value of export products in processing trade) x general tax rate (22%) x 50% for class A and class B companies or 100% for class C companies
3) Restricted imports and exports: Method of calculation similar to "Restricted
2. Promotion of Movement of Companies to West China
Due to the broad increase in restricted products, a large number of companies in the processing trade now have to pay the deposit. In view of this, the tax authorities amended the "cash deposit account system"(*2) along with the Ministry of Commerce and other related sectors.
After the amendment, in East China, class A companies which previously did not have to pay any deposit now have to pay a 50% deposit like class B companies. The deposit for restricted export products becomes an amount corresponding to the import duties assessed on the bonded imported materials as a whole, so the financial burden on companies becomes larger than with restricted import products.
On the other hand, in West China, both class A and class B companies are now allowed to use the "cash deposit account system". Now, payment of the deposit is waived for class B companies like class A companies. Due to this preferential measure, the number of companies moving to West China from East China is increasing.
*2 Details of the Amended "Cash Deposit Account System"
Ms.Yuka JOJIMA, Director, Saitoku International Inc.
Due to China's policy of encouraging the processing trade, the total of its imports and exports relating to that trade rose from US$2.5 billion in 1981 to US$986.0 billion in 2007. The processing trade corresponded to 45.4 percent of the total foreign trade of China in 2007 and has become a major sector supporting the Chinese economy.
In recent years, however, the Chinese Government has been reviewing this
From 2003, it started increasing the products for which processing trade is prohibited. In December 2005, November 2006, and April and December 2007, it issued lists of products for which the processing trade was prohibited four times - by which it greatly increased the prohibited products. Further, on July 23, 2007, it issued a list of products for which the processing trade was restricted by which it newly added 1,853 products to the list of restricted goods (HS code 10 digits) and toughened its clampdown on the processing trade.
I have been working to assist Japanese companies in doing business in China for a long time now and would like to explain these new developments in three parts: the background of this shift in China's policy toward the processing trade, the effects on business of this policy restricting the processing trade, and measures to deal with the processing trade.
1.Two Forms of Processing
When China contracts to do processing for foreigners, it does it in two ways:
using imported materials and using customer materials. In the former case, it imports the raw materials and parts and pays for them in foreign currency, then exports the processed or semi processed products overseas or sends them on to other factories (sent from one bonded factory after processing to another bonded factory for further processing and eventually exported out of the country) in return for payment. In the latter case, it is supplied with the raw materials, parts, etc. from the customer and exports all of the production to the customer.
2.Prohibited and Restricted Products in Processing Trade
In the processing trade, products are classified as "prohibited", "restricted", or "approved". Depending on the product, imports, exports, or both imports and exports are banned (restricted).
The "prohibited products" include products banned under international treaties, high-energy consuming products and high-polluting products. The "restricted products" include imported raw materials for which there is a large price gap between the overseas markets and China and which the tax authorities would have a hard time monitoring and some high energy consuming and high polluting products. All products other than the "prohibited" and "restricted" products are "approved products". No permit is required for these.
Lists of Products for Which Processing Trade is Prohibited or Restricted Issued in Recent Years--------------------------------------------------------------------------------
Date issued Content <Number of Products>--------------------------------------------------------------------------------
Dec. 2005 "List of Products For Which Processing Trade is Prohibited" issued
(Announcement No. 105 of 2005)
Nov. 2006 "List of Products For Which Processing Trade is Prohibited" added
(Announcement No. 82 of 2006)
Apr. 2007 "List of Products For Which Processing Trade is Prohibited" combined
(Announcement No. 17 of 2007)
Dec. 2007 "List of Products For Which Processing Trade is Prohibited" added
(Announcement No. 110 of 2007)
July 2007 "List of Products For Which Processing Trade is Restricted" added
(Announcement No. 44 of 2007)
Source: Ministry of Commerce, the People's Rep. Of China
Note 1. The lists issued in December 2005 and November 2006 were combined with
the list issued April 2007 along with some additional products.
Note 2. The content of the Chinese lists can be determined by the HS codes of the products.
3.Background of Policy Restricting Processing Trade
The following five factors are believed to have been at play behind the policy restricting the processing trade:
1)Reduce Trade Surplus
In these past few years, China's trade surplus (reaching a historically high US$262.2 billion in 2007) has sharply increased. Pressure for revaluing the Chinese currency and inflationary pressures are mounting as a result. The surplus is having a detrimental effect on the Chinese economy. To reduce the trade surplus, China is toughening its restrictions on the processing trade and lowering the VAT rebate rate for exports.
