International Business Training - Trade Articles Americans Often Lose in International Negotiations
Have you ever left a negotiation with a potential international client or partner and felt like you didn't get what you wanted or expected? Maybe you were being honest about what you were thinking and that led to the other side taking the conversation in a direction you weren't expecting. Or perhaps you were trying to keep the conversation going when the other side just stopped talking.

Many companies around the world have learned how to do business with Americans. And in many instances, they have learned how to take advantage of common American business traits that make us vulnerable. Here are ways to counteract some of the most common techniques:

The Sound of Silence

It's fairly simple; your counterparts simply stop talking... for up to three minutes. This amount of silence tends to unnerve Americans and send them into a stream of talking in order to fill the sound gap. Oftentimes Americans will find themselves giving away negotiations concessions just to get the conversation started again. 

This technique is common in East Asia, and it has proven effective against the American need to fill the silence. If you've never seen this technique before, you can test it out in your next internal business meeting. It is typically very effective in inducing an American monologue.

Instead, match the silence. Become calm and quiet waiting for the other side to resume their side of the conversation. This will completely neutralize this technique and usually it only needs to be dealt with once.

High Drama

This is another favorite technique used against Americans. We don't do well with unpredictable behavior and high emotions. Particularly in the Middle East, parts of Africa, and some former Soviet countries, throwing the equivalent of a temper tantrum is a way to gain some concessions in negotiations. This could involve raised voices, pouting and begging.

Americans tend to have two reactions to this drama: (1) walk away from negotiations assuming that their counterpart can't be trusted to control their emotions or anything else, or (2) give in to the emotional display in order to get past it and closer to finishing the deal.

If you are doing business in one of these parts of the world, you should expect this drama. Instead of dreading it, you can even look forward to it. Enjoy the theatrical show because it's for your viewing pleasure! Generally you'll want to stay calm in order to show that the drama isn't generating the intended effect.

Divide the Team and Conquer

Americans are known for their independent thinking, even when serving on a business team. The benefit of everyone having an opinion is that you get a fuller set of options and perspectives to choose from than if everyone has groupthink. But in international negotiations, this can be a major downfall. Once the other side realizes that your team is not cohesive, they will cherry pick the ideas from team members that most benefit their side and restate those positions as if they represent your entire negotiations side. It's hard to negotiate against the other side when your side provides them with their best ideas. This happens more often than many Americans realize.

Counter this before negotiations begin. Discuss the negotiation goals, boundaries and especially roles with your whole team. There needs to be a lead negotiator. The lead negotiator should do all of the talking unless deferring to a specific team expert. Instead of talking out of turn during negotiations, ask to take a break in order to talk as a team. It is vital not to contradict particularly the lead negotiator as it undermines their position and credibility.

There are many other techniques used in international business negotiations, but these three are more commonly used against American companies to gain extra concessions. If you want to be even more effective in your next international negotiation, please download my free International Business Negotiation Preparation Checklist.

Best of success in all of your international business endeavors!
]]>, 14 Apr 2014 00:00:00 GMT
Utilizing Chambers of Commerce and Trade Consulates to Help Minimize International Trade Risk
This is the eighth part in my series of articles on assessing risk in international trade.

In my last article of this series I made some comments about bank and bank risk. In this article I will focus on chambers of commerce and trade consulates.

Chambers of commerce are typically private organisations representing a category of industry sectors and working for the benefit of their membership. Chambers of commerce may be quite broad in their activities or very specifically focused; it depends on their charter.

A trade consulate or attaché is typically the commercial arm of a foreign embassy, high commission or a consulate. They are a public body of a foreign government and, as such, they follow a different agenda than the chambers of commerce. Since they are a public institution, they are subject to their current government policies and typically only serve the commercial interests of organisations from their country.

Both chambers of commerce and trade consulates share roles in common such as networking and business-matching functions. They are able to put people in touch with each other and also find sellers and suppliers to assist in the generation of business activities. Probably the best things about working through these bodies are the facts that they already have a network of industry contacts that have been filtered to varying degrees. This accelerates your efforts in finding a potential seller or buyer. As we all know, time is critical in business.

It is also possible to do some personal networking at the local level by attending the various functions these bodies host from time to time. They may be market-specific or industry-sector-specific functions. In either case, they provide an opportunity for people to meet like-minded individuals with a real or potential interest in doing business in country X, Y or Z in industry A, B or C. Attendees may obtain interesting and useful information during these meetings including third-party referrals, swapping stories about who is doing what to whom, and who are the bad guys. This is all valuable information, especially for the novice in a new area. This is part of information gathering that assists in creating a mental picture about a foreign industry sector and its business environment. Much can be learned in a few hours about what works and does not work. This information comes at a low cost but has high value.

