pricing in international trade

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Chapter7PricinginInternationalTradePricinginInternationalTradePriceisanimportantfactorindeterminingafirm’sabilitytocompeteinworldmarkets.Formanycompanies,pricingpoliciesandproceduresaresecretinformationandnoteasilyavailabletooutsiders.Exportpricesshouldbehighenoughtomakeareasonableprofitandyetlowenoughtobecompetitiveinthemarket.Productsrarelysellononefactoralone,andtheexportershouldbecompetitiveonnonpricefactorsofdifferentkinds.Sourcesofnonpricecompetitionincludereliabledelivery,shortdeliverytime,productreliability,andproductquality,aswellasanyotherfeatureconsidereduniquebycustomers.Thisformofproductdifferentiationbasedonspecificcharacteristicsofaproductorservicegivesfirmsacompetitiveadvantage(Dussauge,Hart,andRamanantsoa,1987).AppleComputerin-creaseditsmarketshareinJapannotonlybyslashingpricesbutalsobybroadeningdistributionoutletsandthroughtheadditionofJapanesesoft-warepackages.Thecrucialelementindeterminingpricerelatestothevalueconsumersplaceontheproduct.Valueresultsfromconsumers’perceptionsofthetotalsatisfactionprovidedbytheproduct(HiamandSchewe,1992).Companiescanchargehighpricesandmanagetoremaincompetitiveifthepricechargedislowerthan,orinalignmentwith,theperceivedvalueoftheprod-uctorservice.Incompetitivemarkets,highpricesrepresentanindicationofthesocialdesirabilityofproducingtheproductorservice.Theymayalsobejustifiedinexportmarketsifthesalealsoinvolvestransfersoftechnologyortraining.Pricinginworldmarketsisoftenusedasaninstrumentofaccomplishingthefirm’smarketingobjectives.Thefirmcouldusepricetoachievecertainlevelsofmarketshare,profits,orreturnsoninvestments,ortoreachsomeotherspecificgoal.Thefollowingpoliciesforpricingandmarkupsgener-allyapplytobothdomesticandexportmarkets:Export-ImportTheory,Practices,andProcedures,SecondEdition153 154EXPORT-IMPORTTHEORY,PRACTICES,ANDPROCEDURES•Highmarkupsarecommoninindustrieswithrelativelyfewcompeti-tors.Markupsarealsohigherinindustriesinwhichcompaniesproducedifferentiatedproductsratherthanhomogeneousones.Thehighmarkupscouldbetakenasrentarisingfrommarketpower.Forexample,inthechemicalindustry,thebiggestprofitslieinspecialtychemicalsdesignedandproducedforparticularindustrialuses(Reich,1991).HighmarkupsmayalsobeduetoR&Dexpendituresandcostsofincreasingtheskillsoftheworkforce.•Exportpricestendtoberelativelylowinsectorsinwhichthereisin-creasedcompetition.Changesincompetitors’pricesorthestateofde-mandaremorelikelytotriggerareductioninexportprices.Markupsarerelativelylowfortextiles,food,electricmachinery,andmotorve-hicles;theyremainhighinindustriessuchasmedicines,computers,industrialchemicals,andtelevisionandcommunicationsequipment(Martens,Scarpetta,andPilat,1996).Thelowmarkupsfortheformerareduetothefragmentedandnondifferentiatednatureoftheseindus-tries,whichmakesitdifficulttoexercisemarketpower.Acompanyneedstodevelopaworkableguidelinewithrespecttopric-ingofitsproductorserviceinexportmarkets.Itspricingpolicyshouldbefirmenoughtoachievethetargetedlevelofprofitsorsales,whilemaintain-ingsomeflexibilitytoaccommodatetheoverallmarketingobjectivesofthefirm.Flexibilityisseenasanabsolutenecessityforoptimizingprofits,andafirmmayuseallpricingmethodsaccordingtothetypeofproductbeingsold,theclassandtypeofcustomer,andthecompetitivesituationinthemarketplace.Mismanagementofexportpricingcouldoftenleadtopres-suresforpricereductionsorthedevelopmentofparallelmarkets.Parallel,orgray,marketsarecreatedwhentheproductispurchasedatalowpriceinonemarketandsoldinothermarketsenjoyinghigherprices.Forexample,EastmanKodakpricesitsfilmshigherinJapanthaninothercountries.AnimporterinJapancanpurchasetheproductatadiscountinaforeigncoun-tryandsellitintheJapanesemarketatapricelowerthanthatchargedbyauthorizedKodakdealers.Appropriatepricingandcontrolsystemsofqualityanddistributionoutletsareimportantinreducingsuchincidencesofparallelmarkets.DETERMINANTSOFEXPORTPRICESAnumberofvariablesinfluencethelevelofexportprices.Someoftheseareinternaltothefirm;othersarefactorsthatareexternaltothefirm.A PricinginInternationalTrade155majorinternalvariableisthecostthatistobeincludedintheexportprice.Thetypicalcostsassociatedwithexportsincludemarketresearch,creditchecks,businesstravel,productmodification,specialpackaging,consul-tants,freightforwarders,andcommissions(Anonymous,1993).Anad-ditionalcostisthechosensystemofdistribution.Thelongdistributionchannelsinmanycountriesareoftenresponsibleforpriceescalation.Theuseofmanufacturers’representativesoffersgreaterpricecontroltotheex-porter.Anotherinternalvariableisthedegreeofproductdifferentiation,thatis,theextentofaproduct’sperceiveduniquenessorcontinuanceofservice.Generally,thehighertheproductdifferentiationafirmenjoys,themorein-dependentitcanbeinitsprice-settingactivities.Theexternalforcesthatinfluenceexportpricingincludethefollowing:•Supplyanddemand:Thepricingdecisionsforexportsaresubjecttotheinfluenceofthesupplyofrawmaterials,parts,andotherinputs.Inacompetitiveeconomy,anyincreaseindemandisfollowedbyahigherprice,andthehigherpriceshould,inturn,moderatedemand.Itisof-tenstatedthatexportsofmanufacturedgoodsexhibitthesamepricecharacteristicasprimaryproducts,theirpricesvaryingwiththestateofworlddemandandsupply(Silberston,1970).Theclassicalsupply-and-demandapproach—wherebypriceactsasanallocatingdeviceintheeconomyandsupplyequalsdemandatanequilibriumprice—islargelybasedoncertainassumptions:perfectbuyerinformation,sub-stitutabilityofcompetinggoods,andmarginalcostpricing.Theclas-sicalassumptionthatreducingpricesincreasesdemandignorestheinterpretationofpricechangesbybuyers.Studieshaveshownthatconsumersperceivepriceasanindicatorofqualityandmayinterpretlowerproductpricesasasignofpoorquality(Piercy,1982).Ifaprod-ucthasaprestigiousimage,pricecanbeincreasedwithoutnecessar-ilyreducingdemand.