Archive for the ‘Logistics’ Category


 

How The Proposed Tariffs Affect You In The U.S.-China Trade War

China U.S. Trade War Proposed Tariffs

For the second time in July the U.S. government has placed additional tariffs on products exported from China and imported into the U.S.  If the proposed tariffs were actioned, there would be changes for both American and Canadian importers. How will the additional tariffs on Chinese manufactured goods affect trade between the United States and Canada?

The Proposed Tariffs Effect On Canadians

Canada is already in the midst of a trade war with the U.S.  Now Canada is unwittingly affected by the trade war between the U.S. and China because many items proposed for additional tariffs are manufactured in China, exported to Canada and then finally exported into the U.S.  The additional tariffs levied against Chinese goods are applicable to goods manufactured in China without regard to the previous country of export.

Canada has enjoyed a long standing trade partnership with the U.S.  Canadian companies often act as Non-Resident Importers; handling all of the import requirements including payment of duties and taxes. This has allowed Canadians to sell their goods to companies in the U.S. as seamlessly as a U.S. company. This allows Canadian exporters to expand their market beyond the Canadian border.

The third list of tariffs released on July 11th cover consumer goods such as furniture, seafood, automobile parts, televisions and video equipment, which we see our clients from Canada ship on a daily basis.

Even though the trade war is between the U.S. and China, other countries are affected because they, like the U.S., have their goods manufactured in China.

Many of the items on the proposed list such as furniture and seafood, which are normally duty free, will be dutiable at 10% if the proposed tariffs are actioned.

If you are a Canadian company who exports Chinese manufactured products into the U.S. you will need to consider how you will address the increase in cost of exporting to Americans.

The Proposed Tariffs Effect On Americans

Over 75% of the new tariffs target machinery for manufacturing goods, electrical equipment, televisions, recorders, bicycles, bicycle parts, and automobile parts: all merchandise which is in high demand with american consumers. With the U.S. being a consumer based economy, where the consumer is interested in paying the lowest price possible, this new legislation would have an adverse effect on the U.S. economy.

In short order, the increase in costs to bring goods into the U.S. will increase costs for producers, importers and ultimately the consumer. This is never a popular solution, however the U.S. has tried to entice China to come to the table to discuss revising their unfair trade practices.  

The additional tariffs were initiated to combat Chinese regulations that require companies wishing to do business in China partner with a chinese company and share the technology associated with their products leading to violations of both intellectual property rights and World Trade Organization (WTO) rules.

Some economists say that a more appropriate way to combat these unfair trade practices would be to band together with other countries and take their concerns to the WTO to initiate a lawsuit against China.

In the long run, if the two countries can come to a satisfactory solution to the root of the issue the U.S. will benefit greatly and the trade deficit will balance out.

The Proposed Tariffs Affect On U.S. Import Bonds

How will the increased duties affect your import bond? Bond limits are set based on duties, taxes and fees paid in a 12 month period. With the increased duties, higher bond limits may be required. In addition to the higher bond limits, the surety company may request financial documents and collateral to secure the bond.

Your Guide To The Proposed Tariffs

This is a retaliatory move by the U.S. to address concerns of intellectual property rights.

The United States Trade Representative (USTR) will be holding a hearing August 20th-23rd on the impact the proposed tariffs will have if imposed. In order to appear at the hearing, submission must be made before July 27th, which must include a summary of the expected testimony. Written comments can be submitted to the USTR from now until August 17th, 2018.

A decision on if the additional 10% tariff will be imposed or not is expected to be announced at the end of August, after the hearings.

This 10% will be in addition to the already imposed 25% tariff on $34 billion worth of goods from China that came into effect on July 6th, 2018. China retaliates with a reciprocal tariff increase on U.S. commodities imported into China.

How You Can Prepare For The Proposed Tariffs

As a business it is best for you to be proactive in your approach to the impending changes. Contacting a trade professionals for advice on how the proposed legislation could affect your company will provide you with the knowledge to make quick decisions when change inevitably comes.