Chambers of commerce also offer documentation services, such as legalisations of documents and the process for registration for certificate of origin issuance. They are also able to offer comments about further legalisations processes, such as consular legalisations, etc. This is useful operational information that may impact the ability to service a foreign customer in accordance with the contract specifications for documentation.

Chambers also offer the opportunity to participate in trade mission. These usually take the form of country and/or industry-specific visits. The chamber conducts a matching exercise between buyers and sellers on the mission ahead of the visit with a view to organising in-country meetings with the foreign counterparts.

Trade consulates also offer business-matching opportunities and the organisations in their databases have usually been the subject of previous enquiry to ascertain export readiness and capability. After all, there is little point in matching someone with a counterpart that is likely to be a failure at the onset. Trade consulates also have reputations to protect: their own and that of their ministry and country. They have no interest in doing anything except what is the best possible. Consequently contacts from these organisations are comparatively lower risk.

Trade consulates also offer some tailored consultancy services. These vary widely in their availability, scope, depth and cost from one diplomatic post to another and from country to country, so it is not possible to make specific statements. Typically a local consultancy firm familiar to the trade consulate would be engaged to provide specific advice. This may vary from a general market analysis, to options for selecting agents or distributors in a particular market, to the provision of a specific market report, or anything else that you may desire. The benefits or pursing this option is that the consultancy service is generally quite reliable and produces good reports. You have the added knowledge that any consultant to be engaged has already been filtered by the trade consulate and is highly likely to be a respectable service.

On this score I am reminded of a past attempt by a consultant to provide some specific in-market information about a country in the Middle East that I was interested in selling to. This consultant's claim to fame was that he was originally from that country, was quite well versed with the business culture and etiquette, and had previous extensive working experience in that country in a marketing capacity. I had not been able to find anyone else to complete that task at the time. The consultant was given a written brief on the information required and was engaged to provide this in exchange for a payment of $15,000. He returned six weeks later and produced his report with an invoice.

Unfortunately his invoice was never paid. This is not because I am a rogue, but it was because of the type of report he produced. I am being generous with the use of the word report. Basically what he provided me with was a country profile that was extracted from some encyclopaedia-like resource. It provided me with the structure of the government, the type of legal system, latitude, longitude, population numbers, average seasonal temperatures, annual rainfall, public holidays, and main local foods—not much else. Sure it was in colour, nicely bound, but no details about the specific information I was seeking—what a waste of six weeks' worth of waiting! Of course, he did demand payment, but once he was promptly referred back to the written brief and his lack of performance, he was never seen again. By the way, the report was handed back to him immediately; one less reason to want to claim any remuneration for the job.

What is the moral of the story? Make sure you have written briefs for consultants. They protect both you and them. Also make sure that you check out the credentials of the consultant as much as you can beforehand. It is about reducing your risk after all.

In summary, the advantages of using chambers of commerce and trade consulates are that you potentially get access to a wide variety of reliable information that should enable you to positively accelerate your business activities in international markets. Some of this information is free, and some of it has to be customised to your needs. In my experience whether or not the information obtained from these sources is free, it has always been worthwhile.

Utilising respectable sources of information not only accelerates your processes but also reduces risks. Networking with others may be of great help in avoiding picking bad apples as partners; this way you will reduce risk. It may be that you will not get details about a business counterpart opportunity abroad, but you may well get details of which organisations you should avoid—typically these organisations and individuals have a track record—and that is very valuable information indeed.

In my next article I will focus on some aspects of market access issues.
]]>, 07 Apr 2014 00:00:00 GMT
When a Mouse is an Elephant
A company in the United States placed an order with a company from a country other than Scotland. The seller asked the buyer to open a letter of credit to pay for the purchase. The merchandise description in the letter of credit read simply, "Scotch Whiskey."

When the documents arrived at the issuing bank, they discovered that the merchandise on the invoice read, "Scotch-type Whiskey," not "Scotch Whiskey" as required by the letter of credit. The rules that govern the processing of letters of credit, the Uniform Customs and Practice for Documentary Credits (UCP), states, "The description of the goods, service or performance in a commercial invoice must correspond with that appearing in the credit." (Article 18c.)

Did it? Does Scotch-type Whiskey mean the same as Scotch Whiskey? A cautious banker would properly conclude, "Why should I make the decision? I'll call the applicant and let him decide." This is an accepted practice as defined in Article 16 of the UCP.