•Locationandenvironmentoftheforeignmarket:Climaticconditionsoftenrequireproductmodificationindifferentmarkets,andthisisre-flectedinthepriceoftheexportproduct.Goodsthatdeteriorateinhigh-humidityconditionsrequirespecial,moreexpensivepackaging.Forexample,enginesthataretobeexportedtocountriesinthetropicsrequireextracoolingcapacity.•Economicpoliciessuchasexchangerates,pricecontrols,andtariffsalsoinfluenceexportpricing:Exchangeratedepreciation(adropinthevalueofacurrency)improvespricecompetitiveness,thusleadingtoincreasedexportvolumesandmarketshares.Forexample,in1984to1985,whenthedollarhadappreciatedtoroughlydoubleits1980 156EXPORT-IMPORTTHEORY,PRACTICES,ANDPROCEDURESvalueagainsttheGermanmark,luxuryGermancarsweresellingforlowerpricesintheUnitedStatesthaninGermany.Inexportmarketswherebuyersareusedtonegotiatingprices,aflexiblepriceisprefera-bleoveronethatuniformlyappliestoallbuyers.•Governmentregulationsinthehomecountry:Differentregulationsinthehomecountryhaveabearingonexportpricing.Forexample,U.S.governmentactiontoreducetheimpactofitsantitrustlawsoncom-petitionabroadhasenhancedthepricecompetitivenessofAmericancompanies.PRICINGINEXPORTMARKETSTheexportpricedecisionisdistinctfromthedomesticpricedecisioninthehomemarket.Theexportdecisionhastoconsidervariationsinmarketconditions,existenceofcartelsortradeassociations,andtheexistenceofdif-ferentchannelsofdistribution.Thepresenceofdifferentenvironmentalvari-ablesinexportmarketsmilitatesagainsttheadoptionofasingleexport-pricingpolicy(ethnocentricpricing)aroundtheworld.Anotherfactoragainstuniformpricingisthatdifferentmarketsmaybeatdifferentstagesinthelifecycleofaproductatanygiventime.Itiscustomarytochargeahighpriceduringtheintroductionandgrowthstagesofaproductandtoprogressivelyreducethepriceastheproductma-tures.Otherpricingalternativesinclude(1)polycentricpricing,whichispricingsensitivetolocalconditions,and(2)geocentricpricing,wherebyafirmstrikesanintermediateposition.Therearefourapproachestoexportpricing.Cost-BasedPricingThemostcommonpricingapproachusedbyexportersisonethatisbasedonfull-cost-orientedpricing.Underthisprocedure,amarkuprateonfullcostisdeterminedandthenaddedtotheproduct’scosttoestablishtheprice.Themarkupratecouldbebasedonthedesiredtargetrateofreturnoninvestment.TheMarginalApproachtoPricingMarginalpricingismorecommoninexportingthanindomesticmar-kets.Itisoftenemployedbybusinessesthathaveunusedcapacityortogainmarketshare.Inthiscase,thepricedoesnotcovertheproduct’stotalcost,butinsteadincludesonlythemarginal(variable)costofproducingthe PricinginInternationalTrade157producttobesoldintheexportmarket.Thiswillresultinthesaleofaprod-uctatalowerpriceintheexportmarketthanathomeandoftenleadstochargesofdumpingbycompetitors.SkimmingversusPenetrationPricingSkimming,orchargingapremiumpriceforaproduct,iscommoninindustriesthathavefewcompetitorsorinwhichthecompaniesproducedif-ferentiatedproducts.Suchproductsaredirectedtothehigh-income,price-inelasticsegmentofthemarket.Penetration-pricingpolicyisbasedoncharginglowerpricesforexportstostimulatemarketgrowth.Increasingmarketshareandmaximizingreve-nuescouldgeneratehighprofits.Demand-BasedPricingUnderthismethod,exportpricesarebasedonwhatconsumersorindus-trialbuyersarewillingtopayfortheproductorservice.Whenpricesaresetbydemand,marketsurveyswillhelpsupplythedatatoidentifythelevelofdemand.Thelevelofdemandgenerallyestablishestherangeofpricesthatwillbeacceptabletocustomers.Companiesoftentest-marketaproductatvariouspricesandsettleonapricethatresultsinthegreatestsales.Afirmdoesnothavetosellaproductatorbelowmarketpricetobecom-petitiveinexportmarkets.Asuperiororuniqueproductcancommandahigherprice.CartierwatchesandLevi’sjeansareexamplesofproductsthat,despitetheirhighprices,generateenormoussalesworldwideduetotheirrep-utation.Theseareproductsforwhichconsumersfeelastrongdemandandforwhichtherearefew,orno,substitutes(productswithinelasticdemand).Incasesinwhichdemandfortheproductiselastic,consumersaresensitivetochangesinprice.Forexample,rebatesandotherdiscountschemesoftenrevivelaggingexportsalesintheautoindustry(whichischaracterizedbyelasticdemand).Afewyearsago,ToyotalaunchedaspecialsalescampaigninTokyotogiveawaymoney(aboutonemillionyento100customers)tosomeofthecustomersofthecompetitorcaritsellsinJapanonbehalfofGeneralMotors.CompetitivePricingCompetitivepressuresareimportantinsettingpricesinexportmarkets.Inthiscase,exportpricesareestablishedbymaintainingthesamepricelevelasthecompetition,reducingpricesorincreasingthepricewithsomelevelofproductimprovement.However,price-cuttingisgenerallyamoreeffec- 158EXPORT-IMPORTTHEORY,PRACTICES,ANDPROCEDUREStivestrategyforsmallcompetitorsthanfordominantfirms.Animportantfactorinestablishingapricingstrategyisalsoaprojectionoflikelyresponsesofexistingandpotentialcompetitors(Oster,1990).TERMSOFSALEDespitewidedifferencesamongnationallaws,thereisahighdegreeofuniformityincontractpracticesfortheexportandimportofgoods.Theuni-versalityoftradepractices,includingtermsofsale,isduetothedevelopmentofthelawmerchantbyinternationalmercantilecustom.ThelawmerchantreferstothebodyofcommerciallawthatdevelopedinEuropeduringthemedievalperiodformerchantsandtheirmerchandise(Brintonetal.,1984).Tradetermsareintendedtodefinethemethodofdeliveryofthegoodssoldandtheattendantresponsibilitiesoftheparties.Suchtermsalsohelpthesellerinthecalculationofthepurchaseprice(Anonymous,1993).AsellerquotingthetermofsaleasFOB,forexample,willevidentlychargealowerpricethanifquotingCIFbecausethelatterincludesnotonlythecostofgoodsbutalsoexpensesincurredbythesellerforinsuranceandfreighttoshipthegoodstotheportofdestination.Thenationallawsofeachcountryoftendeterminetherightsanddutiesofpartieswithrespecttotermsofsale.IntheUnitedStates,theRevisedAmericanForeignTradeDefinitions(1941)andTheUniformCommercialCodegoverntermsofsale.Since1980,thesponsorsoftheRevisedAmericanForeignTradeDefinitionsrecommendtheuseofIncoterms.PartiestotermsofsalecouldalsoagreetobegovernedbyIncoterms,publishedbytheInternationalChamberofCommercein1953(latestrevision,2000,whichnowenjoysalmostuniversalacceptance[Herman,1989]).TheICCisanongovernmentalentity.Incotermsisneitheranationallegislationnoraninternationaltreaty.Itapplieswhenthepartiesexpresslyindicatetheirintentiontoincorporateitintotheirexportsalescontract.IfthepartiesdonotexplicitlyagreetobegovernedbyIncoterms,itcouldbemadeanimplicittermofthecontractaspartofinternationalcustom.Incotermsareperiodicallyrevisedeverytenyearstorepresentcontem-porarycommercialpractice(Incoterms,1980,1990,2000).Inordertoavoidanymisunderstanding,partiestoexportcontractsshouldalwaysstatetheapplicationofthecurrentversionofIncoterms.TheUniformCommercialCode(UCC)andIncotermscomplementeachotherinmanyareas.Tradetermsarenotunderstoodinthesamemannerineverycountryanditisim-portanttoexplicitlystatethelawthatgovernsthecontract.Forexample,acontractshouldstateFOBNewYork(Incoterms)or“CIFLiverpool(Uni-formCommercialCode)”(seeTable7.1). PricinginInternationalTrade159TABLE7.1.MajorDifferencesBetweenIncoterms,2000andUniformCommer-cialCode(UCC)TermsofSaleIncoterms,2000UCCCommercialTherearemanynewManyofthenewtermsintermscommercialtermsinIncotermsIncotermsaregenerallywhicharenotfoundinUCCcoveredbyexistingUCC(FCA,CPT,CIP,DAF,DES,terms(Usingadifferentname,DEQ,DDU,DDP)definition,etc.)ExWorksSellerneedsonlytotenderWhereathirdpartycarrieristhegoodstobuyerbyplacingnotinvolved,riskoflossthematthebuyer’sdisposalpassesnotuponmeretenderatanamedplaceofdeliveryofdeliverybutwhenbuyerandnotifyingthebuyerthereceivesthegoods.Thereistime/place.Thesellerhasnonoprovisionfortransportationobligationtodelivertheandinsurance.Whenthirdgoodstocarrierorloadthempartycarrierisinvolved,onavehicle.Thesellerhastransferofriskoccursuponnoobligationtoarrangetenderofgoodstoenabletransportationorinsurancebuyertotakedelivery.ItrequiressellertoarrangefortransportationandinsuranceFOBExclusivelyusedforNotexclusivetowaterbornewaterbornetransportationtransportationunlessitisFOB(vessel).InFOB(placeofshipment)sellerarrangesfortransportationandinsurance.UCC’sFOB(placeofdestination)isequivalenttoDDUtermunderIncotermsFCA(Incoterms),sellerUCC’sFOB(placeofarrangesfortransportationshipment)equivalenttoFCAonlyinspecialcircumstances.underIncotermsThereisnoobligationforinsuranceThereisnorequirementforRequirespaymentagainstpaymentagainstdocumentsdocumentsFASandCIFThereisnorequirementforUCCrequirespaymentspaymentagainstdocumentoragainsttenderofdocumentsuseofnegotiablebillofladingAlltradetermsareclassifiedintofourgroupsbasedonthepointoftrans-ferofrisk(delivery)fromsellertobuyer(seeTable7.2):1.GroupEterm(ExWorks):Thisgroupinghasonlyonetermandrepre-sentstheseller’sminimumobligation,thatis,toplacethegoodsatthedisposalofthebuyer.Therearenocontractualarrangementsbetweensellerandbuyerwithregardtoinsurance,transportation,orexport. 160EXPORT-IMPORTTHEORY,PRACTICES,ANDPROCEDURES2.GroupFterms(FCA,FAS,FOB):Thesellerisexpectedtobeartheriskandexpenseofdeliverytoanominatedcarrier.Itisthebuyer’sre-sponsibilitytoarrangeandpayforthemaincarriagetothepointofdestination.3.GroupCterms(CRF,CIF,CPT,CIP):C-termsestablishthepointofdelivery(transferofrisk)fromsellertobuyeratthepointofshipment.However,itextendstheseller’sobligationwithregardtothecostsofcarriageandinsuranceuptothepointofdestination.Thismeansthatthesellerbearscertaincostsevenafterthecriticalpointforthedivi-sionoftheriskordamagetothegoods.Theyareoftenreferredtoasshipmentterms.4.GroupDterms(DAF,DES,DEQ,DDU,DDP):Theseller’sdeliveryobligationextendstothecountryofdestination.Thismeansthatthesellercouldbeheldliableforbreachofcontractifthegoodsarelost/damagedaftershipmentbutbeforearrivalattheagreedpointofdestination.Thesellermayberequiredtoprovidesubstitutegoodsorotherformsofrestitutiontothebuyer.Theyareoftenreferredtoasarrivalterms(seeTable7.3).GroupE(ExWorks,ExWarehouse,andExStore)ExWorks,ExWarehouse,ExStore(namedplace):Underthisterm,thebuyeroragentmustcollectthegoodsattheseller’sworks,warehouse,orstore.ThesellerbearsallriskandexpensesuntilthegoodsareplacedattheTABLE7.2.GroupofIncoterms,2000GroupCMainGroupEGroupFMainCarriagePaidGroupDArrival(Departure)CarriageUnpaid(ShipmentTerms)TermsExWorksFreeCarrierCostandFreightDeliveredatFrontiera(EXW)(AMT)(FCA)(AMT)(CFR)(STO)(DAF)(AMT)FreeAlongsideCost,InsuranceandDeliveredExShipaShip(FAS)(STO)Freight(CIF)(STO)(DES)(STO)FreeonBoardCarriagePaidToDeliveredExQuay(FOB)(STO)(CPT)(AMT)(DEQ)(STO)CarriageandDeliveredDutyInsurancePaidToUnpaid(DDU)(CIP)(AMT)(AMT)DeliveredDutyPaid(DDP)(AMT)aAMT:Allmodesoftransport;STO:Seatransportonly. PricinginInternationalTrade161TABLE7.3A.ResponsibilitiesofPartiesunderIncoterms,2000SeaTransportOnlyResponsibilityFASFOBCFRCIFDESDEQLoadingatseller’spremisesSRSRSRSRSRSRDomesticprecarriage(localcartage)SRSRSRSRSRSRContractofcarriageanddispatchBRSRSRSRSRSRTradedocumentation(countryofexport)SRSRSRSRSRSRCustomsclearance(countryofexport)SRSRSRSRSRSRExportchargesSRSRSRSRSRSRTransshipmentatcarrier’sterminalBRBRSRSRSRSRTransport(cargo)insuranceSRInt.maincarriageBRBRSRSRSRSRTransshipmentatterminalBRBRSRSRBRSRTradedocumentation(countryoftransit/BRBRBRBRBRBRimport)Customsclearance(countryofimport)BRBRBRBRBRBRImportchargesBRBRBRBRBRBRLocalcartage/domesticoncarriageBRBRBRBRBRBRUnloadingatbuyer’spremisesBRBRBRBRBRBRdisposalofthebuyeratthetimeandplaceagreedfordelivery,normallytheseller’spremises,warehouse,orfactory.Thepurchasepricebecomespay-ableatthetimeofdelivery.Riskisnottransferredtobuyerifdamageorlossisattributedtothefail-ureonthepartofthesellertodeliverthegoodsinconformitywiththecon-tract(e.g.,damageduetoinadequatepackingofgoods).Thebuyerbearsallriskandchargespertainingtopreshipmentinspection,export/importlicenses,andcustomsduties/taxesneededforexportation.Thebuyerisalsoresponsibleforclearanceofgoodsforexports,transit,andimportssincethesellermakesthegoodsavailabletothebuyerinthecoun-tryofexport.Thistermofsaleissimilartoadomesticsalestransaction,althoughtheproductisdestinedforexport.GroupF(FCA,FAS,andFOB)Freecarrier(FCA),namedplace:Thesellerbearstheriskandcostsre-latingtothegoodsuntildeliverytothecarrieroranyotherpersonnominatedbythebuyer.Theplaceofdeliverycouldbethecarrier’scargoterminaloravehiclesenttopickupthegoodsattheseller’spremises.Theselleris SRSRSRSRSRSRSRSRSRAllModesofTransportSRSR/BRSRSRSR/BRSR/BRSRBRTABLE7.3B.ResponsibilitiesofPartiesunderIncoterms,2000BRSRBRSRBRSRSRBRSRSRSRSRBRSRSRSRSRBRSRSRSRSRSRSRSRSRBRSRSRSRSRBRSRSRSRSRBRSRSRSRSRSRSRSRSRSRSRSRBRSRSRSRSRBRSRSRSRSRBRSRSRSRSRBRSRSRSRSRSRBRSRSRSRBRSRSRSRBRSRSRSRSRResponsibilityLoadingatseller’spremisesEXWFCA1FCA2CPT1CIP1CPT2CIP2CPT3CIP3CPT4CIP4DAFDDU1DDP1DDU2DDP2Domesticprecarriage(localcartage)ContractofcarriageanddispatchTradedocumentation(countryofexport)Customsclearance(countryofexport)ExportchargesTransshipmentatcarrier’sterminalTransport(cargo)BRinsuranceSRInt.maincarriageSRTransshipmentSRatterminalBRSRBRSRBRSRSR/SRSRSRSR162 (continued)AllModesofTransportTABLE7.3BEXWFCA1FCA2CPT1CIP1CPT2CIP2CPT3CIP3CPT4CIP4DAFDDU1DDP1DDU2DDP2BRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRBRSRBRBRBRBRSRBRBRSRSRSRBRBRBRBRSRBRBRBRSRBRSRBRTradedocumentation(countryoftransit/import)Customsclearance(countryofimport)ImportchargesLocalcartage/domesticoncarriageUnloadingatbuyer’sBRpremisesBRBRCIP1:CarriageandInsurancePaidTo(namedfrontierpointincountryofdispatch);CIP2:CarriageandIns.PaidTo(namedfrontierpointincountryofdestination);CIP3:CarriageandIns.PaidTo(namedterminal);CIP4:CarriageandIns.Paidtobuyer’spremises;CPT1:CarriageBRPaidTo(namedfrontierpointincountryofdispatch);CPT2:CarriagePaidTo(namedfrontierpointincountryofdestination);CPT3:CarriagePaidTo(namedterminal);CPT4:CarriagePaidtobuyer'spremises;DDP1:Delivered(namedterminal)DutyPaid,exclusiveof(namedtax);BRDDP2:Deliveredbuyer’spremisesDutyPaid,exclusiveof(namedtax);DDU1:Delivered(namedterminal)DutyUnpaid;DDU2:DeliveredBRbuyer'spremisesDutyUnpaid;FCA1:Freecarrierseller'spremises;FCA2:Freecarrier(namedterminal).BRBRBRBRBRBRBRSRBR163 164EXPORT-IMPORTTHEORY,PRACTICES,ANDPROCEDURESresponsibleforloadingthegoodsontothebuyer’scollectingvehicle.Iftheplaceofdeliveryisthecarrier’scargoterminal,thesellerisonlyrequiredtobringthegoodstotheterminal(notobligatedtounloadthem).Itissoughtthatthecarrierislikelytohavethenecessarypersonnelandequipmenttounloadthegoodsatitsownterminalratherthantheseller.Upondeliveryofthegoodstothecarrier,thesellerreceives(fromthecarrier)areceipt,whichservesasevidenceofdeliveryandcontractofcar-riagemadeonbehalfofthebuyer.NeitherpartyisrequiredtoinsureunderFCA.However,thesellermustprovidethebuyer(uponrequest)withthenecessaryinformationforprocuringinsurance.Besidespaymentofthepurchasepriceasprovidedinthecontract,thebuyerhasthefollowingobligations:•Obtainathisorherownriskandexpenseanyimportlicenseandotherofficialauthorizationnecessaryforimportationofthegoodsaswellasfortheirtransitthroughanothercountry.•Contractathisorherownexpenseforcarriageofthegoodsfromthenamedplaceofdelivery.•Paythecostsofanypreshipmentinspectionexceptwhensuchinspec-tionismandatedbyexportingcountry.Freealongsideship(FAS),namedportofshipment:Thistermrequiresthesellertodeliverthegoodstoanamedportalongsideavesseltobedesig-natedbythebuyer(ICC,2000).“Alongsidethevessel”hasbeenunderstoodtomeanthatthegoodsbewithinreachofaship’sliftingtackle.Theriskstothegoodspasstothebuyeruponseller’sdeliveryalongsidetheship.Thisimpliesthatallchargesandrisksforthegoodsarebornebythebuyerfromthetimetheyhavebeeneffectivelydeliveredalongsidethevessel.Thesellermustobtainathisownriskandexpenseanyexportlicenseandotherofficialauthorizations,includingcustomsformalitiesthatarenecessaryfortheexportofthegoods.Theseller’sobligationtoclearthegoodsforexportissimilartothatofFOBcontracts.Thereisanimplieddutyonthepartofthesellertocooperateinarrangingaloadingandship-pingschedule,andtorenderatthebuyer’srequestandexpenseeveryassis-tanceinobtainingnecessarydocumentsfortheimportofthegoodsandtheirtransitthroughanothercountry.Thesellermustprovidethebuyer(athisorherownexpense)withtheusualproofofdelivery.Thebuyermustcontract(athisorherownexpense)forthecarriageofgoodsfromtheportofshipment.Sincethebuyerhastonominatetheship,heorshehastopayanyadditionalcostsincurredifthenamedvesselfailstoarriveontimeorthevesselisunabletotakethegoods.Insuchcases,apre-maturepassingofriskwilloccur.Costsofanypreshipmentinspectionare