This includes understanding;

  • What country has the most cost effective solution to source your materials from,
  • Determining your rate of duty if there were changes to the proposed tariffs or NAFTA,
  • Education to make yourself prepared for current practices and future changes, as well as,
  • Freight costs to get your products from your source to you.

All of these services are provided to you by our Trade Advisory experts in Canada and the U.S. Contact us to start a conversation with a Trade Advisor today.

 

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Possible Trade War: U.S. and Canada

 

Canada, the U.S. and Mexico Flags NAFTA

On June 1, 2018, the U.S. committed to a 25% tariff on imports of steel and 10% tariff on aluminum, on the European Union, Canada and Mexico. The tariffs have triggered retaliatory tariffs on U.S. goods and heightened the chance of a trade war.

The U.S. steel industry will initially benefit from the tariff increase through decreased international competition, driving up the price of U.S. steel and therefore the profits. These profits can be reinvested into the steel industry by improving their technologies and potentially providing more job opportunities.

A potential downfall to the tariff increase is retaliatory measures from U.S. trade partners, as is the case with Canada. Canada has announced $16.6 billion in retaliatory tariffs. The Canadian tariffs will go into effect July 1, 2018, and cover a broad range of commodities. Some, mainly unfinished iron and steel products will be hit with a 25% tariff, while others including many consumer products will be hit with a 10% duty.

 

If history repeats itself, trade policy experts warn tariff increases could cause future harm. An example of this was in 2002, when the U.S. enacted a tariff of 8% to 30% on international steel. The increased tariffs set off a chain reaction with the European Union responding with tariffs of its own and a number of countries disputed the tariffs at the World Trade Organization. The WTO ruled the U.S. violated the international trade agreements, and opened the door for sanctions and retaliation. Retaliation by the EU cost many Americans their jobs, and in late 2003 the U.S. Government reversed the sanctions.

Canada’s Stance

The tariffs could cost the Canadian economy over $3 billion a year.  According to the Canadian Steel Producers Association, Canada is the largest supplier of steel and aluminum to the U.S.  Approximately 90% of Canada’s steel is exported to the U.S. The price of steel and aluminum is going to go up as a result of these tariffs and jobs will be lost in Canada. Steel production employs around 22,000 people in Canada concentrated mainly in Ontario. Canada exports around 84% of its aluminum to the U.S., which represents around 8,300 jobs in the aluminum sector with the majority being in Quebec.

Canadian consumers can expect to pay more for products imported from the U.S. that are largely made of steel and aluminum which could apply to anything from cars, refrigerators, canned sodas and beer.

International Stance

China, and the European Union have also responded negatively to the U.S. tariff increases. Brazil contributes 13%, followed by South Korea at 10%, and Mexico at 9%. The original target China only imports 2% of the U.S. steel imports.

Along with fighting the tariffs at the World Trade Organization, European officials have been preparing levies on an estimated $3 billion worth of imported American products in late June. In a joint statement, ministers from France and Germany said the countries would coordinate their response.

Steel and Aluminum Statistics

Below you can see a few interesting statistics on Canada-U.S. cross-border steel and aluminum trade.

  • In 2017, Canada exported nearly $17 billion of steel and aluminum products into the U.S. (Statistics Canada)
  • More than $14 billion of steel crossed the Canada-U.S. border in 2017 (Canadian Steel Producers Association)
  • Canada exported $11.1 billion of aluminum and aluminum articles to the U.S. in 2017 compared to $3.6 billion of imports from the U.S. (Statistics Canada)
  • Close to 45% of Canada’s steel production is exported to the U.S.  Predominantly to Michigan, Ohio, Illinois, and New York.
  • Over 50% of American steel exports go to Canada.
  • Canada sent more than $5.6 billion of primary aluminum exports to the U. S. in 2016. New York, Kentucky, Michigan and Pennsylvania are the top destinations.
  • Between 2000 and 2015, Canada’s share of world aluminum production fell from 10% to 5%. For the U.S. from 15% to 2.7%. While China’s increased from 11% to 55%.
  • U.S. aluminum production fell following the 2008 financial crisis and recession. It was up 6.9% in 2018 from 2017.
  • Canadian aluminum production is down 7.6% for the first two months of 2018 compared to the same time in 2017.