The applicant, too, wondered, "What is Scotch-type Whiskey?" The bank and the applicant concluded the beneficiary should submit a correct invoice to read, "Scotch Whiskey."

However, the beneficiary refused to substitute the invoice, which of course made everyone suspicious. If the beneficiary refused to replace the invoice, perhaps they shipped something other than "Scotch Whiskey." They may have shipped a whiskey like Scotch, but not Scotch.

The applicant did not waive the discrepancy, instructed the bank to refuse payment, and returned the shipment. No one, except the shipper, knows what was actually shipped, and he ain't talkin'.

Many exporters become frustrated by a bank's nit-picky examination of documents. The bank has an obligation to pay under the letter of credit only if the beneficiary presents documents that comply with the terms of the letter of credit. Without correct documents a bank can only pay if the applicant waives the discrepancies.

All legitimate discrepancies carry equal weight. A small discrepancy may seem like a mouse to the exporter, but to the importer looking for a way to refuse the payment it may look like an elephant.

Exporters must prepare documents that strictly meet the terms of the letter of credit in order to demand payment from the bank. If unable to meet the terms, they should request an amendment before shipping the goods.

Send me an e-mail to purchase a leaflet publication of the letter of credit rules, the Uniform Customs and Practice for Documentary Credits.
]]>, 31 Mar 2014 00:00:00 GMT
Canada, the Enigma to the North
At 5,525 miles, the U.S.-Canadian border is the longest peaceful frontier in the world. Despite that impressive statistic, Canada remains an enigma for many U.S. business people. According to the U.S. Census Bureau there are more than 300,000 companies that export from the U.S. Canada is the United States' single largest trading partner with annual goods and services trade of about $1 trillion. With such an important export market at our doorstep it is a wonder how little the average U.S. exporter really knows about Canada; present company included.

It seems some of our perceptions of Canada were formed early in childhood through the exploits of Dudley Do-Right and Snidely Whiplash. Perhaps, like me, you gained an appreciation for Canada through consumption of some of its finely brewed adult beverages. Or maybe you have been touched by one of their cultural exports such as actor William Shatner or singers Anne Murray, Celine Dion or (gasp) Justin Bieber.

But do you know anything important about Canada? Quick! Who is the current president of Canada? Well if you answered that Canada does not have a president, good for you! Canada has a constitutional monarchy with the Queen as its figurehead represented by an appointed Governor General and with principle leadership provided by an elected Prime Minister. By the way the current Prime Minister is Stephen Harper.

Perhaps even more discouraging than the lack of awareness of all things Canadian is the tendency to treat our business with Canada cavalierly, as if it were just one more domestic truck shipment across country. You don't think I'm talking about your company? Think again. Many U.S. businesses I have encountered manage their shipments to Canada through their domestic transportation group, even when they have an import/export department!

News flash! Canada is separate country with laws and regulations that differ from those in the U.S.

Your company's lack of knowledge and experience dealing with Canada's commercial and trade regulations is causing your northern customers considerable frustration and might be costing you business. Your Canadian counterparts are probably too polite to share their vexation with you. Secretly, however, they are giving themselves the V-8 salute, slapping their foreheads in exasperation.

It starts with your lack of understanding of their holidays. One customs broker in Canada shared with me that she chuckles every time she is greeted with Happy Thanksgiving in late November. For her, Thanksgiving occurred six weeks earlier in mid October. Her frustration grows, however, when you demand her office be open on July 1, Canada Day.

Of course more serious is the failure of U.S. companies to recognize that their goods are subject to regulatory oversight. Goods traveling from the United States to Canada are subject to the same U.S. export reporting and export control laws as goods sent to other countries.

This is easy to forget because most shipments are exempt from U.S. export reporting and export licensing when shipped to Canada. Nevertheless, U.S. exporters should screen their goods and Canadian transactions and retain transactional records with the same diligence and rigor they would for exports to other destinations. (You are controlling your other exports, aren't you?)

Goods entering into Canada are subject to comparable regulatory oversight as in the United States but with a slightly different twist or accent. For example, food in Canada is subject to regulations under the Canada Food Inspection Agency (CFIA). CFIA has slightly different regulations relative to food additives than the U.S. This results in goods that might pass U.S. FDA standards not meeting Canadian CFIA standards.

The Canadian customs entry process is also different. While Canada uses the Harmonized System Convention as the basis for its customs tariff, it has a unique set of 10-digit codes. These codes may require identifying additional or different product specifications or determining a different reporting quantity.

