- There are several things new exporters should watch out for, especially in legal contracts and payments.
- Understand incoterms and hire freight forwarders, and lawyers and accountants with international trade specialty.
- Always take insurance and take advantage of free trade agreements to save on duties.
Exporting can be exciting and daunting at the same time. Conducting a comprehensive research into the exporting market is the first step to getting it right. This includes understanding the regulatory framework and the permits required, especially items that may be banned or restricted.
Although I know Google has become our first point of reference for pretty much everything, based on my 23 years of experience as a freight forwarder, I strongly urge all emerging and first-time exporters to ask questions.
Austrade is a great place to start, together with the Export Council of Australia. There may be grants available for your type of product and you should be checking out your options because the risks are significant and can be expensive especially for a startup.
It’s also critical to understand export documentation and keep a meticulous paper trail. If language is a barrier, use an interpreter or translator, preferably a NAATI accredited one. The main things to take into consideration are:
1. Legal part
This includes contracts with your potential distributor. Make sure these are as watertight as possible, especially where intellectual property is involved. I have seen far too many clients export a prototype to then find out that someone in their inner circle in the receiving country has copied. It’s best to have trusted contacts in the market and if possible, visit them in order to get a solid understanding of the business environment. Export law is quite complex, so best to seek a lawyer with an international trade specialisation.
There are many forms of payment solutions, especially now. The international payment department of major banks can assist with setting up Letters of Credit, Documentary Credits and international transfers. There are other products just for exporters like export finance. With increased fraud and scammers, you want to make sure you do get paid properly. We recently had a client who sold 3 pallets of books shipped to the USA. 45 days later, our client receives a call from the bank saying the credit card that was used to pay for the books and shipping was reported as stolen. The bank then exercised the option of a chargeback, meaning the owner of the card was refunded. Our client was 3K out of pocket as the bank deducted this from her account. Not all credit card companies operate the same way, some have provisions for fraud - best to check and ask questions.
Understanding these is fundamental. They cover buying terms and will determine who is responsible for what between seller and buyer. Please do not google for the answer but ask your freight forwarder this question. Then google away!
If the wrong Incoterm is used, the Letter of Credit and the Insurance Policy (more on that one) may be deemed null and void. We had one client who came to us after his nightmare experience. Our client was filling out a Letter of Credit at 8pm and he was not sure on which INCOTERM to use, so he called his Accountant. The accountant, a chartered accountant, was excellent at his work but no understanding of international trade.
He told our client, "Mate, just keep it simple and put FOB." Maybe he heard this term in the corridors of university years back. Our client was exporting a delicate product from his factory in Brisbane to Japan. The terms are Ex -Works, not FOB. The Letter of Credit did not match the Bill of Landing or insurance paperwork.
Basically, the accountant gave the wrong advice. The goods were damaged during transit and the insurer rejected the claim. Our client had no choice but to take legal action against the accountant for providing advice which was outside of his scope. Like lawyers, you can hire accountants with an international trade specialisation. Not a good story and we have seen a few cases like this. I cannot stress enough the importance of understanding Incoterms as they form the basis of your selling terms.
This one never ceases to amaze me. The number of exporters who do not take out insurance yet have put everything on the line for this new business! There is a misconception that if goods are damaged, then the transport provider is responsible. This is NOT the case.
All transport modes are “All Care and No Responsibility." Just like how we need to shop around for car insurance, house and contents - please do the same for your exports and imports. It’s hard to pinpoint exactly where or how a damage occurred, as there are so many players in the supply chain, so a comprehensive marine and transit insurance is essential.
We have a client who exports very expensive medical equipment to the USA, UK and Europe. One of their containers was on a ship with many other containers. The items of the other container manifested as 'soft toys' were, in fact, firecrackers. Lightning struck in the open seas, causing the container with the firecrackers to ignite and caused a fire.
Several containers sustained significant damage causing millions of dollars in losses. Our client was covered by insurance after paying the excess (or deductible as is used in marine insurance) and all costs were covered, including our bill! However, there were several exporters who did not have insurance. They lost their goods and they had to pay a share in the overall damage.
There is a principle in Maritime Law called General Average. To quote the definition, all stakeholders proportionally share any loss resulting from the event at sea from the ship, cargo or both. Therefore, the exporters without insurance had to stump up anywhere between 60K and 300K each. Disasters at sea and in all modes of transport happen so best to be 100% covered and prepared.
5. Currency risk
This mainly affects (hurts!) importers, however, it is important even for exporters to understand currency risk. If the amounts are small when you’re starting a business, then fluctuations are manageable. Once your business grows and export amounts increase, then some strategies are required. One suggestion is to sell in Australian dollars, not always possible, but a good way to reduce the risk of losing your profit in currency loss.
6. Free Trade Agreements (FTAs)
We now have so many, so take advantage of them! It means that you do not pay duty in the country of export. Duty can be anywhere from 2% to 25% and they all add up. Your freight forwarder can tell you which countries have FTAs with Australia.
We’ve now covered most of the risks. However, it’s not all doom and gloom. The highlights of exporting are the people we meet along the journey, the dynamics of trade fairs around the world, and the benefits of cross-cultural learning. There’s no doubt that even with technology, the world of international trade is a world of movement. In these movements of people, products and services that lifelong friendships are formed, and we create world peace in our respective worlds. I wish you all happy exporting, be vigilant, surround yourselves with professionals who will give you the correct advice and enjoy the journey!
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