The Beginning of the End for NAFTA?

With the likelyhood of eliminating multilateral trade agreements in favor of bilateral trade agreements. In order to have control over your trade in these uncertain times, you must arm yourself with the knowledge of what your duty rates will be without NAFTA, alternative countries of origin for your imported goods and freight quotations on getting your goods from your new origin to the final destination.

You can talk with our trusted trade advisors to determine your rate of duty without NAFTA. Click here to get in contact with a trade advisory expert today.

Jan Brock | Author

 

 

 

 

 

 

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The Issues and Solutions of Container Exams at the Port of Vancouver

Container Exams at the Port of Vancouver

Importers like you are frustrated with the lengthy delays and subsequent costs of Canada Border Services Agency (CBSA) container exams moving through Canadian Ports, especially in the Port of Vancouver. Let us take a closer look at the cause, reasons for extended delays, and the associated fees with the current CBSA Vancouver container exam program.

Why the Trade Community is Frustrated With Container Exams in Vancouver

According to the Canadian International Freight Forwarders Association (CIFFA) and the container examination cost survey they conducted, delays of up to four weeks were experienced in the Port of Vancouver compared to three to five days in the Port of Montreal.  Their blog post entitled “Container Examinations Out of Control” reported that their members have experienced the following with the current container exam process at the Port of Vancouver:

  • Six to seven week delays in receiving their goods
  • Thousands of dollars in unexpected costs for container exams, storage, detention, per diem and demurrage charges
  • Lost sales as a result of the delays
  • Lost goods in the case of perishables

CIFFA estimates that invoices for examination, demurrage, and storage of containers can range up to $4,000 per container. Those fees add up to millions of dollars, which are inevitably passed on to the consumer.

CIFFA argues that there is no incentive to improve inspection efficiency because container terminal operators charge daily per container storage fees of $150 or more, and shipping lines bill shippers and freight forwarders for demurrage.

Importers bear all the direct costs incurred for the exams. Importers are also responsible for all indirect costs resulting from exams such as damages or losses during the exam, lost sales, production and/or contract penalties due to delivery delays. Another cause of frustration is the unnecessary confusion an importer is faced with when the demurrage, detention, and per diem terms are often and incorrectly used interchangeably on invoices.

Tip: Always clarify in advance what shipping delay charges you face.

Why is the Container Exam Process Longer at the Port of Vancouver?

The two main factors in the delays are the location of the exam facility and the volume of containers at the Port of Vancouver.

It is important to understand CBSA and the transportation industry agreed the best option for examining marine cargo containers for contraband was to use a specialized central examination facility.  With this centralized facility, CBSA officers can conduct efficient examinations using high tech equipment in a secure environment.  The current inspection facility for the Ports of Vancouver is located in Burnaby, a fair distance away from the ports.

More than 80% of global merchandise is transported across oceans as marine cargo, and over 95% of marine cargo imported into Canada comes through five major marine ports:

  • Vancouver
  • Prince Rupert
  • Montreal
  • Saint John
  • Halifax

The three largest Canadian container ports are the Port of Vancouver, Prince Rupert and Montreal. Together, they handled five million, twenty-foot equivalent units (TEU) in 2016. Around 50% of this freight comes through the Vancouver and Prince Rupert ports. The Port of Vancouver consists of 4 container terminals with an annual capacity of just under three million TEUs per year. The volume clearly shows the one CEF/MCEF in Burnaby is busy.

Who is Responsible for the Container Exam Delays in Vancouver?

The delays experienced in Vancouver are further compounded by an already lengthy process. To gain an understanding of where issues lie we need to take a quick look at the stakeholders and their general responsibilities and possible contribution to the issue.

The Current Container Examination Process

Regardless of the Port, the container exam steps are the same as detailed below.

