for the International Sale of Goods
The United Nations has adopted a treaty that over 70 countries, including the United States but not Great Britain, that offers uniform international sales regulations. It does not incorporate Incoterms into its guidelines but references the “shipping terms” to be used in international contracts of sale and purchase and identifies, for example, FOB and CIF. As of August 2010, this treaty had been ratified by the 77 countries that account for the majority of global trade.
The UN Convention on Contracts for the International Sale of Goods (CISG) allows exporters to avoid choice of legal jurisdiction as the CISG offers accepted substantive rules on which contracting parties, courts, and arbitrators may rely on which was developed by the UN Commission on International Trade Law (UNCITRAL) and was signed in Vienna in 1980.
Following ratification by 11 countries in 1980, CISG has been regarded as a success for UNCITRAL because the convention has since been accepted by countries worldwide.
Countries that have ratified the CISG are referred to within the treaty as
“Contracting States.” Unless excluded by the express terms of a contract, the CISG is deemed to be incorporated into (and supplant) any otherwise applicable domestic laws with respect to a transaction in goods between parties from different Contracting States. Of the uniform law conventions, the CISG has been described as having a huge and favorable impact on
Incoterms: Foundation of Global Trade • 39 global trade offering uniformity and a legal reference point for companies trading globally.
CISG has been successful in global trade as it allows uniformity, legal-ity, and at the same time flexibility in member states to use only portions where applicable. A number of countries that have signed the CISG have made declarations and reservations as to the treaty’s scope, though the vast majority (55 of the current 76 Contracting States) has chosen to accede to the convention without any reservations.
Lawyers who are involved in global contracts and traders who enter into sales and purchase agreements with complexity are urged to become familiar with CISG and its application to their business models for them-selves or their clients. There is more reference material on CIGS in the Appendix to this book.
Issues in World Governance
Hundreds of agreements are made that are applicable on a multilateral basis. Some, but not all, impact some aspects of global trade. They also will impact the decision- making options we have when choosing how we construct all the agreements and contracts in our global supply chains.
This will eventually lead us to the details involved with what are the best Incoterms options we have to gain commercial advantage in our import and export transactions.
Any person engaged in global trade has to have a working knowledge of all the country- specific and political mandates that will potentially impact the various factors affecting the business issues in that part of the world.
Business is all about making decisions. The more informed we are and the better we are able to evaluate all aspects of the international business arena including government regulations and politics, the better position we are in to make quality decisions. Many of these decisions we make involve how we construct contractual sales or purchase agreements, of which a key ingredient is the Incoterms.
We now have 11 options. Free trade agreements, treaties, government organizations, protocols, and conventions all affect how “trade” is accom-plished. When we choose a specific Incoterm, this places certain respon-sibilities and liabilities on either party as the importer or the exporter to the transaction. Our choice of Incoterms may introduce uncertain risk or create opportunity. We need to know the difference to make the best deci-sion for our supply chain to function at its best.
Being
informed
on global affairs and how they impactIncoterms®
and the options we have in commercial transactions will greatly enhance competitiveness andprofitability.
Governmental Profiles
World Customs Organization (WCO)
WCO aids the national economic wealth and social protection of its members by promoting honest, transparent, and predictable customs. Established in 1952 as the Customs Co- operation Council, the WCO is an independent intergov-ernmental body whose mission is to enhance the effectiveness and efficiency of customs administrations. With 151 member governments, it is the only inter-governmental worldwide organization competent in customs matters.
Organization for the Prohibition of Chemical Weapons (OPCW)
The mission of OPCW is to implement the provisions of the Chemical Weapons Convention to achieve the OPCW’s vision of a world free of chemical weapons and a world in which cooperation in chemistry for peaceful purposes for all is fostered. In doing this, their ultimate aim is to contribute to international security and stability, general and complete disarmament, and global and economic development.
Convention on International Trade in Endangered Species of Wild Flora and Fauna (CITES)
CITES was formed in 1975 and now has a membership of 152 countries, which act by banning commercial international trade in an agreed list of
Incoterms: Foundation of Global Trade • 41 endangered species and by regulating and monitoring trade in others that might become endangered.