2)Upgrade Processing Trade
China is trying to improve the structure of the processing trade by restricting firms producing low added value products and low processing technology products. It aims to upgrade the processing trade, strengthen the corporate governance and compliance policy, and make improvements in the minimum wage and social insurance of workers in those companies and production facilities.
3)Eliminate Economic Disparity between Regions
When China began its economic reforms, the coastal region of China (East China Region *1) made use of its geographical advantages to achieve dazzling economic growth. This region accounts for a considerable share of the processing trade. On the other hand, the inland region (West China Region*2) has been slower to develop economically and accounts for less than 2 percent of the processing trade. Elimination of economic disparities between regions is one of the most important goals of the Chinese Government. A policy has been adopted of shifting the processing trade to the inland region.
*1.East China Region: Comprised of the 10 provinces (or directly run cities)
of Beijing City, Tianjin City, Shanghai City, Ningxia Province, Hebei
Province, Shandong Province, Jiangsu Province, Zhejiang Province, Fujian
Province, and Guangdong Province.
*2.West China Region: Indicates 22 provinces, autonomous regions, and directly run cities other than the East China Region.
While China has experienced remarkable economic growth, air pollution and destruction of the environment have become major social issues. Through its list of prohibited products, China is trying to crack down sharply on the large energy consuming, environmentally polluting, and resource depleting companies which it has turned a blind eye to up to now.
5)Shift Leadership from Foreign Ventures to Chinese Companies
The processing trade has up until now been led by foreign companies (foreign ventures). The main markets and sales channels have also been closely held by the foreign side. There was little chance of entry by Chinese firms. Raising the level of technology in Chinese companies and promoting the development of such companies are also important goals of the restriction policy.
Mr. Seiichi Yoshitomi, President CEO, PROEYES Corp.
Even if all risks were carefully considered, trade contracts frequently are breached due to various reasons. This leads to demands for damages, dissolution of the contracts, and other trouble. In such cases, the parties concerned end up fighting over means to use to resolve the disputes and country where court jurisdiction is applied. It is important to envision the worst situation which might occur at the time of concluding a contract and draft the contract clauses accordingly.
In the case of international sales, the amounts of damages calculated will differ depending on which country's laws are applied and other unforeseen risks will arise over damages.
The most effective action which can be taken in risk management is to set up the business taking all of this into full consideration at the stage of concluding the contract. Further, it is the parties to the contract, not experts on contract law, that can best understand the business and can predict the risks such as litigation and action against them.
This time, we will explain the force majeure clauses for relatively high risks and dispute resolution clauses (clauses on arbitration and clauses on governing law) among the contract clauses which should definitely be considered when concluding contracts and explain cases studies of risks which can be expected and measures against them.
<<Case Study 1>> Case of Default Due to Force Majeure
There are often cases where force majeure is not specifically set down in the contract, yet is used as a reason for default in contesting responsibility.
[What to Do]
When either of the contract parties, that is, the seller or the buyer, cannot fulfill its obligations under the contract terms, compensation for damages or dissolution of the contract on the grounds of contract violation will be demanded from the side incurring damages.
The general practice is to define situations where obligations are unable to be met as demanded in general business practices even if both contract parties do their best to meet their obligations as “force majeure and reduce or waive contract obligations in such situations. It is necessary to clearly determine which cases to recognize as “force majeure and set down clear clauses for waiver of obligations in such cases. These are not necessarily clear in the law.
Therefore, it is necessary for the contract parties to decide on the reasons for "force majeure" in as much detail as possible. Risks can be avoided by incorporating a suitable "force majeure" clause after considering the country risks, other contract party, etc.
In general, the parties set down provisions waiving the responsibility of the seller for breach of contract due to delays in loading, failure of arrival, or inability to deliver due to hurricanes, earthquakes, and other natural disasters, wars, strikes, government embargo, etc. At the same time, they set down provisions giving the seller a grace period for shipment while the situation continues or provisions enabling termination of the contract when the situation will continue over a long period.
<<Case Study 2>>Case of Disputes Over Misunderstandings
or Questions on Execution of Contract
The contracting parties are supposed to faithfully execute their obligations as set down in the contract, but often disputes arise over misunderstandings or questions in interpretation of contract clauses between the parties.
[What to Do]
It is essential to envision what sort of trouble may arise such as demand for damages, dissolution of the contracts, etc. and determine what means to use where so as to resolve disputes.
As a means for resolution, the courts or arbitration may be considered, but the general practice is to select arbitration, which is advantageous in many points such as the ability of arbitration judgments to be enforced in numerous countries under international conventions and the ability to resolve disputes in a short time, as the method of dispute resolution in international contracts.Arbitration clauses are utilized for this.
