Shipping terms on an international transaction can make the difference between profit and loss
By Randolph R. Nemetz, Director, Global Affairs, MAGNET
Over the past several months, the decline of the U.S. Dollar has allowed Northeast Ohio companies to become more price-competitive in the global marketplace. However, companies that traditionally have not exported, or are expanding their export business, sometimes find themselves in new and unfamiliar territory when negotiating contracts for foreign sales. In negotiating a contract to sell to a foreign party one aspect that needs special attention is shipping terms of sale. Following is a real-life example from our World Trace Center Cleveland files of how the choices made in shipping terms impact a company's profit on a sale. A local manufacturer, which we'll call Northeast Ohio Co. (NOC), had an established business relationship with a a respected distributor in the Middle East which regularly bought small-dollar value quantities of product. The terms of the sale had always been "Ex Works" with payment via wire transfer. Recently, the Middle East distributor came back to NOC wanting to rapidly expand the quantity they were to purchase. NOC welcomed the opportunity, but was a little concerned about the credit-worthiness of the distributor to pay for such an increase in volume. So both parties agreed to establish a Letter of Credit. NOC confirmed the Letter of Credit with a local international bank and felt comfortable that the risk of loss had been minimized. The transaction moved forward. However, during the discussions for the letter of credit the Middle Eastern distributor had requested that the Letter of Credit reflect terms "CIF" as required by their bank. NOC agreed to the new designation but didn't fully understand the impact of that change on the agreement. After NOC received payments under the terms of the LoC and the goods were in the customer's possession, it received a number of unanticipated bills for the transaction. So NOC called the World Trade Center-Cleveland (a part of MAGNET's Global Initiative) to ask if it could go back and charge the customer for these unanticipated bills. My first question was: "What were the terms of sale?" The answer was: "CIF, Customer Incurred the Freight." Actually, the term "CIF" is an Incoterm for "Cost, Insurance and Freight incurred by the seller." Without realizing it, NOC had agreed to pay the freight charges, and could not recoup the loss. When negotiating an international sale, it's important to understand who pays for what given the terms. Below is a chart that can help companies better understand who is responsible for what when negotiating an international sale, followed by a table of definitions of the shipping terms in the chart. (Click on the image for a larger image.) 
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The World Trade Center Cleveland is a member of the world’s largest private international trade organization, the World Trade Centers Association (WTCA), which serves more than 2,000,000 business clients worldwide through over 300 locations in 100 countries. The WTCA is non-political organization that promotes the facilitation of global business.
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