PricinginInternationalTrade165bornebythebuyerexceptwhensuchinspectionismandatedbytheexportingcountry.TheuseofFASisappropriateincaseswheresellerstooktheirshipmenttothepieranddepositeditcloseenoughforloading.However,todaymostoftheoutboundcargoisdeliveredtoshiplinesdaysbeforeplacementalongsidethevessel.Itisalsonotapplicableincasesofrollingcargo(cars,trucks)thatcanbedrivenaboardvessel,orinportswithshallowharborsthatdonotallowforvesselstocomealongsidethepier.Freeonboard(FOB),namedportofshipment:ThecentralfeatureofFOBcontractsisthenotionthatthesellerundertakestoplacethegoodsonboardtheshipdesignatedbythebuyer.Thisincludesresponsibilityforallchargesincurreduptoandincludingdeliveryofthegoodsovertheship’srailatthenamedportofshipment(ICC,2000).Thebuyerhastonominateasuitableshipandinformthesellerofitsname,loadingpoint,anddeliverytime.Iftheshipthatwasoriginallynominatedisunableorunavailabletoreceivethecargoattheagreedtimeforloading,thebuyerhastonominateasubstituteshipandpayalladditionalcharges.Oncethesellerdeliversthegoodsonboardtheship,thebuyerisresponsibleforallsubsequentchargessuchasfreight,marineinsurance,unloadingcharges,importduties,andotherexpensesdueonarrivalattheportofdestination.Unlessotherwisestatedinthecontractofsale,itiscustomaryinFOBcontractsforthesellertoprocuretheexportlicenseandotherformalitiesnecessaryfortheexportofthegoodssincethelatterismorefamiliarwithlicensingpracticesandproceduresintheexportingcountrythanthebuyer.Transferofriskoccursuponseller’sdeliveryofthegoodsonboardthevessel.Seller’sresponsibil-ityforlossordamagetothegoodsterminatesondeliverytothecarrier.Theship’srailisthusconsideredthedividinglinebetweentheseller’sandbuyer’sresponsibilityintermsoftransferofrisk(seeTable7.4).Freeonboarddoesnotappeartobeconsistentwithcurrentpracticeex-ceptforshipmentsofnoncontainerizedorbulkcargo,aswellasshipmentsbycharteredvessel.Inmanyothercases,sellersarerequiredtodelivertheiroutboundcargotoshiplinesdaysbeforeactualloadingofthecargo.Theseller,however,remainsresponsibleforthegoodsuntildeliveryonboardthevessel(seeInternationalPerspectives7.1and7.2).GroupC(CIF,CFR,CPT,andCIP)Cost,insurance,andfreight(CIF),namedportofdestination:TheCIFcontractplacesuponthesellertheobligationtoarrangeforshipmentofthegoods.Thesellerhastoshipgoodsdescribedunderthecontracttobedeliveredatthedestinationandarrangeforinsurancetobeavailableforthe 166EXPORT-IMPORTTHEORY,PRACTICES,ANDPROCEDURESTABLE7.4.PriceDeterminationWorksheet(UCC)Price(orcost)perunit_____3____unites5total1Profit(ormarkup)1Commissions1Financingcosts1Exfactory5Crating/containerizationcharges(ifdoneatfactory)1Labelingandmarkingcosts(ifdoneatfactory)1Drayagecharges(usuallyassociatedwithmovementofcontainers1fromrailroadramptoplantandbacktoramp)Loadingcharges,ifapplicable1Demurrageanddetentioncharges,ifapplicable1Othercharges(specify)1Freeonboard(FOB)truckorrailcaratpointoforigin5Inlandfreightcharges(includingfuelsurcharges)1Unloadingchargesatportfacilities1Drayagetopacker(crater/containerized),ifapplicable1Containerization/cratingcharges(ifdoneatport)1Labelingandmarking(ifdoneatport)1Freightforwardinganddocumentationcharges(includescharges1associatedwithconsularfees,exportlicense,postage,telex,andtelephone/telegramuse,etc.)Drayagetowarehouseandunloading,ifapplicable1Warehousingcharges,ifapplicable1Loadinganddrayagetopierfrompackerorwarehouse,ifapplicable1Wharfagecharges1Terminalnotificationcharges1Demurrage/detentionatport1Freealongsidevesselatportof__________5Vesselloadingcharges1Heavyliftorextra-lengthcharges,ifapplicable1Othercharges(specify)1Freeonboardvesselatportof__________5Oceanfreightcharges1Bunkerorothersurcharges,ifapplicable1Costandfreightto___________5Insurance1Cost,insuranceandfreightto__________5benefitofthebuyeroranyotherpersonwithinsurableinterestinthegoods.Intheabsenceofexpressagreement,theinsuranceshallbeinaccordancewithminimumofcoverprovidedundertheInstituteofCargoClausesorsimilarsetofguidelines.Thecostoffreightisbornebythesellerandthe PricinginInternationalTrade167INTERNATIONALPERSPECTIVE7.1.Incoterms:SalientFeaturesA.Incoterms1990versusIncoterms2000:Importantdifferences:•Incoterms2000placestheresponsibilityforexportclearanceonthesellerinFAScontracts.ThisobligationwasbornebythebuyerinIncoterms1990.•Incoterms2000requiresthebuyertoclearimportsathisorherownexpense(seller’sresponsibilityinIncoterms1990)underde-liveredatquay(DEQ)term.•Incoterms2000obligatesthesellertoloadthegoodsonthebuyer’scollectingvehicleunderFCAterm.InIncoterms1990,thesellerisnotresponsibleforplacingthegoodsonboardthecarrier(plane,truck,etc.)nominatedbythebuyer.B.RecognizingthelimitationofIncoterms:Incotermsonlydealwithmatterspertainingtotheinterpretationoftermsofdelivery.Therulesdonotdealwithtransferofpropertyrightsinthegoods,exemptionsfromliability,orconsequencesincasesofbreachofcontract.Theydealwithobligationsinconnectionwithdelivery,provisionofdocu-ments,insurance,andclearanceofgoodsforexport/importoperations.C.ThirteentermsinIncoterms2000:Incotermsattemptstoreflectcon-temporarycommercialpracticeandoffersavarietyoftermsrangingfromExWorks,whichentailsminimalobligationforthesellertoex-tendedobligations(FCA,FAS,FOB).Italsoprovidesformaximumobligationsfortheseller(DAF,DES,DEQ,DDU,DDP).Incotermsareoftenusedincontractsofsaleandcontractsofcarriage.D.Insurance:Seller’sobligationtotakeoutinsurancetothebenefitofthebuyerappliesonlyunderCIPandCIFterms.Partieshavetoar-rangeinsuranceastheyseefitunderallotherterms.buyerundertakestopayuponarrivalofthemerchandise(ICC,2000).Thesellermustnotifythebuyerthatthegoodshavebeendeliveredonboardthevesseltoenablethebuyertoreceivethegoods.Thesellerhastotenderthenecessarydocuments(commercialinvoice,billoflading,policyofinsurance)tothebuyersothatthelattercouldobtaindeliveryuponarrivalofthegoodsorrecoverfortheirloss.Thebuyermustacceptthedocumentswhentenderedbythesellerwhentheyareinconfor-mitywiththecontractofsaleandpaythepurchaseprice.Importduties/licenses,consularfees,andchargestoprocureacertificateoforiginaretheresponsibilityofthebuyer,whileexportlicensesandothercustomsformal-itiesnecessaryfortheexportofthegoodshavetobeobtainedbytheseller. 