Comprehensive Incoterms, Payment, and Customs Cost Analysis for International Trade

What are Terms of Sale?

The assignment of responsibilities and liability between seller and buyer while preparing and moving products between an agreed origin and destination.

What are Incoterms?

Standardized international commerce terms created by the International Chamber of Commerce (ICC), first introduced in 1936, revised every 10 years.

What do Incoterms define?

Which tasks will be performed by each party, who will pay for each task, and the delivery point where responsibility transfers from seller to buyer.

What do Incoterms NOT define?

Inspection expenses, banking fees for processing payments, and title/ownership transfer.

What is the delivery point in Incoterms?

The point where responsibility/liability transfers from seller to buyer.

What is the responsibility of the seller under EXW (Ex Works)?

Makes goods available at premises.

What is the buyer's responsibility under EXW (Ex Works)?

ALL: export clearance, transportation, customs, insurance.

What is the delivery point for FAS (Free Alongside Ship)?

Goods unloaded at quay alongside vessel.

What are the seller's responsibilities under FAS?

Transport to port, unload, clear export.

What does FOB (Free on Board) indicate?

Risk transfers when goods cross ship's rail at port of origin.

What are the seller's responsibilities under FOB?

All FAS costs plus load onto vessel.

What does CFR (Cost & Freight) entail?

Risk transfers at origin; buyer pays insurance, customs, final delivery.

What are the seller's responsibilities under CIF (Cost, Insurance & Freight)?

All CFR costs plus pay marine insurance.

What is the delivery point for DAP (Delivered at Place)?

Goods arrive at named place (e.g., warehouse).

What are the seller's responsibilities under DDP (Delivered Duty Paid)?

ALL costs including customs clearance and duties in import country.

What is the risk on the buyer for EXW?

Highest.

What is the risk on the seller for DDP?

Highest.

What is Total Landed Cost?

Sum of all costs to bring product to final destination (product + transportation + tariffs + holding costs).

What are holding costs?

Cost of holding inventory; includes operational costs and opportunity costs.

What are in-transit holding costs?

Cost of holding goods that have been paid for but are still in transit.

What is a Letter of Credit (LC)?

Buyer's bank guarantees payment if conditions are met.

What is the risk to the seller with Cash in Advance?

Lowest.

What is the risk to the buyer with Open Account?

Lowest.

What is the purpose of a Bill of Lading?

Contract of carriage, receipt, and certificate of title.

What does a Clean Bill of Lading indicate?

No damage noted.

Who issues the Commercial Invoice?

Seller (exporter).

What is the purpose of documentation in transactions?

Foster common understanding, fulfill regulations, manage risk, record keeping, and security.

What is the role of the Issuing Bank in a Letter of Credit?

Buyer's bank in importing country that guarantees payment.

What does the term 'Confirmed LC' mean?

Seller uses a bank in seller's country in addition to bank in importing country.

What is the risk to the seller with Sight Draft?

Moderate.

What is the risk to the seller with Open Account?

Highest.

What is the purpose of a Pro-forma invoice?

Quotation, establishes terms of sale and payment.

What is the purpose of a Certificate of Origin?

Verifies country of origin for duties and embargoes.

What is the significance of the delivery point in logistics?

It is the point of transfer of responsibility from exporter to importer.

What is the risk on the buyer for D (DAT, DAP, DDP) Incoterms?

Lowest.

What is the cost component for FOB?

Product + export clearance + transport to origin port + terminal handling charges.

What is the calculation for Average inventory?

Order quantity ÷ 2.

What is the impact of payment timing on in-transit holding costs?

In-transit holding costs can be zero if payment occurs at final delivery.

What is the total cost comparison between FOB and DDP in the Old Navy example?

DDP was cheaper due to zero in-transit holding costs.

What are the three roles of U.S. Customs and Border Protection (CBP)?

National Security, Revenue Collection, Regulation Enforcement

What does CBP not do?

International contracts invoice processing

What are the three determinants of tariffs (duties)?

Classification of cargo, Value of the goods, Country of origin

What is the Harmonized System (HS) code length in the U.S.?

Up to 10 digits

What are the first 6 digits of the Harmonized System code?

Common across all countries (called 'roots')

What does 'substantial transformation' mean in country of origin determination?

Last country where product underwent substantial transformation - new name, character, or use

What is the valuation method used in the U.S. for tariffs?

FAS valuation (Free Alongside Ship)

What are anti-dumping duties?

Additional duties imposed to protect domestic market from dumped goods

What is a customs bond?

Financial guarantee from bank/insurance company that duties will be paid

What is a duty drawback?

99% of duties refunded if imported goods are subsequently re-exported

Who is the importer of record?

Party responsible for clearing customs

Which Incoterm places the greatest responsibility on the importer?

EXW

Which Incoterm obligates the exporter to organize international ocean transport?