Canada has also designed a special customs invoice that incorporates more data elements than a standard commercial invoice. Your Canadian customer would like for you to complete that document, or at least provide all of the information required so that they can complete the Canada customs invoice themselves.

Finally your Canadian customer would like you to complete a NAFTA certificate for them, but they want it to be accurate and they want it to be truthful. If you don't know if your goods qualify for NAFTA, then don't complete a certificate of origin!

It is perplexing how many companies fail to agree on which party will take on the import responsibility at the time they negotiate a sales contract. Canada allows for nonresident importer status, and it is common for U.S. companies to take on the role of the importer. Without agreement about this critical obligation, U.S. sellers may find themselves paying duties and fees that were not originally in the budget.

As with any unknown situation, knowledge is power.  The Canada Border Services Agency (CBSA), the customs service in Canada, maintains a plethora of information at its website. Perhaps the greatest flaw in this website is that it provides so much guidance it is difficult to know where to start.

For those of you seeking additional guidance, you may consider taking a seminar or engaging the services of a consultant. Don't underestimate a trip north to meet with clients and service providers. Such visits are invaluable to increasing your understanding of the workings of the Canadian border.

With a little bit of additional knowledge and awareness you will find your Canadian clients will be impressed. They may even invite you to Thanksgiving dinner! Now wouldn't that be great, eh?
]]>, 24 Mar 2014 00:00:00 GMT
Shipping Lithium Batteries by Air
According to current estimates, global manufacturers produce more than four billion lithium batteries every year. We use them extensively in all facets of our lives, and I personally can't imagine living without some of the gadgets they power.

As demand for lithium batteries has grown, so has concern about their safety. Regulators are closely examining all procedures for shipping these batteries. Why? Some battery consignments have overheated and caught fire. Once ignited, they can cause other nearby batteries to overheat and catch fire as well. These fires are very difficult to put out and produce toxic and irritating fumes.

When shipping lithium batteries, it is not always clear which mode of transport will be used. Your shipment may end up on an aircraft, and some aircraft fire suppression systems may be unable to extinguish all types of lithium battery fires. Evidence of this came with catastrophic and tragic results when both crew members of a UPS flight were killed when their 747-44AF crashed on September 3, 2010, near Dubai. Accident investigators traced the cause to a fire involving a variety of lithium batteries being carried as cargo. Correctly shipping these pervasive energy sources, especially by air, is becoming more complicated and often overlooked by shippers.

Counterfeit and no-brand lithium batteries are also of concern, because they may not have been safety tested. These lithium batteries may be poorly designed, have little protection, or contain manufacturing flaws. It is mandatory that all cells and batteries, and each subsequent re-configuration, be tested and pass the UN Manual of Tests and Criteria Part III Subsection 38.3 before they can be shipped. The regulations also forbid transport of batteries that have been identified by the manufacturer as being defective, damaged, or have the potential of producing a dangerous evolution of heat, fire or short circuit (e.g. those being returned to the manufacturer for safety reasons).

The name, lithium battery, is actually a general term and, depending on their chemistry, come in two distinct formats. Without getting too technical, they can come as either singular cells or as a combination of cells, which are considered batteries. While there are distinct differences between the two, let's just call them both batteries for the purposes of this article.

Lithium primary batteries are non-rechargeable and have lithium metal or lithium compounds as the anode. Due to their fully charged nature, shipping these batteries is very restrictive and the U.S. Federal Aviation Administration (FAA) forbids them as cargo on passenger aircraft to, from or through the U.S. The International Civil Aviation Organization's Dangerous Goods Panel is currently reviewing this restriction and is considering implementing it worldwide.

The other more popular form is lithium-ion (or Li-ion) batteries where a lithium gel or polymer is the key energy source. Because of this chemistry, they can be recharged.

Regardless of their format, with a few exceptions, all lithium cells and batteries are regulated for transport as Class 9, Miscellaneous Dangerous Goods. Each consignment containing lithium batteries must be accompanied with a document that indicates that the package contains lithium cells or batteries (primary or rechargeable) and must be handled with care. It also must indicate that a flammability hazard exists if the package is damaged; special procedures including inspection and repacking must be followed in the event the package is damaged; and a telephone number for additional information.

Complicating things further is the particular form in which the batteries are shipped. Both formats can be shipped alone, packed with equipment, contained in equipment, or possibly a mixed combination of these different forms. So we actually have six basic proper shipping names:  
  • UN3090, Lithium metal batteries
  • UN3480, Lithium ion batteries
  • UN3091, Lithium metal batteries contained in equipment
  • UN3481, Lithium ion batteries contained in equipment
  • UN3091, Lithium metal batteries packed with equipment
  • UN3481, Lithium batteries packed with equipment
Fully regulated lithium batteries contain more than two grams of lithium, and fully regulated lithium-ion batteries have a watt-hour rating higher than 100 watt-hours.