168EXPORT-IMPORTTHEORY,PRACTICES,ANDPROCEDURESINTERNATIONALPERSPECTIVE7.2.IncotermsandBusinessStrategies•WhichIncotermsareappropriate?Thechoiceisdependentonthetypeofcargoandthebuyer’sintentiontosellthegoodsintransit.Italsode-pendsontheabilityofthepartiestoobtainthemostfavorablecontractofcarriage.•AppropriatenessofCversusFterm:Incaseswherethesellercanpro-curemarineinsuranceatacompetitivepriceandwheretherearegov-ernmentregulationstousenationalshippinglines,itmaybeappropriatetouseCFRandCIF.Ifthepartiespreferthesellertoprocurecarriage(CPT)andinsurance,CIPmaybeappropriate.Whenthebuyercanpro-cureinsuranceatacompetitiverate,thepartiesmayprefertouseFASorFOB.•Manufacturedgoods:Exportersofmanufacturedgoodsoftensellonex-tendedtermsusingDDUandDDP(sellermakesgoodsavailabletobuyeratthecargoterminal)toremaincompetitive.Sincesuchgoodsarenormallycontainerized,thepartiescanalsouseFCA,CPT,orCIP.•UseofExWorks,FCA:Largebuyerssuchaswholesalers,departmentstoresmayfinditadvantageoustoarrangefortransportationinordertoensurejust-in-timedeliveries.TheCIFcontractmayprovidecertainadvantagestotheoverseascustomerbecausetheselleroftenpossessesexpertknowledgeandexperiencetomakefavorablearrangementswithrespecttofreight,insurance,andothercharges.Thiscouldbereflectedintermsofreducedimportpricesfortheoverseascustomer(seeTable7.5).UnderaCIFcontract,riskpassestothebuyerupondelivery,thatis,whenthegoodsareputonboardtheshipattheportofdeparture.Rejectionofdocumentsversusrejectionofgoods:Whenpropershippingdocumentsthatareinconformitywiththecontractaretendered,thebuyermustacceptthemandpaythepurchaseprice.Therighttorejectthegoodsariseswhentheyarelandedand,afterexamination,theyarefoundnottobeinconformitywiththecontract.Itmayalsohappenthatwhilethegoodscon-formtothecontract,thedocumentsarenotinaccordancewiththecontractofsale(discrepanciesbetweendocumentssuchasbilloflading,commer-cialinvoice,draftandtheletterofcredit,orcontractofsale).Inthiscase,thebuyercouldacceptthegoodsbutrejectthedocumentsandclaimdam-agesforabreachofconditionrelatingtothegoods.Thus,underaCIFcon-tract,therighttorejectthedocumentsisseparateanddistinctfromtherighttorejectthegoods. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxIncoterms,2000xxxxFASFOBCPTCIPCFRCIFDAFDDUDDPDESDEQ2xxxFCA1xxxxxxxxxxxxxxxxxxxxxxxxxxxxExWorksFCAcbdaTABLE7.5.ItemstoBeIncludedintheCalculationofthePriceUsingVariousTermsandRequiredDocumentsInvoiceItemsTotalitemsExportpackingPrecarriageVesselloadingMaincarriageForwardingfeesTotalcarriageInsuranceUnloadingTotalRequiredDocumentsCommercialinvoiceBuyer’sreceiptDeliveryreceiptExportlicensexCleanreceiptTransportdocumentxInsurancexx169 xxxxxxxIncoterms,2000(continued)FASFOBCPTCIPCFRCIFDAFDDUDDPDESDEQTABLE7.52FCA1xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxExWorksFCACIA:Cashinadvance;L/C:Letterofcredit;DD:Documentarydraft;OA:Openaccount.DocumenttotakeDeliveryImportlicenseSuggestedPaymentTermsCashinadvanceLetterofcreditDocumentarycollectionOpenaccountNote:1Seller’splace2Carrier’sterminalaprecarriage:inlandfreighttothepointofdeparturei.e.,portetc.bMaincarriage:Transportationtotheoverseascustomer,normallybyairorshipcdeliveryreceipt:certificateofcarriagegivenbycarrierdcleanreceipt:receiptbycarriertoshowthatthegoodsbearnodamageorloss.170 PricinginInternationalTrade171Paymentisoftenmadeagainstdocuments.TenderofthegoodscannotbeanalternativetotenderofthedocumentsinCIFcontracts.Thebuyer’sacceptanceofconformingdocumentsdoesnotimpairsubsequentrejectionofthegoodsandrecoveryofthepurchasepriceifonarrivalthegoodsarenotinaccordancewiththetermsofsale.Lossofgoods:IfthegoodsshippedunderaCIFcontractaredestroyedorlostduringtransit,thesellerisentitledtoclaimthepurchasepriceagainstpresentationofpropershippingdocumentstothebuyer.Sinceinsuranceistakenforthebenefitofthebuyer,thebuyercanclaimagainsttheinsurerinsofarastheriskiscoveredbythepolicy.Ifthelossisduetosomemiscon-ductonthepartofthecarriernotcoveredbythepolicy,thebuyercouldre-coverfromthecarrier.TheonlydifferencebetweenCIFandCFRtermsisthatthelatterdoesnotrequirethesellertoobtainandpayforcargoinsurance.Carriagepaidto(CPT),namedplaceofdestinationissimilartotheCFRterm,exceptthatitmaybeusedforanyothertypeoftransportation.Eventhoughthesellerisobligatedtoarrangeandpayforthetransportationtoanamedplaceofdestination,heorshecompletesdeliveryobligationsandthustransfersriskofloss/damagetothebuyerwhenthegoodsaredeliveredtothecarrierattheplaceofshipment.Thesellermustnotifythebuyerthatthegoodshavebeendeliveredtothecarrier(firstcarrierinthecaseofmultimodaltransportation)andalsogiveanyothernoticerequiredtoenablethebuyertotakereceiptofthegoods.Thetermisappropriateformultimodaltransportation.Whenseveralcarriersareinvolved(e.g.,carriagebyroadorrailfromtheseller’swarehouseforfurthercarriagebyseatothedestination),thesellerhasfulfilledhisorherdeliveryobligationunderCPTtermwhenthegoodshavebeenhandedoverforcarriagetothefirstcarrier.InCFRandCIFcontracts,deliveryisnotcompleteduntilthegoodshavereachedavesselattheportofshipment.Intheabsenceofanexplicitagreementbetweentheparties,thereisnorequirementtoprovideanegotiablebilloflading(toenablethebuyertosellthegoodsintransit).Thebuyermustpaythecostsofanypreshipmentin-spectionunlesssuchinspectionismandatedbytheexportingcountry.GiventheabsenceofpostinspectionprovisionsintheIncoterms2000,theCPTdoesnotappeartorestrictinspectionbeforepayment.TheCPTtermissimilartotheCIPterm,exceptthatthesellerisnotre-quiredtoarrangeorpayforinsurancecoverageofthegoodsduringtrans-portation. 