Confused about exporting jargon? 11 common trade terms you need to know
Do you have a case of logophobia? Being involved in the world of trade, you just might, especially if you’re new to the game. Between FOB, FAS and DAP, and CIFFA, CETA and FCL, you could feel like you’re either suffering from information overload or drowning in alphabet soup. But the good news is that you don’t have to swallow the dictionary to slice through the jargon. Here’s a tidy guide of some of the more common export terms you need to know.
Incoterms, short for International Commercial Terms, are critically important to know because they’re legal commercial terms used to determine who (i.e., the buyer or the seller) is responsible for what during the shipping process. If you choose or agree to the wrong Incoterms in the contracts during negotiations with your international buyer, you could risk a financial hit.
Incoterms were created as common codes of conduct and contract and are regulated by the International Chamber of Commerce for international trade. Each Incoterm does one of two main things. The first is to determine at what point the responsibility and ownership for the shipment transfers from the seller to the buyer. This is important in case the shipment gets lost or damaged in transit. The second is to determine who is responsible for, or who pays for, the transportation of the goods, import and export processes, insurance, loading and unloading, and the like.
I’ll give a brief description here, but do study the more complete definitions and hire expert help if needed for your negotiations. The 11 Incoterms can be roughly divided into three groups:
- EXW, FCA, FAS and FOB: With these, it’s the buyer that pays for the shipping costs, so they’re ideal if you’re the exporter.
- CFR, CIF, CPT and CIP: These are the terms under which the sellers pay the main shipping costs and include them in their price. Note that while the seller pays for shipping, the goods travel at the buyer’s risk, so the buyer will want to investigate insurance.
- DAT, DAP and DDP: Here, the shipping costs are paid by the seller and the seller assumes all the travel risk. In these cases, the seller will want to consider insurance.
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As you can see, shipping your goods can be complex, but you don’t have to go it alone. There are lots of partners, such as the International Freight Forwarders Association, that regulate the industry. Go to the CIFFA site and find out about the legitimate freight companies in your area.
Similarly, the Canadian Society of Customs Brokers can help make shipping easier. It’s an umbrella organization for those who can help you with customs issues.
Shipping weights and volumes
Familiarize yourself with the terms and conditions of the carriers you’re going to use to deliver your products. If you’re shipping to the U.S., you’ll likely want to go by truck, and you’ll need to know whether you have a TL/FTL (trailer load or full-trailer load) or an LTL (less than a trailer load). Ocean carriers will ask about a full container load (FCL) or less than a container load (LCL).
Note that in freight weight, Canadians still use the Imperial system because of the U.S. influence. In shipping, you pay either by weight or volume. Tip: you can avoid volume charges by making sure your package is as densely packed as possible – using a box that’s too large for your product will cost you. The price is per ton or cubic metre, generally, but if you’re shipping less than a full load, the price is based on weight or volume, whichever is higher.
If you go by air, there’s a volume formula. You pay for one ton as long as it doesn’t exceed six cubic metres in volume. After it exceeds six cubic metres, you pay by volume instead. Unlike trucking measurements, air measurements are metric. You can negotiate prices per pallet instead of per kilogram. The latter is usually more advantageous than a price per kilogram.
Carriers provide only minimal compensation should a container fall overboard in rough seas or a package be stolen at a cargo airport, so consider getting cargo insurance. There are clauses, known as Institute Cargo Clauses A, B, or C, that are internationally recognized and in this case, it doesn’t matter what company you deal with, as they all have the same clauses. A covers you for all risks. B and C are cheaper, but they cover less.
The same applies for other modes of transport. In trucking in Canada, the maximum liability of a trucker is $2 per pound of freight or $4.41 per kilogram. In the U.S., it can be as low as 60 cents per pound.
With shipping through air freight, the maximum liability depends on the nationality of the airline, but they generally pay between $30 and $35 per kilogram.
Ocean freight varies, but usually runs between $500 and $900 per container. Therefore, cargo insurance is even more important for ocean freight.
Wood packaging materials
If you use wood when you ship – such as pallets or crates – you’re bound by international regulations. When shipping anywhere except the U.S., the wood has to be heat-treated or fumigated and certified with a stamp. If you don’t use treated wood, your shipment will be rejected at the other end. The United Nations’ initiative known as the International Plant Protection Convention was put into place to prevent the infestation of forests by certain insects. This only applies to non-manufactured wood, not to plywood and chipboard. Canada and the U.S. have a mutual exemption on this, but in case things change, it’s a good idea to know these rules now.
On the invoice, you include the seller, buyer, origin of the goods and Incoterm to say who is paying for what. This is the most important document because it’s what will be used at customs. It’s a good practice to also give a packing list. It’s not always compulsory, but it’s recommended.
Pro forma invoices
These are similar to the commercial invoice in terms of content, except they’re for items going to another country but not being sold there – such as samples at a trade show, for example.
Certificate of origin
Sometimes a country will want to know where the materials in your product originated, as this can have an impact on free trade agreements, for example. Check on this with your buyer.
CETA makes things easier because Canadians don’t have to supply a separate certificate of origin, but you do have to provide an origin certification on the commercial invoice and follow a certain format. You can look at Annex 2 of the agreement for an idea of what you need to provide.
NAFTA has its own certificate or origin and the rules of origin are determined according to the country of manufacture, the regional value content and the tariff shift. For NAFTA, your product must have between 40 and 62.5 percent North American content. For automobiles, it’s 62.5 per cent of North American content. See Annex 401 of the NAFTA agreement to find the rule for the HS code of each product.
You can learn more about rules of origin in this three-part series on edc.trade.
Terms for payment options
Letters of credit
A letter of credit is issued from one bank to another bank (usually in another country) to guarantee that payments will be made to a party (e.g., a person or a company) on time, for the correct amount, and possibly other specified conditions. Once you have a letter of credit from your buyer, you’re sure you’ll get paid. Note that if you’re dealing with a country where the banking system isn’t stable, the letter of credit must be confirmed by a Canadian bank.
Credit insurance insures the money that you are owed from your sales to your international buyer. If your customer can’t or won’t pay, credit insurance will cover a specified amount of the insured receivables owed. Export Development Canada (EDC) has a very user-friendly portal through which you can access credit insurance. You can also get insurance for other risks, such as Political Risk Insurance.