In order to ship these correctly by air, the batteries must have been tested and pass the UN Manual of Test and Criteria. A shipper must have received dangerous goods training to ensure that they know the proper classification and limits on the net quantity of lithium batteries per package. These details are indicated in the International Air Transport Association’s (IATA) Dangerous Goods Regulations (DGR) Part 4.2 as well as the applicable packing instructions. Appropriate UN tested specification packaging must be used, and the package must be marked and labeled according to the applicable specific requirements. A safety document must accompany the consignment, and a Shipper's Declaration for Dangerous Goods must accompany the air waybill.

All of these requirements also apply to fully regulated batteries packed with equipment. When fully regulated batteries are shipped contained in equipment, the UN performance testing for the package is not required, but the equipment must be packed in strong outer packagings made of suitable material of adequate strength and design in relation to the packaging's capacity and its intended use unless the battery is afforded equivalent protection by the equipment in which it is contained. At this point U.S. shippers of primary lithium metals batteries must be very careful to adhere to the more stringent Department of Transportation (DOT) restrictions for passenger carrying aircraft.

There are some exceptions, but unless a shipment is labeled for cargo aircraft only, every shipment must have "LITHIUM METAL BATTERIES—FORBIDDEN FOR TRANSPORT ABOARD PASSENGER AIRCRAFT" clearly marked on the outside of every package regardless of the shipping mode.

Depending on the amount of lithium or the strength of the cell or battery, there are exceptions for small lithium batteries. Primary metal batteries that include two grams or less of lithium or lithium-ion with a rating less than 100 watt-hours have less stringent requirements. The typical laptop battery, for example, has a rating around 60 watt-hours and qualifies for applying the exception for lithium-ion battery contained in equipment. These include a maximum limit of two batteries per non-specification packaging; no hazard label, only a lithium-ion battery handling label; and no dangerous goods declaration. There is also no maximum quantity per package when cells have a rating of 2.7 watt-hours or less and the total weight of the package does not exceed 2.5 kilograms.

Along with all the exceptions that can be applied, there are numerous special provisions that may apply to a shipment such as the limitations on shipping untested prototypes or the detailed requirements for large batteries that weigh greater than the 35-kilogram cargo aircraft limit. A very important one is Special Provision A164, which specifies packing requirements designed to prevent accidental activation and short circuiting.

This article is by no means an all-inclusive summary of all the details required to ship lithium batteries. Suffice it to say, shipping these types of cells and batteries is not something that anyone can take lightly. They are regulated for obvious reasons, and I strongly recommend shippers review their shipping department's awareness of this. Far too often during one of my training sessions I have discovered that a client occasionally ships a laptop or piece of equipment containing a lithium battery completely unaware it is regulated. They are regulated, and due diligence and training are essential.
]]>, 17 Mar 2014 00:00:00 GMT
Ready or Not, Myanmar Enters the Global Arena—Part 1: An Introduction
Located at the crossroads between Bangladesh, China, India, Laos and Thailand, Burma, officially the Union of Myanmar, appears to be coming out of the shadows. The country remained under the tight control of the military for five decades. In 2010, the environment changed when the former Prime Minister, Lieutenant General Thein Sein, assumed the presidency of Myanmar.

The civilian government led by Sein announced several economic reforms as well as the release of political prisoners, the right to form trade unions, and an easing in media censorship. The government undertook significant legislative reforms including the adoption of the Labor Organizations Law and the Peaceful Demonstration Law and the amendment to the Political Party Registration Law.

Myanmar sits at the crossroads of Asia's great civilizations of India and China, but the country was largely isolated because of four decades of communist rule. Myanmar's recent opening up means that for the first time in more than 50 years foreign government officials, businesses and tourists have an opportunity to visit and explore the country without censorship or restrictions. In this article, I will discuss the progress made by Myanmar to become a part of the global economy and the challenges that international businesses will face.

Sanctions Imposed and Lifted

For decades, Myanmar, under the military rule and media censorship, demonstrated an appalling human rights record. In 1990, global media reports of a crackdown on pro-democracy protests by the military led many countries to impose a wide range of restrictions and sanctions on Myanmar. These sanctions included bans on certain imports and exports, asset freezes, limits to aid assistance, and foreign travel bans for those connected to the military regime.