  1. The marine carrier reports to CBSA with information on the vessel, the crew and the routing via Electronic Data Interchange (EDI) at least 96 hours prior to arrival.
  2. The marine carrier sends cargo data via EDI to CBSA 24 hours prior to loading the cargo onto the vessel at the foreign port.
  3. Using the marine carrier’s information, CBSA performs a risk assessment at the CBSA National Targeting Centre in Ottawa.
  4. At the first Port of Arrival (POA) the vessel arrives and the containers are discharged, put through a radiation portal, and then stacked at the Terminal storage.
  5. Containers that are targeted or selected by CBSA for examination are staged for dockside exam, Mobile Large Scale Imaging or for furtherance to Container Examination Facilities (CEF) or Marine Container Examination Facilities (MCEF) for an intrusive examination.
  6. The containers, which require de-stuffing, are transported to the CEF/MCEF for fumigant testing, possible ventilation, assignment to an examination bay and offloaded and reloaded following an examination.
  7. Containers are authorized to move by CBSA from the CEF/MCEF back to the Terminal and released for transport to the Importer/Consignee.

CBSA Roles and Responsibilities

CBSA targets 1.3% of all containers for examination as it views containerized cargo as a huge risk.  Physical exams are done with the assistance of the Canada Port Authorities. They are legislated to provide facilities for CBSA inspection. These facilities are known as Container Examination Facilities (CEF) and Marine Container Examination Facilities (MCEF).

CBSA has a number of methods to examine Containers:

Container Examination Facilities (CEF) and Marine Container Examination Facilities (MCEF): Containers are moved from the marine port to the CEF or MCEF where they are fully de-stuffed, the contents intrusively examined, followed by an examination of the container itself.  CBSA has a service standard for examination, which states that CBSA will strive to conduct a marine container examination within 24 hours of the arrival of the container at the CEF or MCEF. This service standard does not include weekends or holidays. Additional time is required for fumigant testing and ventilation procedures in addition to container reloading times and containers that are resultant for contraband.

Note on fumigation: The CBSA requires testing of all marine containers for fumigants before examination. Fumigants include methyl bromide, phosphine and benzene. Fumigant testing identifies chemical levels prior to the execution of an in-depth examination. Chemical levels found to be above acceptable levels require that the container be ventilated in order to reduce the elevated chemical levels to a safe level. The maximum time that may be required to ventilate is three days. Once the contents and container can be safely examined,  the container is de-stuffed, examined, and then reloaded and returned to the port.

Large Scale Imaging (LSI) Examinations: LSI examinations are non-intrusive, dockside x-ray examinations of containers, enabling the CBSA officer to see inside the container. Anomalies deep within a container, such as contraband, can be detected, depending on the commodities density. A LSI examination can also assist in determining whether an intrusive examination is needed, and is especially useful in selective examinations.

Pier Examinations: This dockside examination is partially intrusive and involves the CBSA officer opening the container doors to perform visual inspections and a limited physical examination of the cargo closest to the door. The inspection may result in referral for an intrusive examination conducted at the container examination facility.

The CBSA is responsible only for the costs associated with their services, such as the officers examining the container and the equipment and tools required for marine container examinations. They do not bill the importer for these costs.

Goods found violating Canadian legislation may be subject to enforcement action such as a monetary penalty or seizure.

CEF/MCEF Warehouse Operators Roles and Responsibilities

CBSA informs the Warehouse Operator of the containers requiring exam and works with CBSA on priorities. The Warehouse Operator coordinates with the Highway Carriers to move the containers from the Terminal to the CEF/MCEF. They then coordinate and are responsible for the offloading and reloading of containers for presentation of cargo for exam. The warehouse operator is responsible for all truck movements at the CEF/MCEF such as moves to and from the ventilation area and examination bays.

The CEF Warehouse Operator generates the fees for presenting the goods for exam, to cover the cost of transportation to and from the examination facility and the unloading and reloading of the container. They then bill these costs to the shipping lines that in turn pass the cost on to the importer.  

