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Avoid pitfalls when export pricing - Graham Clayton (9/01)

It is the movement of goods from one country to another, and all that is required to facilitate their satisfactory conveyance, that differentiates export pricing from domestic pricing.
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It is the movement of goods from one country to another, and all that is required to facilitate their satisfactory conveyance, that differentiates export pricing from domestic pricing.

 

Simply put, there are more things involved and potentially more things that can go wrong, and these have to be taken into account when setting and quoting export prices.

 

The movement of goods internationally can involve: special packing and labelling requirements, the production of numerous multi-copy documents, insuring the goods against a wide variety of perils and contingencies, the arrangement of domestic and international carriage, including handling and storage en route, as well as numerous other tasks including tracking, inspection and notification services.

 

The exporter can quote a price in such a way as to make the buyer responsible for all such tasks, for specified tasks, or else for none of these tasks.

 

We are talking here about the convenience or service aspect of quoting export prices that can make a firm's goods more saleable to prospective foreign buyers. Some foreign buyers want no involvement in moving goods internationally, arranging insurance, dealing with customs, etc. They want a price that covers delivery of the goods to their doorstep with no hassles. Alternatively some foreign buyers want a price quote based on the export goods being picked up either at the Canadian exporter's place of business or at some specified point of delivery in Canada. They will handle everything else.

 

It should be recognized that there is a sort of self-insurance dimension to an exporter, or their contracted agents, handling the export packing, shipping, insurance and related matters. If things go wrong in moving the goods abroad due to errors made by the foreign buyer or their agents then the exporter may experience delays in getting paid, or buyer refusals to accept or pay for shipments owing to losses, damages, financial penalties, etc., incurred with the shipment.

 

The issue of who is to be responsible for what, vis-à-vis moving the goods from the seller to the buyer, is something that has to be agreed upon by the exporter and the foreign buyer. The exporter then sets the selling price to cover the costs of whatever conveyance responsibilities they have committed to. This is where Incoterms come in.

 

Incoterms (international commercial terms) are a set of standardized export pricing terms developed by the ICC (International Chamber of Commerce) and endorsed by UNCITRAL (United Nations Commission on International Trade Law). They were developed to enable exporters and importers to speak the same commercial language so as to minimize the potential for misunderstanding and to ensure that the responsibility for all tasks involved in conveying goods internationally is clearly assigned to either one party or the other. They were first introduced in 1936 and have been revised periodically to ensure that they are up to date with actual commercial practices and available technologies. The latest version, Incoterms 2000, came in to effect on Jan. 1st, 2000, though some traders continue to use the earlier Incoterms 1990 version by mutual agreement.

 

There are actually 13 Incoterms, each of which is defined in extensive detail, which span the full range of export options for dividing the conveyance responsibilities between international sellers and buyers.

 

At one extreme you have EXW, short for ex works, which is an export price that requires the foreign buyer to take receipt of the export shipment at the exporters place of business or at an agreed upon point of delivery within the exporting country. At the other extreme is DDP, short for delivered duty paid, whereby the exporter quotes a price that covers all costs, including paying duties and clearing customs, associated with delivering the goods to an agreed point of delivery in the buyers' country.

 

Between these two extremes you have the 11 other Incoterms including the most widely used one, CIF, short for cost, insurance and freight. Here the export price covers the cost of the goods delivered and insured to, but not unloaded at, a specified point of entry into the country of destination. The buyer is responsible for all other costs such as unloading and handling costs at the point of entry, customs duties and fees, inland transit costs and so on.

It is important to note that while there are only 13 Incoterms, there are in fact all kinds of variations employed covering a multiplicity of options. For this reason exporters need to be fully versed in, and familiar with,

Incoterms. Once familiar with what the various terms cover, the exporter can then accurately assess costs and construct an export price to quote to foreign buyers.

 

Graham Clayton is an economist and general manager for International Confederation College. 

 




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