The European Union banned investment and trade in Burmese gems, timber and precious stones, while the United States tightened existing economic sanctions on the regime leaders, their families and supporters including freezing assets and implementing travel restrictions against designated individuals responsible for human rights abuses and public corruption. In the first part of 2012, encouraged by the fall of the regime and recent reforms, the United States and the European Union suspended economic sanctions, which provide many opportunities for investment and growth.

A government largely composed of retired generals took power in 2011 and began a radical political and economic reform program that they called a transition to disciplined democracy. They ended pro-democracy leader Aung San Suu Kyi's house arrest and began releasing hundreds of political prisoners. As a result, the West suspended or lifted most of their trade and economic sanctions. In the first part of 2012, encouraged by the fall of the regime and recent reforms, the United States, Australia, Canada and the European Union suspended many of the economic sanctions. With political sanctions easing, American and European companies are showing newfound enthusiasm to explore Myanmar.

Asian Community Eyes Myanmar

During its isolation, Myanmar had been the missing link that prevented ASEAN community from being physically and economically connected. The ASEAN community has been eying Myanmar since 2010 when the country's new government came into power. Road and port building projects are being planned and funded to reconnect Myanmar to this region. Japan, China, India and South Korea are all jockeying for a position in Myanmar. Large projects funded by investors from China, South Korea and Thailand have been approved in a number of sectors that will require imports of capital goods and construction material.

Japan remained engaged with Myanmar during its years of military rule. It is now revamping its involvement in recognition of the reforms taking place in the country. To help Myanmar succeed in its transition to a market economy, Japan's public and private sectors have pledged to support Myanmar's efforts to promote the nation's democratization, rule of law, economic reforms, and banking system reforms. It is also helping to improve the country's education system and science and engineering universities via grants and technical cooperation.

China has gained the most from the Western absence from Myanmar in the past 15 years. Chinese companies have poured about $27 billion into the country. China now dominates the oil, gas and mineral industries in the country. India and Myanmar have signed 12 agreements to strengthen trade and diplomatic ties. India expects to be the economic bridge between South and South-East Asia.

In the next article of this series, I will dive deeper into a discussion of opportunities that await companies looking to do business in Myanmar.
]]>, 10 Mar 2014 00:00:00 GMT
Localizing Your Products for International Markets
Years ago I began my marketing career in a healthcare software company. Generally software is an industry where products can be sold internationally without needing major changes to meet local needs. In the case of healthcare software, practicing medicine can vary from country to country, but luckily the products we marketed were highly customizable for end-user medical professionals. The greater question was: How much should the company localize marketing and support services? Should the website and marketing materials be available in the local language? Did hiring local technical support and providing local language materials help to expand the market in a specific country?

To get the root of these questions, it's helpful to take a closer look at localization versus internationalization. Localizing products or services means that your company makes changes to its offering in order to be able to sell more in another geographic market. Generally, food products require some of the most product localization. This is due to the specific preferences of consumers around the world.

Take, for example, soup. Some countries prefer their soup sold as a powder packet, while others prefer a condensed version. I once was in a country that preferred soup to be packaged as bouillon cubes to be added to hot water. Then there's the matter of individual spices and other ingredients. To sell soup abroad could require reworking every aspect of a product's production and packaging. While that might be costly, the reason to localize is to create a greater local appeal for your offering.

On the other end of the spectrum are highly technical products such as software for scientists. Usually scientists follow the same procedures regardless of country. Oftentimes scientists can read in one of a handful of more common languages such as English or Simplified Chinese. Scientists tend to have access to the internet for software downloads. This is considered internationalization: A standardizing of products and services with minimal changes for the local market.

First Hurdle: Local Regulations

There is not a product or service in the world that can be sold universally without at least some localization. The main reason is local regulations. It is critical to know the national and local laws that apply to your specific industry. This may mean a change in how your product or service is marketed. Or it may mean that your packaging must include specific references to how your product is made. Some industries must make drastic changes to what they sell to be locally compliant. Consider a requirement for metric standards in maintenance tools when your product is designed around the English measurement system. This may be too great a regulatory hurdle to jump.

Cost-Benefit Trade-Off

The trade off is making changes to appeal and sell more to more local buyers versus the cost of making these changes. If the changes are simple and low cost compared to the increased demand and a healthy profit margin, then it is worth making those changes. Here's my general formula:

Expected increase in units sold x profit margin [ > or < ] Cost of localizing

American businesses in particular should keep in mind that the up-front costs of localizing may pay off years later when your product or service is established in the overseas market.

I hope you found this article helpful. If you would like to read more about international marketing and cross-cultural communications, please visit my company site: The International Entrepreneur.