Marine Carriers Roles and Responsibilities

The marine carrier is responsible to present the cargo for examination when requested by CBSA.

If CBSA requests a full container exam the marine carrier is responsible to:

  • Ensure the container is picked up from the terminal and transported to the CEF/MCEF
  • Monitor the pick-up of the container and the subsequent return of the container to the terminal after examination
  • Field any calls from the importer regarding any delays on their shipment

They must obtain any terminal charges for a dockside/tailgate and LSI exam completed at the Terminal.  If the CBSA container hold is removed after an exam the carrier then invoices the importer for the costs incurred at the Terminal. Once the importer pays the costs to the marine carrier the container will be released to the importer.

Marine Terminal Operators Roles and Responsibilities

After the Terminal Operator receives EDI data regarding the vessel and the cargo from the marine carrier they will:

  • ‘Arrive’ the cargo electronically to CBSA when the vessel arrives
  • Discharges the cargo from the vessel to the shipyard
  • Arranges for on-dock and off-dock examinations as requested by the CBSA
  • Permits containers to depart the terminal when released by the marine carrier and CBSA

Importer Roles and Responsibilities

The Importer orders goods for import and then organizes logistics or depends on third party links in the supply chain to facilitate the movement and subsequent entry of the import into Canada.

Customs Brokers & Freight Forwarders Roles and Responsibilities

Customs Brokers and/or Freight Forwarders directly represent Importers in the coordination or facilitation of the exam processes with the Terminal Operators, the Marine Carriers, Drayage Carriers and CBSA.

The Customs Broker and/or Freight Forwarders may be involved in the logistics and may pay charges on behalf of the importer as their client.  The Customs Broker and/or Freight Forwarder is generally aware that a hold has been placed on an Importer’s shipment for examination by CBSA.  Although not a responsibility, the Customs Broker and/or Freight Forwarder generally fields calls from the Importer regarding the status of the delays in the release of the container.

Highway Carriers Roles and Responsibilities

The Terminal Operator informs the Highway Carrier which containers need to be examined by CBSA. The Highway Carrier then makes a reservation for pick-up of the container at the Terminal with the Terminal Operator.

Reservations sometimes have to be made about three days in advance. The Highway Carrier then has a one-hour window around their reservation time to pick up the container at the Terminal and transport it to the CEF/MCEF for CBSA examination.

Once the examination is complete, the Highway Carrier returns the container to the Terminal. The container is then released by CBSA and can now be delivered to the Importer/Consignee by the Highway Carrier or the Drayage Company once a reservation has been made to pick the container up from the Terminal.

Stakeholder Summary

As each stakeholder carries out their responsibility, it results in more opportunities for delays. These can quickly add up to become lengthy delays.

Many of the stakeholders state there needs to be improved transparency and efficiency in the inspection process by ALL parties. CIFFA urges CBSA to address both the pricing model and the regulatory framework of the shipping lines, terminal operators, and warehouse operators surrounding container examinations across the country.

CBSA’s Action to Improve Ocean Trade

The CBSA has made a commitment in their 2017/18 departmental plan “to work with industry partners and the Port Authority in Vancouver to advance the Marine Container Examination Facility (MCEF) project over the course of the year. The opening of a new MCEF will increase the Agency’s examination capacity and enhance the facilitation of legitimate trade.”

The CBSA held a one-day conference with all stakeholders in Vancouver in September of 2017. The conference identified a number of opportunities for improvement.  Some areas of improvement included the communication between all stakeholders regarding delays, service hours, and service standards including:

  • Shipping lines, Terminal Operators and Warehouse Operators must post standard fees associated with the movement and facilitation of freight through the marine process.
  • Terminal Operators need to improve the reservation system for pickup and return of CBSA examined or targeted containers. CBSA needs to provide proof of examination, LSI exam and ventilation timelines to stakeholders.
  • There needs to be a transparent dispute resolution between all stakeholders. Use of technology for real-time status and progress of the exam providing importers and their service providers’ insight to better plan and mitigate impacts of the exam to their business and supply chains.
  • Importers need the flexibility and the option to deliver direct from the exam site.
  • CBSA needs to identify opportunities to improve efficiencies and consistencies with their targeting and examination of container freight. A clear focus on the client is necessary which is transparent with defined and measurable service standards.