Montreal Protocol
The Montreal Protocol on Substances that Deplete the Ozone Layer is a landmark international agreement designed to protect the stratospheric ozone layer. The treaty was originally signed in 1987 and stipulates that the production and consumption of compounds that deplete ozone in the stratosphere are to be phased out.
Organization for Economic Cooperation and Development (OECD) The OECD groups 30 countries in an organization that, most importantly, provides governments a setting in which to discuss, develop, and perfect economic and social policy. They compare experiences; seek answers to common problems; and work to coordinate domestic and international policies that increasingly, in today’s global economy, must form a web of even practice across nations.
Wassenaar Arrangement
This agreement was established to contribute to regional and international security and stability by promoting transparency and greater responsibil-ity in transfers of conventional arms and dual-use goods and technologies, thus preventing destabilizing accumulations. Participating states, France included, will seek, through their national policies, to ensure that trans-fers of these items do not contribute to the development or enhancement of military capabilities that undermine these goals and are not diverted to support such capabilities.
When we choose an Incoterm, this agreement above all could poten-tially impact both the risks and costs for the importers and exporters who engage in trade that crosses international borders.
Some acts occur in one country and impact all countries that do busi-ness with that country.
The Lacey Act
The Lacey Act (16 U.S.C. 3371 et seq., the Act) as amended makes it unlawful to import, export, transport, sell, receive, acquire, or purchase
in interstate or foreign commerce any plant, with some limited excep-tions, taken or traded in violation of the laws of the United States, a U.S.
state or a foreign country. On September 2, 2009, the U.S. Department of Agriculture (USDA) Animal and Plant Health Inspection Service (APHIS) published a notice in the Federal Register announcing a revised enforcement phase in plan for the act’s requirement for a plant product import declaration (see 74 Fed. Reg. 45415 for details); (USDA: Animal and Plant Health Inspection Service). The revised plan identifies a list of products and the associated Harmonized Tariff Schedule (HTS) Chapter or Heading for which the requirement for a Plant Product Declaration Form (PPQ 505) is anticipated to be enforced.
Nuclear Non- Proliferation Treaty (NPT)
Participation in the Nuclear Non-Proliferation Treaty
The Treaty on the Non- Proliferation of Nuclear Weapons is a landmark international treaty whose objective is to prevent the spread of nuclear weapons and weapons technology, to promote cooperation in the peace-ful uses of nuclear energy, and to further the goal of achieving nuclear disarmament and general and complete disarmament. Opened for signa-ture in 1968, the treaty entered into force in 1970. On May 11, 1995, it was extended indefinitely. A total of 190 parties have joined the treaty, including the five nuclear- weapon countries of the United States, Russia, the United Kingdom, France, and China (also the five permanent mem-bers of the United Nations Security Council). More countries have ratified the NPT than any other arms limitation and disarmament agreement, a testament to the treaty’s significance. Four non- parties to the treaty are known or believed to possess nuclear weapons: India, Pakistan, and North Korea have openly tested and declared that they possess nuclear weap-ons, while Israel has had a policy of opacity regarding its own nuclear weapons program. North Korea acceded to the treaty in 1985, but never came into compliance, and announced its withdrawal in 2003. The NPT consists of a preamble and 11 articles. Although the concept of “pillars” is
Incoterms: Foundation of Global Trade • 43 not expressed anywhere in the NPT, the treaty is nevertheless sometimes interpreted as a three- pillar system, with an implicit balance among them:
1. Nonproliferation 2. Disarmament
3. The right to peacefully use nuclear technology
The NPT is often seen to be based on a central bargain. According to the treaty: “the NPT non- nuclear- weapon states agree never to acquire nuclear weapons and the NPT nuclear- weapon states in exchange agree to share the benefits of peaceful nuclear technology and to pursue nuclear disarmament aimed at the ultimate elimination of their nuclear arsenals.” The treaty is reviewed every five years in meetings called Review Conferences of the Parties to the Treaty of Non- Proliferation of Nuclear Weapons. Even though the treaty was originally conceived with a limited duration of 25 years, the signing parties decided, by consensus, to extend the treaty indefinitely and without conditions during the Review Conference in New York City on May 11, 1995.