I also offer a free International Market Entry Checklist that includes what to consider when localizing your products or services for new markets.
]]>, 03 Mar 2014 00:00:00 GMT
International Trade Risk: Assessing Banks and Bank Risk
This is the seventh part in my series of articles on assessing risk in international trade. 

In the last two article of this series I concentrated on the issue of country competitiveness and fairness of trade. In this article I will discuss the role banks play in international trade and the potential risks you should be aware of. 

There is no doubt that banks play a vital role in society. Throughout the ages financing business activities has always been crucial for generating economic activity. Modern day banking is largely attributed as being Italian in origin, dating back to the Renaissance period in particular. 

Italy was wealthy at the time, with powerful merchant city-states such as Firenze, Siena, Venezia and Genova controlling much of the commerce in Europe. It has been claimed by some writers that Italy was virtually the monopoly banker of Europe for about 600 years. It was not until nations north of the Alps managed to grow food that the seat of finance moved northwards towards Austria and Germany. We need to remember that in those days economies were based on agriculture; the industrial revolution took place much later.

The significance of Italy in today's commercial environment can be witnessed, for example, in the use of the bill of exchange—one of the four traditional methods of payment still used in modern day international trade.

Early commerce relied on private investment, or risk taking, by wealthy individuals. They lent money they had and expected a return. If thing went according to plan, they realised a handsome ROI (return on investment), otherwise they may have lost all of their capital. Such was the case when a wealthy family loaned money to a foreign royal as part of a war chest. If the borrower lost the war, they also lost all of their assets, meaning they were unable to repay the principal back to the lender. Of course, in those days, it wasn't unusual for the borrower to die in conflict.

It was not until public banking was established that new principles were established. In the Western world these principles particularly related to the charging of interest and the associated notion of usury—that is, applying an inappropriate lending rate. As it is not my intention to provide a detailed historical account of the development of trade finance, I will stop here with history, but as someone once told me: "History is everything," so I consider this little background useful.

I have already written several articles on different methods of payment, as have several other colleagues, so the material here does not seek to duplicate that information. Instead I want to take a different perspective on banking.

Banks around the world are the lifeblood of business finance; we may complain about them, but as entrepreneurs we need them to provide liquidity. The problem has been that some banks do not appear to play by the rules, particularly in the last decade. These banks have taken excessive risks resulting in failures that have wide ramifications: the recent global financial crisis provides one good example of such events.

In international trade banks are relied upon for several purposes, such as:
  1. Foreign Exchange. The provision of specific products that may assist a trader in minimising their exchange-risk exposure.
  2. Trade Facilitation. This is highly relevant when payment is by letter of credit (LC) where banks decide on the basis of documentary data alone whether payment should be effected or not. Discounting of proceeds (advancing payments on future receivables) may be another example of trade facilitation.
  3. Commercial Loans. The availability of cash to ensure the viability of the firm. These loans may be short or long term, of a structural nature (investment in capital equipment etc.) or to provide some cash flows, as examples.
This article focuses on the second point, trade facilitation, particularly as it relates to payment for foreign sales and purchases.

When assessing and managing bank risk, country risk and bank risk are essentially inseparable. A country's risk profile is largely influenced by the health, or otherwise, of its financial system. Since banks reflect the financial position of an economy, it not difficult to imagine the natural alignment between these two elements. The risks we need to be concerned about when assessing a foreign bank may be summarised as follows:

How Reputable is the Bank?

In answering this question we may rely on a number of information sources, such as the The Organisation for Economic Co-operation and Development's Country Risk Classification, the World Bank's Doing Business, Transparency International's Corruption by Country Chart, investment services such as Moody's and Standard and Poor's, and other publicly available information to gain a broad picture about a specific bank or the banking industry in a particular nation we may know little about or have zero or limited transaction experience.

Are They Known to Your Bank?

International transactions are typically conducted through a series of correspondent arrangements, and banks have many links across different nations. Make no mistake about it, if banks are good at nothing else they are good at managing risk—this is their core business. If a bank has been suggested in negotiations, proceed cautiously if it is unknown or if no favourable reports can be obtained from your local sources.

Do You Need to Mitigate Your Risk?

A bank may be quite good, but the nation in which it operates may not be. Again this is the common link between bank risk and country risk. Banks are subject to national laws and regulations. This means they are also subject to political forces since laws and regulations are created by politicians. I will not discuss the merits or otherwise of political forces as this is beyond the scope of the article. 