When one of the contract parties is of Japanese nationality, we recommend negotiating with the other party for an arbitration clause designating the Japanese arbitration association, that is, the Japan Commercial Arbitration Association. When both of the parties argue for arbitration in their own countries and cannot agree on the place of arbitration, a compromise agreement may be reached for utilization of the arbitration associations of both countries.
<<Case Study 3>> Case of Dispute Where Contract Parties
Argue Governing Laws Advantageous to Themselves
There are often cases where the contract parties will not agree on the governing law and time will be taken for concluding the contract since use of their own laws as the governing law would be more convenient and less difficult.
[What to Do]
There are no laws or uniform business practices applied in common in the world regarding the establishment of international sales contracts and the uniform interpretation and execution of rights and obligations among parties arising from such contracts. Therefore, the domestic law of one of the contract parties is determined as the governing law for use as the standard of interpretation and execution of the contract. Each party therefore argues for its own country's law.
When concluding an international contract, it is crucial to determine the laws to apply, that is, the governing law, and prepare contract clauses consistent with the same. When there is no provision on the governing law, the international law of the place of arbitration is used to determine which country's laws will be used as the governing law.
The "Vienna Convention on Contracts" (*), which sets down rules for resolution
of disputes in international sales, is sometimes applied when agreed
on by the parties concerned, but Japan is still not a party to this Convention.
(The Japanese government is scheduled to begin procedures for entry in 2008.)
(*) Vienna Convention on Contracts
The "Vienna Convention on Contracts" is the short name of The United Nations Convention on Contracts for the International Sale of Good
Mr. Seiichi Yoshitomi, President CEO, PROEYES Corp.
Exporters usually prepare export declarations based on the content of contracts with importers and, after loading the cargo, supply the importers with: 1) a commercial invoice; 2) a packing list; 3) a bill of lading (B/L or AWB, *1); 4) an insurance policy, and other documents. These documents are generally well known.
However, sometimes, when declaring exports, the customs broker will ask for additional special documentation causing the exporter to panic.
This time we will introduce some typical examples where additional documentation is requested at the time of declaring exports or from the importer and explain the background behind these requests and what to do about them.
*1 Billing of Lading (B/L or AWB)
A billing of lading (B/L) is a negotiable instrument certifying that cargo to be transported by the shipping company was received at the port of loading and promising to transport the cargo to the designated destination and deliver it to the rightful owner.
In the case of air cargo, an air way bill (AWB) is issued instead of a B/L, but this is not a negotiable instrument but just a document showing receipt of cargo. Therefore, when used as a documentary bill of exchange, procedures for establishing collateral are required at the bank.
<<Case Study 1>> Export Permit/Approval Application
The registered Customs specialist to whom the export clearance procedures have been entrusted asks you to give him the Export Permit/Approval Application.
[What to Do]
Global trade is in principle "free trade", but a minimum level of control is recognized for maintaining international peace and economic order. Japan also controls its trade based on this thinking. Exports of specific products and exports to specific regions require advance approval under the Foreign Exchange and Foreign Trade Control Law.
The Law is applied flexibly in response to changes in the domestic and international situation for each HS tariff code (*2) through ordinances of the Ministry of Economy, Trade, and Industry and the Customs Office (Ministry of Finance).
This Law establishes export controls through the Export Trade Control Order and requires advance approval for exports of products designated as strategic commodities.
Further, there are also a catch all provision (*3) and requirements for export approval for designated products and designated regions. It is therefore necessary to carefully investigate whether advance approval must be applied for
*2 HS Tariff Codes
Japan is a member of the World Trade Organization (WTO), the sole international organization handling global rules for trade between countries. The tariffs and import and export statistics for all imported and exported products are managed by the tariff bureau of the Ministry of Finance based on the HS tariff code established by the WTO. Over 135 countries around the world have joined the WTO. All of these manage import tariffs using the HS tariff established by the WTO.
*3 Catch All Provision
Under this provision, almost all products, even those exported to even ountries other than the 25 for which export controls have been established, require approval in advance as not being liable to be utilized for weapons of mass destruction.
<<Case Study 2>> Shipper's Declaration for Dangerous Goods
Good are not deemed as dangerous, but the airline holds off acceptance and demands submission of a Shipper's Declaration for Dangerous Goods.
