Landed Duty Paid: Import Case Study 1
Dew Mountain Beverages of Massapequa, New York, purchases 5,000 cases of bottling caps and cases for sparkling water packaging processing from Luigi Mineral Water Machinery, Milan, Italy, for $7,500.00 USD Delivered Duty Paid.
The cost of the international transportation is $900.00 USD. The U.S.
inland freight delivery charges are $300.00 USD. The U.S. duties fees and taxes are $700.00 USD.
Upon arrival into the United States, CBP examines the imported articles and determines that the country of origin markings are not sufficient to meet the U.S. country of origin marking requirements enforced by U.S.
Customs and Border Protection. It is discovered that the packages are not marked appropriately. A notice of Not Legally Marked Merchandise/
Notice of Redelivery is issued to the Importer of Record, Dew Mountain Beverages of Massapequa, New York.
Dew Mountain is not notified in a timely fashion by the broker of record who was selected by Luigi Mineral Water and received a penalty notice for failure to redeliver the merchandise to CBP custody for marking.
Luigi Mineral Water Machinery is made aware of this issue and refuses to reimburse Dew Mountain for penalty amounts received for Dew Mountain’s failure to respond to U.S. CBP requests. Additionally, Luigi states that they are not responsible to meet every request from CBP in the United States on goods that were adequately cleared for export from Italy.
What Incoterms rules were breached in the above scenario? And how should Dew Mountain use the Incoterms rules to resolve this conflict?
Answer:
Dew Mountain should never have been nominated as the importer of record as the DDP term requires the seller to be responsible for all import customs formalities inclusive of acting as importer of record.
Dew Mountain should refer to A9 of the DDP reference of the Incoterms 2010 reference and point out to Luigi that as the seller, Luigi did not meet their responsibility to ensure the proper markings were on the packaging performed by Luigi as the seller.
On future purchases Dew Mountain amends the Incoterms to allow them the responsibility for import clearance. Additionally the purchase order outlines packing marking and labeling requirements under both FDA and CBP guidelines.
Landed Cost CIF: Case Study 2
J&J Ltd. of Guangzhou, China, sold solar panel displays to Sunshine Technologies for $300,000 USD CIF. J&J contracted their freight for-warder, Better Freight International Ltd., to move the cargo on a door-to-port basis to the door-to-port of Chicago, Illinois.
Better Freight was notified that the shipment would be ready for pick up from J&J on the first of the month. The goods were picked up on time and moved to the port of loading for export loading. The proper Importer Security Filing (ISF) information was filed in a timely manner and the shipping carrier Main Container Line loaded the container accordingly.
While in transit, the container was subject to carriage stress, and move-ment causing damage to the solar panels resulting in 100% loss of the quality of the goods.
Sunshine, upon investigation, discovered that the freight forwarder Better Freight and the container carrier Main Container Line were notori-ous for damaged cargo and poor stowage of containers from the Far East.
Sunshine filed a claim with J&J for the full value of the cargo plus a 30%
profit that was expected after U.S. importation and U.S. resale.
The seller, J&J, upon receipt of notification of the claim for damages refused the claim and informed Sunshine Technologies that they, J&J, were not liable for the loss or damage.
How would you use the Incoterms to assist in the resolution of this dispute?
Answer:
The seller is responsible under CIF to pay the cost to destination and procure insurance on behalf of the buyer; however, the risk of loss or dam-age to the goods passes from the seller to the buyer as soon as the goods are tendered to the carrier. The claim should be filed by Sunshine with the insurance company and not with J&J.
The other problem associated with this Incoterms utilization is that the insurance company and scope of coverage are not sufficient. The importer has difficulty in submitting the claim, which is denied as the insurance
Landed Cost Modeling • 127 company advises that only major perils were covered and that this loss was not.
Going forward, the importer makes a decision to utilize Incoterms where they control the purchase of the cargo insurance, such as with CFR or CPT terms, so they can make sure the policy conditions are adequate for the risks involved and that they have a relationship with the insurance broker and underwriter who will work on their behalf.
Reducing Costs: Case Study 3
A Dutch company is looking to sell tulip bulbs to Horticulture Company in Cape Town, South Africa. They offer CIP Incoterms 2010 and plan to ship by airfreight into Cape Town via Lufthansa Airlines originating in Venlo and exported from Amsterdam.
The CIF price, all in, is 23,500 euros. The customer in South Africa advises that the cost is too high. Other suppliers do much better on the airfreight.