Steps To Improve The CBSA Marine Container Exam Program

CBSA argues that numerous factors complicate the issue, and terminal/warehouse operators are only one part. CBSA states it is working with the Port of Vancouver, terminal operators, and other industry stakeholders to improve the system’s efficiency.

This initiative includes the construction of a new federal government container examination facility (MCEF) on Tsawwassen First Nation land which is strategically adjacent to the Port of Vancouver’s Deltaport and the new Delta iPort container logistics center.

A New MCEF in Tsawwassen

A new MCEF in Tsawwassen (TCEF) will augment the severely constrained facility in Burnaby and will initiate the new CBSA marine container examination program focusing on technology (scans) and less on manual inspections. The TCEF will consist of a new warehouse complex, which will house CBSA container examination facilities, a fumigant ventilation area, a LSI fixed building site and operator transload area in the warehouse. The facility is currently under construction and should be operational as of May 2018.

The Operator of the TCEF will charge fees such as drayage, scans, ventilation and de-stuffing. The Vancouver Fraser Port Authority (VFPA) will set the fees the TCEF Operator can charge but will consult with the Industry to ensure fees stay competitive.

CBSA and VFPA are considering options to release goods at the earliest opportunity for consignees so that delays are minimized. This would suggest that the container arrives at Deltaport and is selected by CBSA to be examined and/or LSI scanned. The container is moved from the adjacent Deltaport to the TCEF and scanned through the LSI facility. Then the container will be released or transported to the adjacent warehouse for examination, ventilation testing and then subsequently released directly from TCEF by CBSA to be delivered to the importer.

Outcome for Importers & Consumers

This post will help you gain a clearer understanding of the issues associated with the current CBSA Vancouver container examination operations. It is a complex problem, which will require all stakeholders to collaborate and take responsibility in improving their role in the process in order to provide consumers with goods that are not subject to a flawed and costly system.


If you have any questions on CBSA container exams, please leave them in the comments section below, and I would be happy to look into them for you.

 

 

 

Perishables Shipping | 12 Questions Every Shipper Must Ask

Perishables Shipping | 12 Questions Every Shipper Must Ask

Seldom do shippers or product owners know or understand the terminologies or intricacies of perishables shipping to ensure safe, and seamless passage of their goods. Without industry expertise, critical shipment details may be overlooked resulting in product damage or contract loss. Here are tips and tools to be a successful perishables exporter.

When we are contacted to move perishables shipments, the conversation may include the commodity trade name and that it must be kept at a specific temperature. It is packed in boxes, on skids, and is delivering to a foreign city, ready for pickup tomorrow. We then ask them the following questions:

  • What are the Incoterms® (terms of sale)?
  • Is there a letter of credit (L/C) involved?
  • How many commodities (SKU) make up the shipment?
  • What are the weights and dimensions of each shipping piece?
  • Are any pallets used certified and does the product contain the required markings?
  • Have the pallets been shrink-wrapped and were corners used?
  • Are there temperature recorders on the freight?
  • *What export documentation has been prepared to accompany the shipment?
  • Will your company file the B13A export document for Statistics Canada?
  • ** Does your product require phytosanitary certificates and has the Canadian Food Inspection Agency (CFIA) completed the
  • inspection?
  • What mode of transport is optimal: air, ocean, or highway?
  • Has this shipment been pre-quoted – what is the quote reference?

TIP: Be ready to share your knowledge of the shipment to ensure proper handling and transportation to destination.

This list of condensed questions will start a conversation about a perishables shipment. It is important to note that although the client is familiar with their products and may not understand the need for these questions, we are not and therefore are required to ask in order to meet your specific shipping requirements. This ever-changing field is a constant learning process for freight forwarders and carriers. The freight forwarder, the person in charge of the shipment, must have a clear understanding of the shipment to be able to react to any situation following pickup from origin door. This would include after hours and weekends when the shipper is not available.

