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Import 101 - Chapter 3/7: 8 Basic Concepts Every Importer Should Understand

We have covered two out of seven topics in our Import 101 series:

1. Decide What to Import

2. What to Consider When Choosing a Sourcing Country for Your Merchandise

Remember in our previous post when we said things were going to get complicated? This is the post where we explain key concepts and processes that any importer should know.

Importer’s Number: Any individual or business who conducts importing activities to the US must have an importer’s number. This is a Federal Employer Identification Number (FEIN) for companies or Social Security Number for individual importers. This link provides detailed instruction how to apply for FEIN.

International Freight Forwarding Companies, also known as Freight Forwarders: A freight forwarder, who handles ocean or air freight forwarding, or both, is a third party who is able to provide you with a range of importing and logistics services. Some services they provide are: sourcing for trucking companies, warehouses, ocean carriers, handling administrative work like getting custom bonds, filing all customs paperwork, and more. An experienced freight forwarder understands the industry, knows the rules, already has many contacts, and therefore can be very helpful to you. They will save you a lot of time and effort when it comes to learning and dealing with the complexities of international shipping. The down side of directly engaging with freight forwarding companies is that it can be costly for you. You’ll also be dependent on your freight forwarder whenever you want to have some insight about your importation process.

Customs Broker: A customs broker is a person or firm licensed by an importer’s government whose main job is to assist you with entering and clearing goods through customs. His scope of work is not as broad as that of a freight forwarder, since a customs broker is specialized only in customs processes. However, hiring a customs broker is a common practice among shippers, regardless of their businesses’ sizes. The customs broker will require a power of attorney from you in order to perform his service. If he is the one who drafts the power of attorney, you (or your lawyer) should carefully review and make appropriate changes to the document so that its terms protect you – and not solely the customs broker. At the very least, the power of attorney should at least agree to not hold you liable for any financial and non-financial damage due to the the customs broker’s negligence or mistakes. It is a good idea to provide him with a letter of instruction, specifying which services you’d like him to perform.

Importation Bonds: also known as a customs import bond, bought by the importer from a surety company, is a financial guaranty between the importer and the CBP, ensuring that all the duties and charges will be paid. Most importers have a customs bond. If you have a freight forwarder, he will help you get one. There are two types of bonds:

  • Single transaction bonds: for single importation, typically covering as much as three times the value of the goods, suitable for importers who have very few importations a year. If you are a new importer and shipping few sample shipments from your suppliers – this is the right option for you.
  • Continuous bonds: for all importations over a period of time – typically a year. Its value is at least $50,000, approximately 10% of the total duties and charges paid in the previous year; or reasonably estimated for the current year.

Incoterms (International Commerce Terminology): When developing an international purchase agreement with foreign suppliers in other countries, it is critical to make sure that you and your suppliers both understand the terms and conditions. Very often the two sides have different standards and assumptions. If you don’t clarify terms in the beginning of the transaction, this can lead to misunderstanding and wrong expectation. Using abbreviation is a practice that often lead to confusion. To standardize the understanding of the phrases and abbreviation commonly used in international trade agreements, International Chamber of Commerce has developed “Incoterms” which include explanation for terms such as EXW, CPT, FAS, FOB, etc.  Incoterms define the cost, responsibility, the risk of sellers and buyers.  For example, EXW is abbreviation for “Ex Works,” which means goods available from the place of production (in Latin, “ex” is “out of or from). EXW, which is usually followed by a place name, means the seller will have the goods available to the buyer at a specified place (i.e. factory, warehouse) at a specific time. The buyer’s responsibility includes loading the goods for transportation, clearing for export, and so on. Ex Works implies the minimum obligation and risk for the seller and the maximum obligation and risk assumption for the buyer, the phrase applies exclusively to air, rail, road, and containerized, multimodal transport.

There are eleven incoterms that are used by business in four different areas. Here you can find full explanation and a summary table for your convenience use.

Patent, Trademark, and Copyright Registrations and Infringements:
If you invent a product, have it manufactured abroad, and import the product into the US you should initiate a patent, trademark, or copyright search to make sure that the patent, trademark, or copyright has not already been registered in the US. In your purchase documentation, you should receive warranties and representations from your supplier that he will compensate and hold you harmless from any infringement actions.
If you are importing products into the US, take care to make sure the products do not infringe the patent, trademark, or copyright registration of another person. Unless the manufacturer has already registered the patent, trademark, and copyright in the US, importation of such products may still infringe a valid right of someone else.
You may also want to register a patent, trademark, and copyright for the product with authorization from your supplier.Confidentiality and Non-Disclosure Agreements: It is vital that your supplier sign Non-Disclosure Agreement before you give them any confidential business information, sample, or prototype.Payment to Your Supplier: There are several ways to make payment including cash in advance, a letter of credit, payment upon documentary collection, and an open account. Since payment is a major concern of most shippers, we will dedicate a separate section for this topic.

Once you’re somewhat familiar with the foundation concepts above, you’ll want to learn more about the following concepts:

Anti-dumping & Countervailing Duty: “Dumping” happens when goods are imported into a country at a lower price than their fair value. Make sure your goods are not under this category because if so, the customs duties can be much greater than normal importation.
Prevailing Market Price: If you sell your products in the US market at the price below the prevailing market price, competitors may charge that the sales are predatory pricing or dumping.
US Industry Standard: You should make sure that your foreign manufacturer will supply you with products that meet the US industry standards. Depending on your products, there are respective industry standard; for example, if you import paper boxes with your company information printed on the boxes, there is an industry standard of how much lead the ink used can contain.
Marine & Air Casualty Insurance: Depending on your sales terms with the supplier, you may be responsible for procuring insurance that covers the shipment. Without insurance, if something should happen to your goods and the carrier is proven liable, you will not be well-compensated. Without insurance the maximum amount a carrier will pay you is only $500 per ocean shipment package and $20 for air. Insurance should be arranged prior to the exportation from supplying country.

Keep in mind that the above items are relatively high-level; we may not particularly use or apply them right away or even in the near future – but along the way, this foundation will help you understand common practices and more complicated matters that come with international shipping.

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