The invoice under the CIP sale is as follows:
ExWorks price 20,000 Euros
Inland 500 Euros
Air 2,500 Euros
Insurance 500 Euros
CIP Cape Town 23,500 Euros
Answer:
The customer, unhappy with this price in Cape Town, contacts an airfreight consolidator at Cape Town International Airport, who has an office in Brussels.
This consolidator offers an inbound air freight rate from Brussels to Cape Town for 1,100 euros. The additional cost from originating green-house to Brussels is only 150 euros.
The savings is now at a total of 1,250 euros (2,500 minus 1,100 plus 150) per transaction.
The buyer in Cape Town now amends the Incoterms to FCA Brussels and controls the inbound airfreight from Brussels Zaventem Airport.
They arrange their own cargo insurance and the only downside is that as a consolidated shipment it will move on an indirect flight with only two flight options every 2 to 3 days.
They have at least one to two shipments per week for most of the year.
This change in the Incoterms and the new logistics will potentially save this importer over 100,000 euros per annum.
Landed cost is an important aspect of global trade which is heavily influenced by the choice of Incoterms.
Global traders need to know the information outlined in this chapter
“stone cold” as to be in the best position to make better Incoterms choices that work in favor of lowering landed costs and making their company more competitive.
Small U.S. Exporter, Changing the Incoterms Choice:
Case Study 4
A small farmer in Illinois has developed a potential market in Japan for fresh soybeans. The company in Japan is a huge trading company with import and export activity all over the globe. They have a very compre-hensive freight and logistics staff in place in their home office in Tokyo.
The Illinois farmer offers a price DAT Incoterms 2010 Kobe, Japan, to the Tokyo based customer.
3000 bushels @ $12.50 USD
$37,500.00 ExWorks
$1,100.00 Inland Freight to Long Beach
$1,950.00 Ocean Freight to Kobe
$40,550.00 DAT Kobe
The offer is rejected by the Tokyo Company as the DAT price is higher than they pay from other suppliers.
Answer:
In evaluating the situation, the ExWorks price is competitive, but not with all the freight charges added on to ship to Kobe.
The buyer, who has strong freight contracts in place, negotiates a new Incoterms with the Illinois farmer.
The buyer, who has a major contract in place with a favored Japanese Flag Steamship Line—K Line—has an ocean freight price, because of their annualized freight commitment to the carrier, of $1,100.00 USD. They also can improve the inland freight costs because of their existing relationships and tariffs in place with several trucking companies on the West Coast.
Landed Cost Modeling • 129 The new cost to the Tokyo-based commodity trading company is as follows:
3000 bushels @ $12.50 USD
$37,500.00 ExWorks
$800.00 Inland Freight to Long Beach
$1,100.00 Ocean Freight to Kobe
$39,400.00 DAT Kobe
Savings to the buyer: $1,150.00
As the buyer in Tokyo is planning on several shipments per month over the next 18 months, the overall savings would fall into the over $13,000.00 USD range.
This Incoterms option places the small company in Illinois in a more competitive position in this transaction, when changing the Incoterms options to favor the buyer in Tokyo purchasing prowess on inland and ocean freight contracts, with more favorable pricing.
Both parties win in this Incoterms option and can compete favorably.
Chinese Exports to the United States: Case Study 5
A Chinese chemical manufacturer located just outside of Shanghai is looking to grow sales into the American market, where a number of their products for the cosmetics industry are booming.
They believe in offering DDP Incoterms to their smaller customers who they believe would prefer not to be involved in any customs formalities.
One buyer in Plano, Texas, on their third import from this supplier in Shanghai, is approached by CBP (Customs Border and Protection/
U.S. Customs).
CBP in Dallas is inquiring and looking for forms 7501 and 3461 (U.S. import clearance documents). The buyer advises that while they are the final destination, they are not the importer of record and have no such forms or really anything to do with the import clearance formalities, as they are making the purchases on a DDP Incoterms from the supplier in China.
CBP does the litmus test for ultimate consignees and determines that the import would have never occurred unless for this PO and that the current importer of record showing on this transaction is a disinterested foreign entity who has no interest in this U.S. and delegates the entire cus-toms clearance process to a independent third party.
CBP advises the buyer in Plano that they are not only the ultimate con-signee by CBP definition but also the importer of record.
That company in Plano is fined $11,000.00 and is having numerous ship-ments stopped at the inbound gateway by CBP for inspection.
Soon after this problem arose … the company in Plano amends the Incoterms to DAP Plano. This requires the Chinese exporter to deliver the goods to Plano but the customs formalities are for the account of the buyer in Plano.
The company in Plano hires a licensed customhouse broker in Dallas who now protects their interests by handling the clearances in their name;
they do it correctly and handle all record-keeping requirements.