[What to Do]
"Dangerous goods" include not only ignitable and flammable cargo generally considered dangerous, but also radioactive cargo. These latter goods are prohibited from being carried on aircraft. They may only be transported as air cargo when conditions set under Aviation Law (Ministry of Land, Infrastructure, and Transport) based on air transport rules established by the United Nations and the International Atomic Energy Commission are met.
Therefore, to ensure safety during transport, sometimes not only an export invoice, but also a Shipper's Declaration for Dangerous Goods established by the International Air Transport Association is required to be submitted.
Depending on the degree of danger of the products being transported, special packaging, labeling, and other requirements are set. Details must be entered into the Shipper's Declaration and advance approval of the shipping company obtained.
Air transport of dangerous goods may expose the passengers to health hazards. Parties wishing to transport dangerous goods must take care to observe of the legal regulations involved of the country of departure, the countries transited, and the country of arrival. There are similar rules of shipping for maritime transport.
<<Case Study 3>> Certificate of Origin
The importer requests a certificate of origin from the exporter in addition to the general shipping documents.
[What to Do]
Countries around the world establish systems of preferential tariff rates for developing countries for helping to promote global trade as a whole. The tariffs sometimes differ depending on the country where the cargo was produced.
To prove the country of origin of the cargo, one submits the commercial invoice and papers for the certificate of origin to the chamber of commerce and industry. It is important to note that some export destinations require that a certificate of origin certified by the chamber of commerce and industry also be stamped by the embassy of the importing country.
Recently, free trade areas are being formed all over the world such as the AFTA (ASEAN Free Trade Area). The tariffs in the areas are being scrapped or lowered. To obtain these benefits, it is necessary to identify and prove the country of origin of the cargo.
The certificates of origin and other certifying documents issued by the chambers of commerce and industry, which take a strictly neutral position, contribute to the smooth promotion of global business transactions as clear evidentiary documentation. For this reason, they are issued only to applicants who can swear that the contents of the submitted documents are accurate and for which the content of the matter applied for certification can be determined to be true such as through papers showing the state of business.
Mr. Seiichi Yoshitomi, President CEO, PROEYES Corp.
In the previous installment, we explained that the start of Marine Cargo Insurance is based on the interpretation of the terms of trade. Here, we will explain trouble relating to shipping contracts, insurance contracts, and waiver clauses and the thinking concerning them.
A number of specialized businesses (freight carriers, carriers, customs clearance brokers, etc.) are consigned to handle the work in the long process until delivery of products, so overseas transactions are inherently risky. Carriers (sea and air cargo companies) are obligated to safely transport and hand over freight to the destinations and are liable for damages incurred in the process. For this reason, some people might ask Marine Cargo Insurance is necessary. It is important to fully understand the limited liability of the carrier and the role of Marine Cargo Insurance. Further, people tend to think that if obtaining Marine Cargo Insurance, they are covered for all circumstances, but insurance contracts include surprising waiver clauses. Full attention to them is necessary.
<<Case Study 1>> Waiver Clauses and Limited Liability of Carriers Under Shipping Contracts
Carriers (sea and air cargo companies) consigned to ship the freight have the obligation to safely ship the freight to the destination and are liable for any damages in the process. Here, the importer failed to insure the freight. However, an accident occurred. A claim was lodged with the carriers, but only partial compensation could be demanded. This was because the carriers were not liable for the full damages under the shipping contract.
[Ways to Avoid It]
Shipping contracts include detailed waiver clauses and limits on the liability of the carrier. Specifically, carriers are liable for damages to freight due to negligence (commercial negligence) in loading, handling, shipping, and storage, but disavow liability for damages over the contracted limits. The limits are, in the case of sea cargo, 666.67 SDR (*1) or the total weight x 2SDR/kg, while in the case of air cargo, are 17 SDR/kg. Further, under shipping contracts, carriers are not liable for damages to freight not arising from carriers negligence such as fire, natural disasters, force majeure, and war.
Marine Cargo Insurance compensates the freight owner for damages to the freight regardless of shipping contracts. If obtaining Marine Cargo Insurance, the owner also need not directly negotiate with the carrier to settle claims: the insurance company deals with the carrier. This is not only convenient for freight owners, but also prompts carriers to take more care, improves the safety of international shipping for all parties, and reduces the percentage of damages of freight owners. The need for Marine Cargo Insurance should be able to be understood from this.
*1 SDR (Special Drawing Right)
An SDR is a monetary unit determined in value by the weight average of the main currencies of the member states of the International Monetary Fund (IMF), that is, the U.S. dollar, Euro, Japanese yen, and British pound, over a certain period based on international financial statistics announced by the IMF. Japan calculates the value of the SDR converted to yen used for certain periods. Since FY1988, it has revised this every two fiscal years by notifications of the Minister of Finance (notification ofJanuary 2004, 160 yen/SDR).