172EXPORT-IMPORTTHEORY,PRACTICES,ANDPROCEDURESGroupD(DAF,DES,DEQ,DDU,andDDP)AmongtheGroupDterms,deliveryExQuay(DEQ)anddeliveryExShipareusedforwaterbornetransportationwhiletheotherthreecanbeusedforanytypeoftransportationincludingmultimodaltransport.AllDtermssharecertaincommonfeatures:1.Theyarearrival/destinationterms.2.Thesellerisrequiredtoarrangefortransportation,payfreight,andbeartheriskoflosstoanamedpointofdestination.3.Thesellermustplacethegoodsatthedisposalofthebuyer(variesaccordingtoterm).4.Thereisnorequirementforuseofnegotiablebillofladinganddeliv-eryoccursonlyafterarrivalofthegoods.5.Incotermsdonotrequireinsuranceduringtransportation.Sellermayhavetoarrangeandpayforinsuranceoractasself-insurerduringtransportation.6.Thebuyermustpaythecostsofanypreshipmentinspectionexceptwhensuchinspectionismandatedbytheexportingcountry.Therearenoprovisionsforpostshipmentinspection.Deliveryatfrontier(DAF),namedplace:DAFisfrequentlyusedincon-tinentalexporttrade(USA-Canada)whererailorroadtransportationisin-volved.Itshouldspecifynotonlythefrontierbutalsotheplaceofdelivery(e.g.,deliveredatU.S.–Canadafrontier,Vancouver).Thefrontierreferstoageographicalorcustomsfrontier.Itcanbethatofthecountryofexport,import,orsomeintermediatefrontier.Theseller’sobligationsunderDAFtermhavebeendefinedasfollows:•Toobtainathisorherownexpenseanyexportlicenseandotherdocu-mentsnecessaryforplacingthegoodsatthebuyer’sdisposal•Tocontractathisorherownexpenseforthecarriageofthegoodstothenamedpointattheplaceofdeliveryatthefrontier.•Toplacethegoodsatthedisposalofthebuyeronthearrivingmeansoftransport,notunloadedatthenamedplaceofdelivery.Theriskoflossisontheselleruntilthegoodsreachtheplaceofdeliveryatthefrontier.Theriskoflosspassestothebuyeronarrival,withoutun-loading.Ifthereisnodesignatedplaceofdelivery,itmaybedeter-minedbycustoms.(Incoterms,2000)•Toprovidethebuyer(atseller’sexpense)withthenecessarydocu-mentstoenablethelattertotakedeliveryofthegoods(invoice,export PricinginInternationalTrade173license,transportdocument).Thesellermustprovidecustomarypackagingwhichisrequiredforthedeliveryofthegoodsatthefron-tier.Thebuyermustbearallriskoflossordamagetothegoodsfromthetimetheyhavebeendeliveredatthefrontier.Deliveryexship(DES),namedportofdestination:TheDEStermisap-pliedonlyforwaterbornetransportationandalmostalwaysusedwithchartervessels.Thesellerisresponsibleforthecarriageofthegoodstothenamedportofdestination.Transferofriskfromsellertobuyeroccurswhenthegoodsareplacedatthebuyer’sdisposalonboardshipatthenamedportofdestination.Thesellerdeliverswhenthegoodsareplacedatthedisposalofthebuyeronboardthevesselnotclearedforimportatthenamedportofdestination.Thismeansthatthesellerbearsalltheriskandexpenseinvolvedinbringingthegoodstothenamedportofdestination(beforedischarging)thatis,thegoodsshouldbemadeavailabletothebuyeronboardthevesselattheunloadingpointtoenablethemtoberemovedfromthevesselbyunloadingequipment.Thesellerisalsoobligatedtonotifybuyeroftheestimatedtimeofar-rivalofthevesselandprovidethenecessarydocuments,suchasinvoiceandbilloflading,aswellasprocureexportlicenseandothercustomsfamiliari-tiesnecessaryfortheexportofthegoodsandtheirtransitthroughanothercountry.Thebuyerisresponsibleforunloadingthegoodsandimportclear-ance.Deliveredexquay(DEQ),namedportofdestination:TheDEQtermisusedforwaterbornetransportation.Acentralfeatureofthistermisthatthesellerarrangesandpaysfortransportationtothenamedportofdestination.Deliveryoccurswhenthegoodsareplacedatthebuyer’sdisposalonthequayorwharfatthenamedportofdestination,thatis,thesellerdischargesgoodsonthequayorwharf.Thebuyerisrequiredtoclearthegoodsforim-portandhandleotherformalitiesandchargesnecessaryforimportation.Withregardtootherissuessuchasnoticetobuyer,provisionofdocuments,packing,etc.,itissimilartoDESterm.Ifthepartieswishtoextendtheseller’sobligationstohandlingofthegoods(riskandexpensetobeincurredbytheseller)fromthequaytoawarehouseorterminalinoroutsidetheportofdestination,itisappropriatetousedeliverydutypaid(DDP)ordeliverydutyunpaid(DDU)term.InDDP,deliveryoccurswhenthegoodsareplacedatthebuyer’sdisposalonanymeansoftransportnotunloadedatthenamedportofdestination.UnlikeDDU,thesellerpaysforimportdutiesandotherchargesnecessaryforimportationattheportofdestination.Inotherareas, 174EXPORT-IMPORTTHEORY,PRACTICES,ANDPROCEDURESsuchasnoticetothebuyer,provisionofdocuments,packing,theDEQtermissimilartoDDUandDDPterms.ThemajordifferencesbetweenarrivalcontractsandaCIFcontractareasfollows:•Inarrivalcontracts,deliveryiseffectedwhenthegoodsareplacedatthedisposalofthebuyer.InCIFterm,deliveryiseffecteduponload-ingthegoodsonboardthevesselattheportofdeparture.•Inarrivalcontracts,thebuyerisundernoobligationtopaythepurchasepriceifthegoodsarelostontransit.InCIFcontracts,thebuyerisre-quiredtopayagainstdocuments.However,thelossofgoodsgivesthebuyertherightofclaimfromthecarrierortheinsurancecompanydependingonthecircumstances.CHAPTERSUMMARYSourcesofExportCompetitivenessPriceandnonpricefactorssuchasreliabledelivery,shortdeliverytime,productreliability,productquality,designflexibility,supportservices,fi-nancialservicesExportPricingObjectivesMarketshare,profits,atargetedlevelofreturnoninvestmentPricingandMarkupPolicy1.Highmarkupsarecommoninindustrieswithrelativelyfewcompeti-torsandwhichproducedifferentiatedproducts.2.Lowmarkupsarecommoninsectorsofincreasedcompetition.DeterminantsofExportPricesInternalVariablesCostofproduction,costofmarketresearch,businesstravel,productmodi-ficationandpacking,consultants,freightforwarders,andlevelofproductdifferentiation