ISALC, Lewis and Clark College

International Travel of Products by Hirokazu Tsuzuki

 

Today, Japan exports many products to the US, and indeed we can easily find many Japanese products at every retailer. For example, the Fred Meyer store at Burlingame has a kind of confectionery called "pocky" made by Glico Co., a Japanese company. However, people basically do not know how Fred Meyer buys "pocky" from Glico, and the procedure is relatively complicated but interesting.

Fundamentally, today, almost all countries choose to follow the International Commerce Terms (Incoterms), which is an international logistics rule enacted by the International Chamber of Commerce (ICC). "Incoterms" generally defines the obligations and extent of responsibility of exporting and importing companies. Domestically, corporate liability law and product liability law is similar to "Incoterms" for international transaction. For example, if we buy a daily dish at a deli department and feel bad in a Fred Meyer store, Fred Meyer will have to take liability for us. Also, if we buy a TV made by Sony Co., and the TV causes a fire in our home, Sony will have to take liability for us. However, responsibility in the "Incoterms" is only for exporting and importing companies in international sphere. Moreover, one of the most important rules in the "Incoterms" is 13 kinds of trade terms, like Free on Board (FOB) and Cost, Insurance, and Freight, named port of destination (CIF).

Please think about what you will do when you buy necessities in a store. You may bring the necessities to a cashier and pay money, and basically foreign trade is the same as our routine shopping, but there are some differences between the two. Please think again after bringing the necessities to a cashier. Do you negotiate about the price of the necessities with a clerk? The answer is usually no. However, when Fred Meyer wants to buy the "pocky" to sell them in its stores, Fred Meyer has to negotiate some terms of the sales contract with Glico, like the price and number, because there is no confirmed price, and this offer is the beginning of foreign trade. However, when Fred Meyer initially offers to purchase the "pocky", getting agreement to the proposal by Glico is uncertain, and the situation is common in a foreign trade sphere. Therefore, Glico and Fred Meyer begin to negotiate the contract using a system of counter offers. For instance, if Glico cannot agree to the first offer from Fred Mayer, Glico can propose another contract to agree with Fred Meyer, and it is called a counter offer. In other words, repeatedly proposing counter offers is the negotiation of the sales contract between the two companies.

Within the period of counter offers, there is another important condition, which is the extent of the responsibility between exporting and importing companies. In other words, if a freight ship had an accident on the sea and an importing company could not get the freight, which company, the exporting or the importing, would have to take the liability for the sea accident. Generally, the "Incoterms" has two prevailing trade terms, called Free on Board (FOB) and Cost, Insurance, and Freight, named port of destination (CIF). If both exporting and importing companies agree to choosing the trade terms of FOB, the extent of liability is finished when an exporting company coveys its products in a container to a ship from lighterages (a transition mechanism). In other words, once when an exporting company conveys its products on board (on a ship), the exporting company is free from the liability. Again, the official name of FOB is Free on Board. On the contrary, if both exporting and importing companies choose CIF, the exporting company has to take the liability until the time when the freight, including its products reaches a port of discharge and pays the cost of freight and insurance. Additionally, when both companies choose CIF, an exporting company has to include a Policy of Insurance into a shipping document. Thus, if Glico and Fred Meyer agree to selecting FOB, Fred Meyer has to pay the cost of the "pocky" and its insurance, and if the "pocky" is destroyed at sea, Fred Meyer has to make the payment for the lost "pocky." On the contrary, if Glico and Fred Meyer agree to the trade terms of CIF, Fred Meyer does not have to take the liability of the "pocky." However, Fred Meyer has to make a higher payment than if they used FOB because Glico requires more shipping charge and insurance premium (usually 10%) than if Fred Meyer does the procedure on its own. Therefore, the purchase price of the "pocky" is raised when using CIF compared to FOB.

After confirmation and acceptance of the sales contract between the two companies, Fred Meyer begins to pay the fee through a bank, and this is the second procedure. Please remember when we buy a product in a Fred Meyer store, we only pay the fee of goods using money, a credit card or a check. However, in foreign trade sphere, a company requests the buyer bank where has its checking account, to make a document, and it is called a Letter of Credit (L/C). A L/C is a kind of security, which is guaranteed to be paid by the buyer bank. Thus, in this case, Fred Meyer has to request the bank to issue the L/C for purchasing the " pocky." Then, the bank sends the L/C to Glico through an advising bank.

After receiving the L/C, Glico has to send the "pocky" to a port of discharge and receive the fee using shipping documents from a negotiating bank, and this is the third procedure. Shipping documents basically consist of two documents, a Bill of Landing (B/L) and Commercial Invoice. Routinely after paying the fee at a cashier, we simply take our goods home. However, in the foreign trade sphere, the transportation is the most complex procedure. When an exporting company makes a contract with a freight company to send its products, the exporting company simultaneously requires the freight company to issue a B/L. A B/L is a kind of a document, and any person who possesses a B/L has the right to possess the freight. Also, at the same time, the exporting company has to make a Commercial Invoice that is proof of sending its products to an importing company. After preparing the two documents, the exporting company brings the shipping documents, composed of a B/L and a Commercial Invoice, to get the payment for the products. Then, the negotiating bank sends the shipping documents to the importing company through the buyer bank that issues a L/C for the importing company. In case both export and import companies agree to CIF, an exporting company has to make a contract with an insurance company to get a Policy of Insurance (P/I) and to send a P/I as a part of the shipping documents. Therefore, in this case, Glico has to do two things. One is that Glico has to send the "pocky" to a port of discharge, and another is that Glico has to make the shipping documents for getting their payment for the "pocky." In other words, Glico has to receive a B/L from a freight company, make a Commercial Invoice and sometimes get a P/I from an insurance company.

After sending the "pocky" as freight in a bulk container and sending the shipping documents through a negotiating bank by Glico, Fred Meyer has to take the container of the "pocky" to a port of discharge. At that time, a businessman working at Fred Meyer has to bring a B/L to confirm the ownership of the "pocky" that is in a bonded warehouse. Finally, after completing the procedure of customs clearance, Fred Meyer can bring the "pocky" from the bonded warehouse and can sell the "pocky" in its stores.

Although we can easily buy worldwide products in a retail store, the procedure of foreign trade is still complex; especially, how an importing company makes a payment to an exporting company. Therefore, the "pocky" could be a popular candy, but the high price of the "pocky" prevents that in the U.S. because of the complex procedure of international trade causing the "pocky" to have a high price. As it is, although we can easily buy a box of "pocky" in a Fred Meyer store, the international logistics as needed to get the "pocky" to the strore shelves is still complex and complicated

Created by:krauss@lclark.edu
Updated: 10/23/99