TIP: Be proactive and start the discussion early.

From this list of questions the conversation continues until we have a complete picture of the shipment and knowledge of where, when and how it must move. From door to door any number of issues, security measures or documentation questions can arise that would cause a delay and/or negative result.

Conversely the carriers – truckers, steamship lines and airlines – have a similar list of questions when the freight forwarder is booking the shipment. If we are not able to provide a complete understanding of the shipment, those carriers may have doubts about a successful delivery, which could affect them supplying a booking confirmation and final freight rates as a matter of liability. All parties involved in a freight movement want to deliver the shipment in its best possible condition, on time and as quoted. Carriers are bound by the information contained in the bill of lading and/or in the booking confirmation. Therefore, all questions must be asked, answered and understood, and itemized on the export documentation and on-hand with the freight forwarder.

TIP: Exporters must be as detailed as possible when organizing their shipments. Be ready and prepared to share all information with your freight forwarder so they can ensure the documentation is correct and in order, as well as being your conduit to the carriers. If your freight forwarder does not ask all these questions or is not available 24/7, you will require a freight forwarder that better meets your needs.

Finally, do not hesitate to ask any and all questions of your freight forwarder. They may not have all the answers exactly when you ask them but they gain the knowledge and reply as promptly as possible, as to put your mind at ease that you are receiving the best possible service.

We hope you will drop in again as this series on perishables shipping continues. If you have any questions or suggestions regarding the movement of perishable commodities, please do not hesitate to call us at 888.538.1566.

Cost Insurance Freight CIF Incoterm ® 2010 | Use Case Scenario

Risk, Responsibility and Rewards – How The CIF Incoterms ® rule delivers and what it covers in greater detail:

cif-incoterms

 

In order to better reflect modern commercial reality, the ICC created a new classification system for Incoterms and abolished the previous classification system which was based on the first letter of the Incoterm rule. Under Incoterms 2010, the ICC has divided the Incoterms in accordance with the means of transportation as follows:

Rules for any Mode or Modes of Transport: EXW, FCA, CPT, CIP, DAT, DAP, DDP

Rules for Sea and Inland Waterway Transport: FAS, FOB, CFR and CIF

 

CIF Incoterms ® (Cost Insurance Freight)

 

In our series on the importance of understanding and leveraging Incoterms® 2010, we take a deeper and more detailed look into the CIF Incoterm and the impacts negotiated, as well as often overlooked during the establishment of project viability or business case development for capital projects that are going to be requiring international sales contracts to fulfill their mandates.

First we review what CIF Incoterm is as defined by the International Chamber of Commerce (ICC): CIF is recommended for use with non-containerized sea freight.

CIF Definition: CIF, or “cost, insurance and freight”, is a term used in international contracts for the sale of goods being shipped by sea to a port of destination where the seller pays the cost of the insurance and transport of the goods to the destination, and provides the buyer with the documents necessary to obtain the goods from the carrier. Legal delivery occurs when the goods cross the ship’s rail in the port of shipment (where they are being shipped FROM).

 

Insurance Charges:

Under CIF, the seller is required to obtain insurance only for minimum coverage. If the buyer wants more comprehensive insurance, they must ensure that the seller is contractually obliged to do so within their contract.

Insurance coverage for goods during shipment:

Freight insurance can be purchased directly from a shipper or from a third-party insurer. also called cargo insurance.

 

Cargo insurance Types:

Insurers offer two basic types of ocean cargo insurance policies. A voyage policy is used when insuring a single voyage, sometimes referred to as a “stray risk” or “trip risk.” Voyage policies are used primarily to cover shipments made by infrequent shippers. The other basic type of policy is the open cargo policy.

 

Motor Truck Cargo insurance (Cargo) provides insurance on the freight or commodity hauled by a For-hire trucker. It covers your liability for cargo that is lost or damaged due to causes such as fire, collision, or striking of a load.