PricinginInternationalTrade175ExternalVariablesSupplyanddemand,locationandenvironmentofforeignmarket,andhomecountryregulationsApproachestoExportPricing1.Cost-basedpricing:Exportpriceisbasedonfullcostandmarkuporfullcostplusadesiredamountofreturnoninvestment.2.Marginalpricing:Exportpriceisbasedonthevariablecostofpro-ducingtheproduct.3.Skimmingversuspenetrationpricing:Priceskimmingischargingapremiumpriceforaproduct;penetrationpricingisbasedoncharginglowerpricesforexportstoincreasemarketshare.4.Demand-basedpricing:Exportpriceisbasedonwhatthemarketcouldbear.5.Competitivepricing:Exportpricesarebasedoncompetitivepres-suresinthemarket.Groupsoftermsofsale,20001.GroupE(ExWorks):Buyeroragentmustcollectthegoodsattheseller’sworksorwarehouse.2.GroupFA.FCA,freecarrier:Placeofdeliverycouldbethecarrier’scargoter-minal(sellernotobligatedtounload)oravehiclesenttopickupthegoodsattheseller’spremises(sellerrequiredtoloadthegoodsonthevehicle).B.FAS,freealongsideship(namedportofshipment):Requiresthesellertodelivergoodstoanamedportalongsideavesseltobedesignatedbythebuyer.Seller’sresponsibilitiesendupondeliveryalongsidethevessel.C.FOB,freeonboard(namedportofshipment):Sellerisobligedtodeliverthegoodsonboardavesseltobedesignatedbythebuyer.3.GroupCA.CIF,cost,insurance,freight:Thistermrequiresthesellertoarrangeforcarriagebyseaandpayfreightandinsurancetoaportofdestination.Seller’sobligationsarecomplete(transferofrisk)whenthegoodsareputonboardtheshipattheportofdeparture.B.CFR,costandfreight:ItissimilartoCIFtermexceptthatthesellerisnotobligatedtoarrangeandpayforinsurance. 176EXPORT-IMPORTTHEORY,PRACTICES,ANDPROCEDURESC.CPT,carriagepaidto:ItissimilartoCFRtermexceptthatitmaybeusedforanymodeoftransportation.D.CIP,carriageandinsurancepaidto:ItissimilartoCPTtermexceptthatthesellerisrequiredtoarrangeandpayforinsurance.4.GroupDA.DAF,deliveryatfrontier:Sellerbearsallriskoflosstothegoodstillthetimetheyhavebeendeliveredtobuyeratthefrontier.B.DES,deliveryexship:Appliedonlyforwaterbornetransportation.Thistermrequiresthesellertodelivergoodstoabuyeratanagreedportofarrival.C.DEQ,deliveryexquay:Sellerisrequiredtodelivergoodsatthequayattheportofdestination.D.DDP,delivereddutypaid:Goodsplacedatthebuyer’sdisposalonanymeansoftransportnotunloadedattheportofarrival.E.DDU,delivereddutyunpaid:SimilartoDDUexceptthatthesellerpaysforimportduties.REVIEWQUESTIONS1.Highmarkupsarecommoninindustrieswithrelativelyfewcompet-itors.Discussandprovideexamples.2.ThelargeinfluxofshrimpimportsintotheUnitedStatesfromAsiaandLatinAmericadepressedwholesalepricesbyover40percentbetween1997and2002.Despitesuchlowerprices,shrimpentréesatsomeseafoodrestaurantsintheUnitedStatesrosebyabout28percentduringthesameperiod.Discusswhyprices(shrimppricesatseafoodrestaurants)arenotalignedwithcosts.3.Whatisthedifferencebetweenmarginalandcost-basedpricing?4.Selleragreedtodeliver300tonsofcoffeetobuyerDESportofMontreal,Canada.Thegoodsweretransportedandunloadedattheportandkeptatcustomsshedforinspectionandpaymentofduties.Thebuyerwasnotifiedofthearrivalofthemerchandiseanditslocation.Beforethebuyerpickedupthegoods,thecustomsshed(includingthemerchandiseinit)wasdestroyedbyfire.Thebuyerclaimsrefundofthepurchasepricestatingthatshedidnotreceivethegoods.Isthesellerresponsible?5.Inreferencetoquestion4,wouldtheoutcomebedifferentifthecontracthadbeenDEQportofMontreal?6.SellerinNewYorkagreestoshipgoodstobuyerinLima,Peru,underaCIFcontract.Thegoodswereloadedontheshipandsellertenderedthenecessarydocumentstobuyerforpayment(inNew PricinginInternationalTrade177York).Thebuyerrefusedpaymentclaimingthatitwillonlypayaf-terinspectionuponarrivalofthegoodsattheportofdestination.Isthesellerentitledtopaymentbeforearrivalofthegoods?7.DiscussthemajordifferencesbetweenCIFandarrivalcontractssuchasDES.8.StatethemajordifferencesbetweenIncoterms1990andIncoterms2000.9.WhatarethelimitationsofIncoterms?CompareandcontrastIncotermswiththeUniformCommercialCode.10.Inwhatcaseswouldexport-importmanagersprefertouseGroupC(shipment)terms?CASE7.1.INCOTERMS(CIF)AcontractofsalewasenteredbetweenanAmericancompany,BAT,Inc.,ofCalumetCity,Illinois(buyer),andaGermanscientificequipmentmanufacturingfirm,Tola(seller),forthesaleofamobileMRI.TolasenttherequestedMRImachinetobuyeraboardtheship,SuperiorCarrier,ingoodworkingcondition.However,whenitreacheditsfinaldestination,ithadbeendamagedandwasinneedofextensiverepair.Thebuyeranditsinsur-ancecompanybelievethattheMRIwasdamagedintransit.BAT’sinsur-ancecompany,St.GuardianInsurance,coveredthecostofthedamage,whichwas$350,000.Inturn,theinsurancecompanyintendstorecoverfromTola.However,Tolaclaimsthat,sincethegoodswereshippedunderCIF(NewYork)term,theywereundernoobligationfortheloss,thatis,itscon-tractualobligationwithregardtoriskoflossendedwhenitdeliveredthemachinetothevesselattheportofshipment.Thebuyer(itsinsurancecom-pany)contendsthatIncotermswereinapplicablesincetheywerenotspecif-icallyincorporatedintothecontract.Theyalsoarguethattheseller’sexplicitretentionoftitlemodifiedtheriskofloss.Question1.DoyouagreewithBATandSt.GuardianInsurance?Why/whynot?CASE7.2.INCOTERMS(C&F)InAugust2006,InternationalCommoditiesExportCorporation(ICEC)enteredintoanagreementforthesaleof230tonsofChinesewhitebeanstoNorthPacificLumbercompany(NPL).Accordingtotheagreement,the 178EXPORT-IMPORTTHEORY,PRACTICES,ANDPROCEDURESbeansweretoconformtosamplepc-16andtheshipmentwastobemadeonthebasisofC&F.ThirteenseparatecontainersofbeanswereloadedonboardtwovesselsattheportofHongKongtoPortland,Oregon.Aninde-pendentsurveyorofqualityfoundthebeanqualitytobeinconformitywiththedescriptionofthegoodsintheshipper’sinvoice.TheU.S.FoodandDrugAdministration(FDA)detainedtheshipmentonarrivalinPortland,Oregon,onthegroundsthatthegoodscontainedfilthandwereunfitforhumanconsumption.Thebeanswerestoredinaware-houseunderfederalgovernmentdetention.Aftereffortstoobtainreleaseofthecargo,thebuyerrejectedtheshipmentsforfailuretoconformtothecontract(samplepc-16).Questions1.Didtitlepassfromsellertobuyer?Ifso,when?2.IsthesellerresponsibleforthegoodsunderC&Fwhenthegoodsareonboardthevessel?Howaboutafterdeliverytobuyer?