<<Case Study 2>> Marine Cargo Insurance with all risk clause
An "all risk clause" is a clause stipulating compensation for all risks which might occur during sea transport (*2). We used to think that by contracting for this in Marine Cargo Insurance, all accidents could be insured against, but in one case we claimed damage to packaging of arriving freight, but were refused compensation by the insurance company. In Marine Cargo Insurance, there are also waivers of liability over damage, so this must be confirmed in advance.
[Ways to Avoid It]
Whether or not Marine Cargo Insurance covers freight damage without problem depends on the clauses in the insurance contract and the types of damages (causes) insured.
Accidents where the packaging ends up being damaged routinely occur. If the accident investigation finds that the accident was caused by improper packaging, all liability is waived and damages cannot be claimed. For example, this happens when used containers are used or when refrigerated freight is transported by dry containers.
When negotiating contracts with exporters, it is necessary to sufficiently clarify how the exports will be packaged. However, often it cannot be judged what kind of packaging would be deemed improper. Therefore, before deciding on packaging conditions with the exporter, we recommend consultation with the insurance company.
In addition, there are the following waiver clauses. Be careful.
- Damages due to delays in schedules of ships or planes
- Damages due to defects or nature inherent to freight such as spoilage during transport (spoilage of food, rusting of metal products, etc.)
- Damages due to natural loss of weight or volume occurring during transport (loss of powder, evaporation of moisture, etc.)
*2 Marine Cargo Insurance with all risk clauses
Insurance with clause stipulating coverage of damages due to all accidents in freight shipment occurring during the insured period due to external factors such as sinking or fires on the ship, damage by seawater during the voyage, and accidents during loading and unloading.
Mr. Seiichi Yoshitomi, President CEO, PROEYES Corp.
In trade transactions, Marine Cargo Insurance contracts are concluded to prepare against the eventuality of some accident occurring during freight shipment and the freight being damaged. There are often cases where trouble arises due to insufficient knowledge of the framework of Marine Cargo Insurance. Advice relating to Marine Cargo Insurance will be given in two installments. In the first installment, case studies of trouble not covered by insurance under the terms of trade of sales transactions and ways of avoiding it will be explained.
Trade transactions move freight and documents between different countries. Unless the liabilities of the exporter and importer are clearly delineated, trouble is likely to ensue. Which of the exporter and importer should bear the risk of the transport and which should arrange for Marine Cargo Insurance and international shipping is determined by international rules for the different terms of trade.
Under these international rules, the entire process of transport from the exporting country to the importing country is supposed to be covered by Marine Cargo Insurance as a means for dealing with risk on the sea. At this time, it is important to sufficiently confirm the framework of the Marine Cargo Insurance in order to draw up insurance terms tailored to the nature and transport conditions of the individual freight.
<<Case Study 1>> Accidents occurring before loading at exporting country
When importing under the FOB term (*1) or CFR (C&F) (*2) term, the importer itself concludes the Marine Cargo Insurance contract, but sometimes the cause of the accident is judged to have arisen before the loading at the exporting country and consequently payout from the insurance company cannot be obtained. In particular, the interval from the exporting country warehouse to loading is outside the coverage of the Marine Cargo Insurance.
[Ways to Avoid It]
In the terms of trade defined by the International Chamber of Commerce (INCOTERMS) (*3), when importing under FOB or CFR term, the burden of risk is transferred to the importer at the point of time of loading on the ship. That is, in insurance contracts, insurance starts not from the exporting country warehouse, but from the point of loading on the ship.
Marine Cargo Insurance is not a "term" contract like with automobile insurance or fire insurance, but a "journey" contract compensating for damage which may occur during sea or air transport or land transport from the warehouse of the exporting country to the warehouse of the importing country. However, the time of start of insurance is based on the time of transfer of the burden of risk defined by the INCOTERMS.
We recommend that you confirm with the exporter during negotiations on the sales transaction whether it has insured the span from the exporting country warehouse to loading and, if this is not covered by insurance, that it be added to the Marine Cargo Insurance contract by an FOB attachment clause so as to eliminate this gap in the insurance coverage.
*1 FOB (Free On Board)
Term under which burden of risk is transferred when freight passes Ship's rail.
*2 CFR (Cost and Freight: C&F)
Term under which all costs up to arrival at the port of import are included. Also indicated as "C&F". The burden of risk is transferred in the same way as FOB.