CFR

What does 'delivery point' refer to under Incoterms?

The point of transfer of responsibility for the goods from exporter to importer

Who is responsible for developing and updating Incoterms?

International Chamber of Commerce (ICC)

What is the bill of lading called when the carrier notes visible damage?

Soiled

What is the sequence of payment methods reflecting increasing risk for the seller?

Cash in advance, sight draft, date draft, open account

What does it mean when a letter of credit is confirmed?

Seller uses a bank in the seller's country in addition to the bank in the importing country

What is the holding cost for a $100 item stored for one year at 20%?

$20

Which agency serves as the official customs authority in the United States?

U.S. Customs and Border Protection (CBP)

What can a U.S. importer request from CBP if uncertain about product classification?

A binding ruling

Which factor does not influence the amount of duties or tariffs applied to imports?

Whether the importer is an individual or company

Which Incoterm places the greatest responsibility on the importer for arranging and prepaying shipping tasks?

EXW

What factors influence a shipper's choice of Incoterm?

All of the above

Which activity is part of the international shipping process?

All of the above

Which of the following is not defined by Incoterms?

Which party pays for inspection expenses

Under Incoterms, what does the term 'delivery point' refer to?

The point of transfer of responsibility for the goods from the exporter to the importer

Which entity is responsible for developing and updating INCOTERMS?

International Chamber of Commerce (ICC)

Who ultimately bears the cost of transportation and shipping, even when the exporter prepays?

The importer

What is one obligation the exporter must fulfill regardless of the Incoterm used?

Package the goods and prepare them for shipment

Under the CIF Incoterm, which cost components are included in the seller's invoice?

Price of the product at the seller's warehouse + transportation costs to port in country of export + international ocean transportation + insurance

Who is responsible for issuing the Bill of Lading?

Ocean carrier

What is the bill of lading called when the carrier notes visible damage to the cargo?

Soiled

Who prepares and issues the commercial invoice in an international transaction?

The seller

Which document is typically not accessed or used by either the exporter or the importer?

Manifest

Which of the following is not a reason for using documentation in international trade?

All of the above are purposes of documentation

Which sequence of payment methods reflects increasing levels of risk for the seller?

Cash in advance, sight draft, date draft, open account

In a letter of credit arrangement, who is referred to as the beneficiary?

Exporter

Which statement is not a correct description of the bill of lading?

It is the confirmation of the legal obligation of the importer to pay for the purchase of goods

Which payment method ensures the seller receives payment through a bank guarantee, even if the buyer refuses or is unable to pay upon delivery?

Letter of credit

Which two categories make up holding costs in inventory management?

Cycle stock and in-transit holding costs

If a company incurs annual holding costs of 20% per dollar of inventory, what would be the holding cost for a $100 item stored for one year?

$20

If payment under the FOB term is postponed until delivery at Old Navy's warehouse, what would the in-transit holding costs be?

Zero

Under the FOB Incoterm, what costs would the Chinese supplier include in the invoice to Old Navy?

Cost of the ink can at the supplier warehouse + transportation costs to the Port of Shanghai

Why were in-transit holding costs zero in the example using DDP and open account payment terms?

Because payment is only made when goods arrive at the Old Navy warehouse

How many digits are used in the U.S. customs classification code for imported products?

10

Who is consistently responsible for handling customs clearance in the United States?

The importer of record

What is the name of the tax refund granted by CBP to U.S. companies that import parts, manufacture goods domestically, and then export them?

Duty drawback

Which function is not part of a customs agency's responsibilities?

International contracts invoice processing

What valuation method is used in the U.S. to determine tariffs on imported goods?

FAS valuation

What is the country of origin for U.S. customs purposes if a company makes TVs in Japan, sends them to China for packaging, and then ships them to the U.S.?

Japan

Under which Incoterm does the exporter **************** of Importer of Record?

DDP

Which factor does not influence the amount of duties or tariffs applied to imports into the U.S.?

Whether the importer is an individual or company

If a U.S. importer is uncertain about the correct product classification, what can it request from Customs and Border Protection?

Binding ruling

Which of the following are common elements of the total cost of ownership model?

All of these are part of the TCO model

The ___________ component of customer service includes such factors as availability of spare parts, technical support, feedback and complaint processes, etc.

Post-transaction

A leveling of production costs between China, Mexico, and the United States means that U.S. firms will increasingly focus on _____________ to be competitive.

All of these

__________ is when a retailer thinks there is more inventory than there actually is.

Phantom inventory

____________________ tells you lost sales using the percentage of demand fulfilled from on hand inventory.

The item fill rate (IFR)

When a shopper in a retail store encounters an out-of-stock, what are some possible reactions?

All of these are options

One approach to estimating the cost of a stockout per unit of lost sale is to calculate an estimate of the ____________.

Expected value