Basic introduction to international trade. Part 1
(I Intentionally tried to keep it to very basic level, in 2nd part, I will try to explain bit more technical details)
International Trade normally takes place between two companies in two different countries. So let’s begin with an example without going through technical details.
Let’s suppose, you are an importer or dealer of Laptops. And you have a shop or outlet. And you find an OEM (original equipment manufacturer) or manufacturer, in Shenzhen China that makes unbranded laptops and will be willing to put, your own logo on to it.
You shoot him an email and given how Chinese are aggressive in sales, you should see a response within milliseconds, and skype, whatsApp QQ, wechat … they are all over.
First, you ask them to quote a price for let’s suppose, 300 pcs of Laptops. And they send you their quote, in international trade terms., it’s called ‘Proforma Invoice’ - it is not a final Invoice … it’s an initial offer.
They quote you price for example i.e $300 per laptop and then there is bargain, and you finally agree to $250 per pc price. And this is when the Vendor or Supplier or Exporter or Shipper will issue you, the importer, the buyer, the consignee, ‘Commercial Invoice’ look i used various terms for each party, it means the same, but it gets used in different places depending on the documents.
For instance, on Shipping documents it’s mostly … Shipper and Consignee, than Seller or Buyers … and likewise on trade documents like Invoice etc it’s Seller and Buyer … though it refers to the same.
Once the exporter or supplier issue you ‘Commercial Invoice’ and it’s when you have to proceed with the goods payment … there are various options.
1. Wire Transfer
2. Letter of Credit
1. Wire Tranfser, it’s bit unsafe, because you pay up front, and you have no guarantee if the Supplier will ship the goods, it is however the quickest takes 10 min. and no hassle. However one will only opt for if they have enough trust with the supplier.
2. Letter of Credit. or L/C. Under LC, you get your Bank involved as the party., it’s the safest., Once the suppliers in China ships the goods and submit Shipping documents to the bank, and only when the Bank will pay him on your behalf, so it makes sure goods you ordered got shipped. It’s bit lengthy process. And there are various types of LC … like Cash or Credit LC too. But here we are only talking the basic points.
So either way once the goods payment has been effected or it’s ready for shipping, you as a buyer have two options either to ask the Supplier himself to arrange the shipping for it and they can charge for it or you can arrange at your own and have your Cargo Agent to pickup goods from the supplier … most international cargo agents have international presence through either own offices or through agency offices.
Mode of Transport.
Normally goods are shipped by two basic transport modes.
1. By Air
2. By Sea
1. By Air. It’s quick, it normally takes 2-3 days … but bit expensive … however for lighter items or for smaller shipments By Air is most suitable and you are charged on per KG basis… i.e $3.50/KG from Shenzhen, China to New York JFK airport.
2. By Sea., under by sea, you have two choices given the volume of shipment. LCL (less than container load) … which is basically buying space for in container box along with others … and you pay for the price for how much space you occupy … you are normally charged on per cubic meter … i.e $75 per CBM (cubic meter) in 40’ Container there is approx 56 CBM space.
Or if you have large shipment, then you can hire/rent your own container box., the two basic types are 20’ feet Container box and 40’ Feet Container Box … it’s all yours… and you are charged on container basis and it’s up to you what and how much you will fill it … i.e $600 per 20’ or $900 per 40’ from Shenzhen to New York.
However by sea it takes bit time … from 20 to 30 days… normally depending on distance.
Once the shipping has been effected from overseas, and upon arrival of goods in your country, it goes through ‘Customs’ and they impose Customs Tariff, and Govt collects taxes levied on it according to the Govt issued Tariff and after you pay the Taxes, the goods are released to you.