*3 INCOTERMS (International Commercial Terms/International Rules for Interpretation of Commercial Terms) International interpretation of scope of liability and scope of burden of expenses between parties to trade transactions by International Chamber of Commerce (ICC). Note that the English terms routinely used in trade transactions are usually ones expressing trade terms rather than INCOTERMS.
When importing by air cargo under an FOB term, the importer arranges the Marine Cargo Insurance contract, but sometimes the cause of the accident is judged to have arisen inside the airport before loading on the aircraft at the exporting country and consequently payout from the insurance company cannot be obtained.
[Ways to Avoid It]
The FOB term defined by the INCOTERMS envisions sea cargo and deems that the burden of the risk has been transferred from the exporter to the importer when the freight "passes Ship's rail". When importing air cargo under FOB terms, the burden of risk is interpreted as being transferred at the point of time of loading on the aircraft. For this reason, accidents occurring in the exporting country airport are not covered by insurance.
In the case of air cargo, the freight is treated as being under the management of the carrier in the term from receipt at the carrier warehouse in the airport to loading on the aircraft. Sometimes it takes close to a day before loading. During this period, the freight is considered outside the control of the exporter or carrier. There is also risk of damage during that time. We recommend using the FCA (*4) term drawn up envisioning air cargo.
*4 FCA (Free Carrier)
Term under which the burden of risk is transferred to the purchaser when freight is handed over to carrier designated by the purchaser at a designated location in the exporting country. This is term used for air cargo or when a sea container goes through a container yard (facility receiving, storing, and transferring sea containers) or a container freight station (facility storing and transferring small lots of freight not of container unit size for mixed loading in containers).
Mr. Seiichi Yoshitomi, President CEO, PROEYES Corp.
In the previous month's edition, we explained about how to avoid accidents in international shipping. This time we will describe frequently occurring risks in shipping to China and ways to avoid damage to cargo as proposed by a major marine insurance company.
Cargo destined for China is often damaged at the container yard (*1), during land transport, and at the time of import customs clearance.
<< Case Study 1>> Damage to Cargo at Container Yard
Due to the sharp rise in ships arriving at Shanghai, not all of the cargo handling work for container ships is handled at the specialized container wharves at Waigaoqiao. In particular, there are few specialized container wharves at Zhanghuabian, Jungonglu, and Baoshan located at the mouth of the Yangtze river - where medium and small vessels plying short Asian lanes from Japan and South Korea call. Container cargo is increasingly being handled at conventional ship (*2) wharves.
Conventional ship wharves do not have specialized cranes for handling containers. They handle containers by general cranes suspending the containers at single points. In this case, when lifting the containers, the containers shake a lot resulting in movement and damage of the cargo in the containers.
*1 Container Yard
Facility serving as location for loading and unloading containers to and from ships and as juncture between sea and land transport.
*2 Conventional Ship
Cargo vessel of size and cargo handling equipment suitable for efficient transport of grain, coal, ore, and other bulk cargo and large sized machinery larger than containers and other specific single cargo.
[ Ways to Avoid It ]
At which wharf a ship docks when arriving in port is decided by the local port authorities. The shipping company entrusted to carry the cargo does not have that right. That is, the shipper cannot specify that the containers be handled at specialized container wharves.
It is therefore necessary to consider in advance the load which might be applied to cargo due to shaking when containers are handled by a general crane at a conventional ship wharf and to strengthen the stacks in the container, improve the packing, etc. In particular, it is necessary to be extremely careful with unevenly weighted cargo such as machinery and equipment.
<< Case Study 2 >> Damage to Cargo During Land Shipment
The container yards adjoining the port of Shanghai are congested. Customs clearance takes time, so in more and more cases shippers transport the cargo to inland container yards by bonded trucks and go through the import customs clearance procedures there.
In this case, the unloaded containers are transported not using specialized container chasses, but on flat bed trailers. Many of these trailers are old and have broken, deformed, or rusted twist locks for fastening the containers, so fail to lock them. Therefore, accidents such as containers falling off the trailers or turning over during transport have been reported. Further, many trailers have badly worn tires. Incidents of tires blowing out and the load carried being seriously damaged have also been reported.
[ Ways to Avoid It ]
When selecting the trucking company, it is recommended to meet and talk with its staff in advance to confirm that the firm is properly managing its operations.
There is the strong image that China's roads are worse than Japan's, but tests show that on certain highways in China, there is conversely less shaking during transport. On general roads, however, Chinese drivers continue to exhibit poor road manners and frequently brake sharply - naturally having an effect on the load. The risk of involvement in accidents is far higher. From this viewpoint as well, it is necessary to select trucking companies which thoroughly train their drivers.
