Harnessing technology towards a clearer understanding of Incoterms®
20 February 2020
Written by Mark Heath, the Founder of start-up “Open Borders Direct” and CEO of start-up “Acies”, an insurance Managing General Underwriter
This article first appeared in the Winter 2019 edition of World Trade Matters.
Exporting is “easy when you know how”, but, it’s not when you are ultimately responsible for negotiating and correctly pricing products for sale overseas.
This is because it’s extremely difficult to have clear visibility and transparent oversight of your product as it moves through an internationalised supply chain, which is physically fragmented, until the product reaches the delivery point of final destination - passing through borders and Customs, changing hands, accumulating risks on the way, being exposed to taxes, new surcharges, financial penalties and ever-increasing customer expectations.
Throw into this mix a high element of paperwork and manual processes and suddenly any unbudgeted “surprises” can quickly materialise, wiping out margins, damaging cash flow and more.
This is far from ideal, but the UK is a technology powerhouse and has an immense amount of global trading experience, so harnessing a technology-enabled way of trading plays to both these strengths.
This “harnessing” effect is happening right now and being made possible through the emergence of ecosystems where technology platforms connect buyers, sellers, the payment processing industry, trade financiers and insurers together with forwarders and transportation companies. Further, it does this with accuracy and speed.
An ecosystem’s (simple) business model is based on collaboration and ease of access, not control and isolation. It involves different commercial partners, who operate in different sectors, seeing the opportunity of linking up, creating a network and collectively offering a more compelling competitive advantage to the benefit of buyers and sellers – and in the process, simplifying and automating the process for customers. Ecosystems are not about contracting out or transferring problems from one party to another but finding a solution together. Nor are ecosystems complicated consortiums, which can be fraught with competing politics or differing competitive agendas.
We don’t need any reminder about the importance of international trading agreements and forging new relationships – the media beam this news relentlessly into our living rooms every day. But the recently released (on 15th October 2019 in the UK) Incoterms® 2020 rules are a good reminder for companies to re-visit the commercial terms used in contracts for the sale of goods. These Incoterms® rules, from the International Chamber of Commerce, are applicable for domestic as well as international trade but are arguably more valuable the longer the distance your goods travel.
However, despite these rules being globally recognised, many companies importing and exporting are completely unaware of Incoterms® or how to apply them in a “heads of agreement” with their trading partner. Many companies only use commercial invoices or purchase orders without stating any reference to each other’s responsibilities. Companies also sometimes continue to use the same Incoterms® year after year for historical continuity even if the mode of transportation, costs and risks have changed over time. Certain countries like China typically export using only FOB (Free on Board) or CIF (Cost Insurance and Freight) simply because of a lack of familiarity and awareness that other rules exist. This will change.
The USA clearly speak the same language as the UK, but this common language can give a false sense of security and it doesn’t help when one party (the USA) is thinking about a different law of sales (the Uniform Commercial Code) when they communicate with their UK counterparty. In the US, the term FOB can be used in relation to the transportation of goods via airports and trucks but in the UK, FOB is a marine terminology and only involves the transportation of goods by ships. This miscommunication complicates trade and introduces friction, but this can be solved by mapping these languages together in a code, with the help of technology.
Banks providing traditional Letters of Credit insist on Bills of Lading because this document of title acts as a security providing them rights over the goods (in the event of default) but also acts as collateral reducing their cost of capital. Digital alternatives will emerge.
Customs’ duties and tariffs clearly impact pricing decisions and for companies who have only ever traded with the EU to date, they have effectively never experienced the complexity of cross border trade. The importance of having your fully completed documentation easily accessible in one place is becoming increasingly necessary. Knowing that you have used the proper tariff classification and duty payable is more than just important - it is the responsibility of the company trading the goods (not the customs broker) and would be one of the first enquiries in an HMRC audit.
In addition to the relevance of Customs duties relating to the rules of (country) origin, demonstrating the provenance and being able to certify or prove the origin of products matters – it matters for consumers, is a matter of quality, reflects safety standards and has become a competitive advantage for manufacturers and retailers whose products are traceable. Technological systems, scanning and data make this certification process transparent and a reality.
IoT (the Internet of Things) sensors fitted to individual containers and shipments make it possible today to monitor the condition of goods (think temperature monitoring and food safety) and monitor whether goods have been interfered with or damaged, as well as tracking the location and movement of goods. This helps insurers quantify risks, improve prices and respond far quicker to pay claims for clients than ever before.
At a time when UK manufacturers are reporting a deterioration in sales and orders, this makes it even more important and timely to remove risks, give certainty around costs and make things fast and easy for suppliers and buyers. Roll on ecosystems.