Export from United Kingdom to Mexico. Critical Analysis of Complexity of International Trade
After that, the importer receives the Commercial Invoice defining “the process used by customs officials to classify merchandise so that duties and taxes can be correctly assessed”. It declares total sum for products that has to be paid including tax and it states the agreed Incoterms which will be explained in the following chapter. Additionally the Commercial Invoice acts as a documentation of sales for the exporter.
The Incoterms are at least declared within the Commercial Invoice albeit negotiated before between the British exporter and the Mexican importer. The Incoterms, as shown in figure xxx, define two vital aspects: who is responsible to organise as well as pay the transport and who is responsible to carry the risk. The choice of Incoterms depends on a variety of factors.
TABLE OF CONTENTS
1 Export from United Kingdom to Mexico
1.1 Purchase Documents
1.2 International Sales Contracts
1.3 Bill of Lading
1.4 Air and Sea Waybills
1.5 Bills of Exchange
1.6 Letter of Credit
1.7 Insurance Documents
1.8 Free Trade Agreement EUR.1
2 Complexity of International Trade
1 EXPORT FROM UNITED KINGDOM TO MEXICO
1.1 PURCHASE DOCUMENTS
The first document to begin with is the Purchase Order to trigger the delivery between the Mexican importer and British exporter confirming price, quality and quantity of products being ordered. After signed by the importer the Purchase Order acts as a binding acceptance for both sides (globalnegotiator, nd). After that, the importer receives the Commercial Invoice defining “the process used by customs officials to classify merchandise so that duties and taxes can be correctly assessed” (Fedex, 2015). It declares total sum for products that has to be paid including tax and it states the agreed Incoterms which will be explained in the following chapter. Additionally the Commercial Invoice acts as a documentation of sales for the exporter (Bade, 2015).
1.2 INTERNATIONAL SALES CONTRACTS
The Incoterms are at least declared within the Commercial Invoice albeit negotiated before between the British exporter and the Mexican importer. The
Incoterms, as shown in figure xxx, define two vital aspects: who is responsible to organise as well as pay the transport and who is responsible to carry the risk. The choice of Incoterms depends on a variety of factors.
First of all, Incoterms are part of the pricing strategy used within the sales contract and influencing trading into foreign markets. The choice of Incoterms depends on the fact if the exporter is already established within the (Mexican) market enabling the exporter to choose a strategy with low risk eg. EXW, FCA, FAS or FOB. In contrast, if the (British) exporter aims to start trading with new market it is more likely to offer Incoterms with higher risk to stimulate trade with (Mexican) importer. However, well-established companies may have standard Incoterms albeit are forced to negotiate these due to trading power of the partner or rising competition. Secondly, the choice of Incoterms are influenced as well by the value of shipment and amount of goods within one shipment (Bade, 2015).
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Figure 1: Iccwbo, 2010. Incoterms 2010
Within the chosen scenario a common Incoterm could be Free On Board (FOB) where the British exporter is responsible for organising, paying and handling the risk till the goods are loaded onto the ship. This means a lower risk for the British exporter and a higher risk for the Mexican importer. However, in case the Mexican importer has high leverage within the negotiation, Incoterms such as Delivered At Place (DAP) could be decided on. This would increase risks and costs for the British exporter as he would be responsible to deliver the products to an agreed place (Bade, 2015).
Yet, as the risk always means internal costs for the responsible party some incoterms involve insurance transforming internal risks into payable risks. Most common is CIF which transfers the exporters risk to an insurance as soon as it is handed over to the carrier till it is on the ship. Additionally, the importer can transfer the risk to insurance as soon as the goods are on board till they are delivered to the final destination agreed on the BoL. Within chapter xxx the process, requirement and importance of insurance documents will be evaluated (Bade, 2015).
It is important to be aware of the rights and duties defined by Incoterms to avoid miscalculation affecting accounting as well as misunderstandings influencing stability of relationships. Furthermore, within the Sale of Goods Act (SGA) terms from 1979 sales contracts need to include particular information in order to proceed claims. However, when using CIF and FOB the SGA apply differently regarding risk and ownership which needs to be considered within the rejection and acceptance process for international trade (Bade, 2015).
1.3 BILL OF LADING
The Bill of Lading (BoL) is a vital document between the British exporter and a suitable freight provider proceeded after the Commercial Invoice. The BoL can include different terms and conditions as well as laws applied which affects rights and duties of both parties during transition.
According to Hapag-Lloyd “the responsibility of the Carrier shall be determined in accordance with German law, making the Hague Rules compulsorily applicable” (Hapag-Lloyd, 2015). If it comes to suit, the jurisdiction based on either Hague Rules or Hague-Visby Rules depends on the country the BoL has been issued. The same approach is followed Orient Overseas Container Line (OOCL) as stated within their terms and conditions “All carriage under this Bill of Lading shall have effect subject to any legislation enacted in any country making the Hague or Hague-Visby Rules compulsorily applicable” (OCCL 2015). Shipco also stated that “the Contract evidenced in this Bill of Lading shall have effect subject to the Hague-Visby Rules, if and as enacted in the country of shipment” (Shipco, 2015).
All three exemplary freight provider base their terms and conditions on the Rules applied in the particular country. In the taken scenario the Hague-Visby Rules apply in UK and Mexico (Informare, nd) and are more beneficial for the carrier enabling him to use a stronger bargaining power against the shipper freight provider) (HVR, 1968). Additionally, the BoL is a collateral document accepted by banks obtain a loan or line of credit (Bade, 2015). According to the Bill of Lading Act 1855 the BOL needs to be a negotiable document meaning that it can be transferred to a third party promising.
Summarising, the BoL is the most important document within international trade as it is a legally binding document. Without the BoL a shipment can’t be proceeded as it is the evidence for the contract of carriage. Apart from that, the BoL is the receipt for goods shipped, the declaration of the goods condition and the certification of ownership. The BoL is the basis for claims caused for example through damage, loss or delay according to the Carriage of Goods by Sea law. The consequences of a missing or incorrect BoL are costly as occurred claims can’t be proceeded. (Bade, 2015).
1.4 AIR AND SEA WAYBILLS
In the scenario between UK and Mexico the goods can be transported either by air or/and by sea which then involves waybills as well. The waybill is not transferring ownership as the BoL does but acts as an important document to serve as evidence that the carrier had been contracted to transport these goods. It also proofs that the goods have been received by the captain. If the captain don’t receive BoL or waybill the goods won’t be transported. Additionally, the waybill can’t be negotiated meaning that the owner of the goods can’t be changed. In contrast, the BoL can be sold changing the ownership of goods while still in transition. Consequently, the waybill is not accepted as collateral and can’t be used to obtain financial services (Bade, 2015).
1.5 BILLS OF EXCHANGE
The Bill of Exchange (BoE) is one of the oldest and most common payment methods within international trade. The parties involved are the drawer (here the British exporter), the drawee (the Mexican importer) and the particular bank of each party agreeing on a sum of the goods as well as a fixed day the delivery has to be paid. The BoE is accepted by signature from the Mexican importer transforming it into a check which means a binding contract once again. Furthermore, the BoE can be sold from the British exporter to a third party to fulfill its payment obligations.