CBP returns in 6 months and is favorably impressed by how the importer in Plano has acted with due diligence, reasonable care, and supervision and control in the import process.
CBP lessens the inspections and moves ahead favorably with this importer of record.
Trade Compliance Issue: Case Study 6
A U.S. company who manufacturers aviation products that they sell to the military has received an order to supply various aviation spare parts to a government agency in Saudi Arabia destined for their Air Force.
The P.O. states that the buyer wants ExWorks Terms in the contract of sale. The supplier in Kenosha, Wisconsin, has no problem with this term as it takes them out of the loop for export functions.
When the government agency in Saudi contacts their freight forwarder in Jeddah to contact their agent in London to make the freight arrange-ments out of the United States … they meet several challenges … in this customer-routed freight transaction.
The Jeddah’s agent in Chicago advises that the nature of the product, the destination, and the intended use all dictate that an export license from the U.S. Department of State maybe required for this export. Also tied into this equation is the Schedule B number, along with DDTC designations.
The first consequence to this circumstance is that the process of the export is delayed due to the potential State Department ITAR protocols:
The International Traffic in Arms Regulations of the State Department.
It is finally determined that the exporter has to file for an export license.
After a 24-day wait the exporter finally receives the export license.
Landed Cost Modeling • 131 The license has various stipulations. One of which is that the exporter or the USPPI (U.S. Principal Party in Interest) has to control the outbound export from the United States.
The ExWorks Incoterms does not allow this option in its intent.
The exporter or USPPI (in this case, the supplier in Kenosha) has to make arrangement with a freight forwarder in Chicago to handle this export from the United States.
Concurrently they amend their Incoterms to FCA port of export, in this case Chicago O’Hare Airport, as this is an airfreight shipment.
The FCA O’Hare Incoterms are now secured, allowing the supplier in Kenosha to meet the requirement of the State Department Export License.
While the buyer in Saudi wanted to control the export, they have to compromise their protocols and chose another Incoterm that satisfies the U.S. government so the export can go forward—a compromise that pro-duces favorable results for all the parties in the export transaction—the seller, the buyer, and the U.S. Government!
German Optics Company, the DDP Advantage: Case Study 7 A German optics company located in Berlin has developed multitask-ing eye care and optical equipment for utilization in optometrists’ offices around the globe.
The new equipment will do the work of three pieces of current equip-ment utilized by eye doctors, saving the eye doctors hundreds of thou-sands of dollars.
The Berlin company begins to market their products shipped door to door, installed, and upon delivery and installation a company technician will be present to show the technicians and eye doctors how to utilize the new equipment.
In this “turnkey” sale, the eye doctor is only required to pay an advance of 10% upon ordering and pay the balance after the “turnkey” occurs.
In their first few orders they sell with the Incoterms of DAP the doctor’s office.
The optics company immediately run into a few problems in some sales into North America, as well as in Southeast Asia. The problems are con-sistent. Most of the doctors and technicians they are selling to are small operations and lack the resources, contacts, and capabilities to customs clear the goods in their own countries.
The Berlin optical company sees some immediate sales potential begin to dwindle because of this customs clearance dilemma.
Answer:
The Berlin optical company’s managing director has a good contact with a freight forwarder in Hamburg who, when advised of the problem, offers a very viable solution.
The forwarder advises that the Incoterms should be amended to DDP and they will handle the entire logistics to destination, inclusive of local customs formalities. This will eliminate the need for the doctors’ offices to find local customhouse brokers and deal with the complexities of cus-toms clearance.
Prior to shipment, the forwarder advises what all the landed costs will be—shipping, duties, taxes, fees, etc.—and these costs are built into the sales contract which will be agreed to by the buyer at the time the agree-ment is finalized and the goods are shipped.
The forwarder, as an option, can also handle the shipment on a collect basis to assure payment takes place when the delivery and the turnkey occur.
In some countries where an exporter can be the importer of record, such as Brazil or Mexico, the forwarder will handle the sale on a DAP basis and their office or agent will step in and represent the buyer’s import interests as an extension of the exporter’s supply chain.
That forwarders office or agent in that local market will handle the cus-toms formalities on behalf of the doctor’s office and make sure the process is minimized for them as much as possible.
In either situation the exporter is providing a door-to-door “white glove”
service offered by either:
• Amending the Incoterms utilized or
• Adjusting the role of the freight forwarder’s responsibilities upon clearance and delivery at destination
Either scenario allows the Berlin company to be leveraged in their global sales and allows these optometrists’ offices easier accesses to equipment that has multi- utilizations and is a better overall spend.
Competitive advantage works to everyone’s benefit!
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