In 2012 this treaty remains a very difficult global protocol to enforce and maintain governance over. Any company that manufacturers nuclear or nuclear- related products and sells to global markets is impacted by the edicts and regulatory implications under this global treaty. This might impact an Incoterms decision in the following way.
An American company based in Salt Lake City, Utah, manufactures power adapters for regulating nuclear power equipment in nuclear power plants. It has just received an order from a company in Russia for five units. This product is controlled by the U.S. Department of Commerce Export Regulations. The manufacturer goes through the necessary pro-cess to obtain an export license. After a rigorous export license applica-tion, the license is obtained. The license requires that the exporter obtain proof of delivery to the specific consignee listed in the export license. The manufacturer, after careful deliberation, decides to use the DDP Incoterms because that will provide the best control over the export and import pro-cess to assure that delivery is made under the export license requirements.
The treaty causes U.S. government action, which then causes an export license protocol. That process requires control over the delivery process.
Control over the delivery process causes a decision to be made to use the DDP Term. There is a direct and indirect link between a global treaty and
the choice of Incoterms between a seller and a buyer. While other options exist, this choice is believed to present the best opportunities to mitigate the risks associated with failure of the manufacturer to meet U.S. govern-ment export license protocols put in place for the following reasons:
• The nature of the product
• The destination
• The consignee
• The logistics of how freight moves in this supply chain
• Export license requirements
The business executives who make these arrangements—from market-ing to sales to customer service to operations to logistics, and includmarket-ing legal and finance—all need to have this basic knowledge of world affairs so they can apply it to the very detailed decisions on how freight is moved globally. There is “connectivity” in the company that needs to take place, with everyone backing each other up to both avoid risk and assure profit-able global operations.
An example of a major disaster for a U.S. company can be found in Gibson Guitars.* Based in Nashville, Tennessee, as reported by several news sources it is being carefully watched by many trade professionals and practitioners. In 2011, federal agents raided the Gibson Guitar Corporation in Nashville for the second time in several years. A Gibson facility was raided, although it’s believed to be related to a prior raid at the same facil-ity in November 2009, for possible violations of the Lacey Act. The Lacey Act is a federal environmental law that prohibits importing endangered plants and wildlife. It was amended in 2009 to also include wood products.
* Sources include http://www.joc.com, http://www.cbp.gov, and http://www.inboundlogistics.com.
Incoterms: Foundation of Global Trade • 45 During the raid in 2011, federal agents seized materials, files, and comput-ers from the plant on allegations that a rare ebony wood from Madagascar was illegally used at the factory. No charges were ever filed.
Wednesday morning, several hundred employees at the facility were first evacuated.
“We were just in our department and one of the supervisors just come in [sic] and said everybody get out and we just shut the machines off and headed out the door,” one employee who did want to be identified said.
They were later told to go home after being allowed to reenter the build-ing to collect their belongbuild-ings.
The Gibson Guitar facility in Memphis was also raided by federal authorities Wednesday morning.
In a statement released after the event, Gibson said they are “fully coop-erating with agents of the U.S. Fish and Wildlife Service as it pertains to an issue with harvested wood.”
The statement continued, “Gibson is a chain of custody certified buyer who purchases wood from legal suppliers who are to follow all standards.
Gibson Guitar Chairman and CEO sits on the board of the Rainforest Alliance and takes the issue of certification very seriously. The company will continue to cooperate fully and assist our federal government with all inquiries and information.”
I believe that Gibson will be eventually be exonerated and a resolve will be made favorable to the company. But the case itself clearly makes the point about chain of custody as well as responsibility and liability, which we know that Incoterms help dictate. The choice of the Incoterms has a potential impact on how this situation will play out and, in future situations, will be a very delicate area where these types of wood products crossing international borders are involved. It brings into the Incoterms
“equation of options”—that the nature of the product, where it origi-nates from, and the rules around its sale and use could impact the decision on which Incoterms a seller and buyer might consider.