<< Case Study 3>> Damage to Cargo at Time of Import Customs Clearance
When imports clear customs, about 10% are inspected by the customs authorities. Shanghai's customs inspection authorities do not have sufficient inside space and often inspect the cargo outside. While awaiting inspection, the cargo unloaded from the containers is left standing outside. There is therefore the risk of the cargo suffering water damage due to sudden rainfall.
[ Ways to Avoid It ]
Measures have to be taken to prevent all of the cargo from being unloaded from the container at the time of inspection. Specifically, it is recommended that a detailed list of the cargo be posted at the inside of the container door in the Chinese language.
Further, the way the cargo is handled is generally rough. Therefore, cargo is often damaged when being unloaded from the container or handled at the inspection grounds. Use of sufficiently strong packing materials and requesting the cargo receiver to witness any inspections are therefore also effective.
Mr. Seiichi Yoshitomi, President CEO, PROEYES Corp.
In both sea and air transport, it is quite commonplace for the cargo to be lost or damaged on route. Sometimes this can be avoided by just a little care. It is therefore important to be fully aware of risk management in logistics. Striving to avoid accidents in shipments is an important precaution leading to a better reputation for your company and improved quality of transport. Below, we will describe some case studies of accidents during the global transport of cargo and hints for avoiding them.
<< Case Study 1>> Loss of Sea Containers
You might think that after packing your cargo into a container and loading the container on the ship, the cargo will automatically be delivered to its destination, but the unexpected still occurs.
For example, sometimes the container ship encounters rough weather in the middle of its voyage - for example, typhoons, low atmospheric pressure fronts, and other poor weather conditions - leading to waves of as high as over 10 meters in some cases. This causes what is called "water hammer" incidents. That is, the force of the waves sweeps away entire containers or breaks through the walls of the containers and washes away the cargo inside.
Hints for avoiding trouble: Container ships store containers in both spaces under the deck and on the deck. The shipping charge is the same in both cases. Therefore, when contracting with a shipping company for transport, we recommend that you designate "under deck". The only thing damaged when encountering rough weather is the cargo on deck.
<< Case Study 2 >> Water Damage of Air Cargo
Demand for fast international deliveries is steadily rising, but it still takes a bit of time from arrival at the destination to actual delivery. At the quickest, it takes two hours or so after arrival of the aircraft, general five to six hours. Naturally, the cargo is stored in a warehouse,
but there are cases of water damage from transport from the aircraft to the warehouse.
Hints for avoiding trouble: In the case of packing in cartons, even with small quantities, we recommend that you load the cartons on a pallet and shrink package the entire assembly (*1). In particular, when transporting cargo to the Asian region, this is effective at the time of the seasonal squalls where large amounts of rain can fall in very short periods. Shrink packaging can prevent the cartons from water damage.
*1 Shrink Packaging
In this case, this specifically means loading the cartons on a pallet and wrapping the entire assembly with a polyethylene film such as food wrap. This is effective in preventing the stacked up cartons from shifting during transport and preventing water damage while handling the cargo in rainy weather.
<< Case Study 3 >> Accidents to Cargo due to Stopovers
In both air and sea transport, to reduce costs, often indirect rather than direct routes are used. Further, there are also some destinations, which can only be reached by utilizing indirect routes. The greater the number of changes in carriers, the more times the cargo has to be unloaded and reloaded, so the more frequent the cargo is damaged by cargo handling equipment. Further, delays in inspecting the cargo mean delays in reloading as well.
Hints for avoiding trouble: In terms of risk management in logistics, it is better not to use an indirect route to a destination reachable by a direct route, but in the final analysis you should balance this against the possible lower costs.
If the increase in handling causes damage to the cargo, it will be necessary to send replacement products or take other steps to resolve complaints. Further, tremendous time, labor, and cost are involved in dealing with complaints when cargo is lost on indirect routes or is delayed due to delays in reloading.
When it is necessary to use an indirect route, we recommend you conduct an on-site investigation of the location of any stop. In the case of container transport, it is important to confirm that a gantry crane (*2) is provided at the container berth at the stop.
Hong Kong, which serves as a relay port for South China, has limited space in the dockside container yards, so often barges are brought alongside ships for loading and unloading them. Since specialized container handling equipment is not used, damage to cargo due to tilting or dangling of the container and breakage due to dropping have been reported. The risk is particularly high with unevenly weighted cargo (machinery, heavy objects, etc.)