 

Marine insurance:

Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport or cargo by which property is transferred, acquired, or held between the points of origin and final destination.

 

Cargo Management Charges:

 

Stevedoring charges:

Stevedoring is the process of loading and unloading ships. The main sectors of stevedoring are container terminal operations – the loading and discharge of container vessels at terminal ports, largely using advanced mechanical technology. Stevedoring charges are the charges incurred for unloading the goods from ship hold to wharf. These charges are treated as forming part of the freight and are to be added to the value for the purpose of charging duty on imported goods. This contingency arises only when the carrier does not include these charges in the Freight Bill.

 

Wharfage charges?:

A charge assessed by a shipping terminal or port when goods are moved through the location. Wharfage is one of the costs of transport goods within the distribution system used by a business to bring its goods to market.

 

Terminal Handling Charges:

Terminal handling charges or Container Service Charges (CSC or THC) are essentially charges on top of the sea freight, collected by shipping lines to recover from the shippers the cost of paying the container terminals or mid stream operators for the loading or unloading of the containers, and other related costs borne by the shipping lines at the port of shipment or destination terminal before being loaded onboard a vessel.

 

Container Freight Station (CFS) charges:

CFS is the term used at the loading port and means the location designated by carriers for the receiving of cargo to be loaded into containers by the carrier. At discharge or destination ports, the term CFS means the bonded location designated by carriers for devanning of containerized cargo.

 

Entry of Goods Valuation and Charges:

 

Entry costs and their determination are also a part of negotiating the international sales contract under CIF. You may wonder how Incoterms selection impact the landed entry costs, it is often overlooked that the Incoterms define where the responsibility for costs rests within the contract covering all of the aspects mentioned above and in certain circumstances there may also be packaging requirements for containers where inspection is required for example.

It is often overlooked that inspection for customs or quality control / delivery inspections incur a cost of service that needs to be considered in the overall costing process.

 

What is included in CIF value?

For the purpose of customs valuation, the CIF value is the price paid for the goods plus the cost of transportation, loading, unloading, handling, insurance, and associated costs incidental to delivery of the goods from the port or place of export in the country of export to the port or place of import in the country.

Assessable value:

Assessable value is a very broad term and complicated, it means the total end assessed value upon which various duties and taxes are levied . The Assessable value is calculated based on various factors/valuation rules mentioned in the Excise Act/Rules as per the Import or Export country.

 

Use Case Scenario:

 

For our case study purpose, below is an example of an international sales contract announced by Northern Minerals Ltd. where CIF was selected from the 2010 Incoterms to guide the pricing, risk and responsibility for this agreement where they are leveraging CIF to determine clarity on costs for their sales agreement:

Northern Minerals Ltd. (ASX:NTU) announced that it has entered into a sales agreement with Lianyugang Zeyu New Materials Sales Co. Ltd. (JFMAG). The agreement covers all planned production from the company’s Browns Range pilot plant.

JFMAG is a subsidiary of Guangdong Rare Earths Group, and Guangdong Rare Earths Group is a subsidiary of Guangdong Raising Asset Management. Guangdong Rare Earths Group is one of China’s five major vertically integrated heavy rare earths companies.

The Sales Agreement terms are based off CIF Incoterms 2010 with pricing referenced from a 2-month average of quoted prices on Asian Metals and Beijing Ruidow Information Technology.

Under the Sales Agreement, prior to the first shipment of rare earth carbonates, JFMAG will make a pre-payment to Northern Minerals of A$10 million. The prepayment covers approximately 15% of the expected value of production during the Pilot Plant phase, with the remaining 85% to be paid to Northern Minerals over the course of the agreement based on volumes delivered. JFMAG or its nominated beneficiary will be issued 40 million unlisted options at $0.25 exercise price which can be converted to ordinary shares to offset the pre-payment of A$10 million.

Northern Minerals Enters Sales Agreement for Browns Range Pilot Plant Output