In this case, Gibson may have elected to take itself out of the inbound supply chain and found a domestic source that had already imported the goods or purchased the goods on a DDP basis, where the seller would have taken the risks and costs of customs clearance in the United States. As ultimate consignee, Gibson may still have had some responsibility and risk but may have been removed from some of the cross fire.
Any party selling or involved in the supply chain of goods protected under various government regulations needs to think out the Incoterms option very
carefully, as the risks of government scrutiny could be much greater than the potential rewards. In some instances, Incoterms providing “control” may be warranted to assure that all aspects of the transaction are done correctly: for example, documentation, classification, origination, record- keeping, valua-tion. In other instances, the choice of the Incoterms would provide others control so they bear the responsibility and risks, where that party may be more suitable to handle. In either case, one needs to factor in a lot more infor-mation when certain tenuous products are involved.
Australian Quarantine and Inspection Service (AQIS) Laws Another example looks at Australian import regulations governed under its AQIS regulatory laws. The AQIS is primarily concerned with ensuring that dangerous or illegal goods don’t enter Australia. While dangerous goods include items such as weapons and explosives, “dangerous” can also mean food, plant material, and animal products that can harm the envi-ronment or agriculture in Australia. It is important to know the customs regulations prior to importing anything into Australia, as AQIS officers screen all flights, passengers, baggage, mail, and cargo before materials are allowed into the country. If you export to Australia, your basic knowledge of these laws may impact how you sell or what Incoterms you choose.
Items You Must Declare When Importing or Traveling or Shipping to Australia
According to AQIS, you must declare the following items as they may be prohibited in Australia: dried fruit and vegetables; instant noodles and rice; packaged meals; herbs and spices; herbal and traditional medicines, remedies, tonics and herbal teas; snack foods, biscuits, cakes and confec-tionery; black tea, coffee and other beverages; infant formula (must be accompanying a child); airline food/ snacks; dairy products (fresh and powdered) including milk, cheese, and “non-dairy” creamers, and airline food containing dairy, including milk, yogurt, and sandwiches containing cheese; all whole, dried and powdered eggs, egg products that contain more than 10 percent egg as an ingredient, homemade egg products including
Incoterms: Foundation of Global Trade • 47 noodles and pasta that are not commercially manufactured; all uncanned meat from all animal species, sausages, salami, sliced meats, airline food, pet food, rawhide articles, and handicrafts including drums; cereal grains, pop-ping corn, raw nuts, pine cones, birdseed, unidentified seeds, some commer-cially packaged seeds, ornaments including seeds; all fresh and frozen fruit and vegetables; mammals, birds, birds’ eggs and nests, fish, reptiles, amphib-ians, and insects, feathers, bones, horns, tusks, wool, animal hair, skins, hides and furs, stuffed animals and birds; shells and coral (including jewelry and souvenirs); bee products including honey, beeswax, and honeycomb; used animal equipment including cages, biological specimens; craft and hobby lines made from animal or plant material; used sporting and camping equip-ment, used freshwater watercraft or fishing equipment; potted/ bare rooted plants, cuttings, roots, bulbs, corms, stems, and other viable plant material, banana products; souvenirs made with or filled with straw, wooden articles and carvings including painted or lacquered items, items that include bark, artifacts, handicrafts, and souvenirs made from plant material, palm fronds or leaves, straw products, bamboo, cane or rattan basket ware and furnish-ings, potpourri, coconut shells, Christmas decorations, wreaths and orna-ments, dried flowers and arrangeorna-ments, and fresh flowers and leis.*
Example
A Taiwanese food manufacturer sells dry packaged Asian noodles to a cus-tomer in Perth, Australia. The buyer in Perth, wants little to do with the import hassles of buying on a DDP basis.
DDP requires the exporter to handle the import formalities. The
DDP requires the exporter to handle the import formalities. The