Further, at the time of cargo handling, commissioning a surveyor (third party inspection organization) (*3) to monitor the work would also be an effective means of avoiding trouble. There are many examples where monitoring and guidance of cargo handling by surveyors have helped greatly reduce damage.
*2 Gantry Cranes
Container ships are not themselves equipped with cranes for loading and unloading containers. Loading and unloading cranes especially for containers (gantry cranes) are installed at the dockside. Crane hooks are fastened to the four corners of the top parts of the containers. The containers can be moved in parallel and kept from be dangled by such equipment.
*3 Surveyor (Third Party Inspection Organizations)
As third party inspection organizations, there are maritime assessors (in charge of investigating causes of complaints etc.), inspectors of international cargo (in charge of inspection of quantities of cargo, inspection of state of packaging, etc.), etc. In Japan, the NKKK (Nippon Kaiji Kentei Kyokai) is famous. Maritime insurance companies often make use of this in judging claims. This type of insurance company may also be asked to introduce surveyors.
Mr. Seiichi Yoshitomi President CEO, PROEYES Corp.
Claims are an integral part of imports and exports. Sometimes they are unavoidable. Other times the risks of claims are self invited. Generally, Japanese businesses decide on only price and delivery dates when concluding contracts and do not clarify other terms. When concluding contracts for import and export transactions, however, it is important to limit the scope of responsibility of the parties and agree on methods for handling any claims which might arise in worst case scenarios.
One method to deal with claims is first for the importer to speedily notify the exporter of the details of the problem while attaching the required documentation and retaining rights over the claims (filing claim notice). The parties then discuss the method of resolution. Depending also on the prior business transactions between the parties, the importer will sometimes waive its rights for compensation in view of future transactions, but usually disputes cannot be resolved that smoothly. Therefore, when concluding contracts,agreeing on third party mediation or arbitration or other methods of resolution would help lead to quick settlement.
Here, we will describe several examples of claims and the ways to avoid them. The most usual types of claims are claims regarding inferior quality, claims regarding shortages and different or delayed shipments, and market claims.
<< Case Study1 >> Claims Relating to Inferior Quality
A frequently occurring type of claim relating to imports is the inferior quality of the shipment or differences in quality compared with the initial samples. In particular, businesses selling to Japan for the first time often do not understand the quality standards of the Japanese side, judge quality by their own criteria, and end up shipping inferior products. To avoid this, before starting to import from abroad, it is important to ensure that the other party fully understands one's quality requirements. Discussing quality control at the time of production, shipment inspections, and other management methods and clarifying the scope of responsibility of the exporters are also critical points. Along with this, it is necessary to clearly stipulate the warranty and claim clauses and arbitration clauses in the contract envisioning the need to deal with claims and cases where smooth resolution is not possible.
<< Case Study 2 >> Claims Regarding Shortages and Different or Delayed Shipments
The custom in trade practice is allowance of a 5% difference in contract quantities. Shortages should in particular be watched for. When setting an allowance for this, the quantities at each stage of the contract must be clearly set down.
In the case of exports, frequently claims are received over shortages due to differences from the invoiced quantities. To avoid this, the exporter itself must inspect quantities and weights at the time of export.
Another type of claim which often occurs when importing is a damage claim. Overseas manufacturers are not necessarily familiar with trade practices. They often do not recognize the importance of export standard packing and end up shipping by packaging the same as for domestic shipments - resulting in damage in the shipment process. To avoid this, it is important to confirm the method of packaging with the exporter in advance. In the case of FOB(*1) contracts and CFR(*2) contracts where the importer insures the shipment,damage due to inferior packaging, it must be noted, is not covered by insurance in that it constitutes "bad packing".
*1 FOB: Abbreviation for "free on board". A trade term meaning that the seller's obligation for delivery is completed when the seller loads the cargo on the ship designated by the buyer within the contract period and the cargo passes the ship's rail. The seller bears the costs up to the loading charge.
*2 CFR: Abbreviation for "cost and freight". Also known as "C&F". The seller arranges for the ship and loads the cargo on board, but is not obligated to arrange for marine insurance. The seller's risk is the same as with FOB. When passing the ship's rail, responsibility passes from the seller to the buyer. Note that "CIF (cost insurance and freight)" means the price including ocean freight and marine insurance.
<< Case Study 3 >> Market Claims
A small mistake by the exporter may result in a claim over failure to honor the contract and a demand for a price discount. Delays in schedules or ships or aircraft are not the direct responsibility of the exporter, but in some cases price discounts are demanded due to delivery delays. To avoid such risks, it is essential to clarify the scope of responsibility of the parties at the time of concluding the contract.