If we consider this issue in relation to payment settlement method via export LC, then options may be to have the LC openly confirmed with a local bank (presumably your bank), or have it confirmed in a country other than the importing nation. The reason behind this suggestion is simply that if the nation where the bank offering the payment is questionable, it does not matter which bank you use. It is the nation that is the problem, not the operator within it. If a negative response is received on confirmation, proceed very cautiously or ask for more secure payment options (prepayment).

Consider an exporter in a delicate situation with a sensitive customer who may be easily offended by being asked to provide a confirmed LC. They may think this request means the exporter does not trust them. If the exporter is afraid that their request my cause them to lose the sale, they may decide to take a chance on the LC and go ahead with the transaction.

There is a better solution than risk losing payment. The exporter may instead make the LC subject to a silent confirmation. This is an arrangement whereby the LC is confirmed privately between an exporter and a bank (usually the exporter's bank, but it may be any bank) and nobody else need know about this. This option saves face for the importer and the exporter, but still provides financial comfort to the exporter. Of course, if the request for silent confirmation is denied, the same advice as for ordinary confirmation applies: find an alternative payment solution.

For importers it is also important to make sure they are comfortable with the bank the exporter uses for LC transactions, especially if the payment arrangements are immediately on presentation of the documents in the exporting nation and the exporter's bank has been given authority to pay against acceptable documents. I am not suggesting banks deliberately do anything untoward, but problems have been known to happen before. The importer needs to ensure they are dealing with a reputable bank; otherwise payment may occur against sub-standard or non-existent goods. How do importers satisfy themselves that a foreign bank is an acceptable risk? Confirmation is not an option as the importer knows the LC is sound; therefore, they need to evaluate the reputation of the bank.

In summary, assessing bank and bank risk should be part of the process when engaging in new business and also part of the ongoing review of transactions that should occur in an organisation. As the world of commerce changes in response to economic events, natural disasters and human decisions, so too does the risk associated with such transactions. The message is simple, yet often ignored: Do your research and be prepared. When it comes to money there is no room for emotion or complacency.

In my next article I will discuss Chambers of Commerce and Trade Consulates.
]]>, 24 Feb 2014 00:00:00 GMT
How Do They Say Hello in France at 4 a.m.?
Many customers use international wire transfers when making payments overseas. This includes businesses paying invoices as well as individuals sending money to relatives.

Prior to the current state-of the-art ability to initiate such transactions online, a customer was required to call their bank with the pertinent information, such as the amount to be transferred, beneficiary's name, address, bank, and bank account number.

The customer's bank is the remitting bank. The remitting bank determines how to route the money to the beneficiary's bank and to notify the beneficiary's bank that they sent the money. On rare occasions, and for a variety of reasons, the money doesn't arrive promptly at the beneficiary's bank. In such cases, the remitting bank traces the wire to determine where the money went, what went wrong, and how to correct the problem so the beneficiary receives the funds.

A bank I worked for had a customer who asked us to send a payment to a beneficiary in France. A young man in our department, Eric, took the call. He recorded the information, determined the routing, and informed the customer that the beneficiary should have the money in two to three days.

A week later, the customer called Eric and informed him that the beneficiary in France claimed non-receipt. Eric offered to put a tracer on the wire and promised the customer he would resolve it quickly.

Another week elapsed and again the customer called, somewhat less understanding this time, and informed Eric that the money still had not arrived in France. Eric came into my office and asked, "Roy, if I get up at 4:00 a.m. tomorrow and call the bank in France from my home, will the bank pay for my phone call?"

I smiled to myself as I replied, "Eric, if you want to get up at 4 a.m., yes, the bank will pay for your phone call!"

The next morning, at a staff meeting, he related what had happened. He had called the beneficiary's bank in France. The bank's operator answered, "Bon jour." Eric, who knew no French, tried to explain that he needed to speak to someone in the international department who could speak English.

After several phone transfers, he reached someone who could help. They discussed the transaction and finally placed the problem with another bank in France, an intermediary bank, who apparently had failed to relay the money. Eric asked the employee at the French bank if she had the telephone number of the intermediary bank. She said she did, and she gave it to him.

Eric then dialed the number of the intermediary bank. As it rang the first time or two he anticipated hearing, "Bon jour," and expected he would again have to find an English speaking person. Instead, he heard a voice with a distinct American accent, say, "Hello?"

Of course, this caught Eric off guard. Since he knew he had carefully dialed the number, including country code and city code, he jumped right into his reason for calling. "Hello, my name is Eric. I'm calling from a bank in the United States and I'm trying to trace a wire transfer we sent to you two weeks ago," he said and then went into a lengthy explanation of the problem.

When he paused, the voice on the other end said, "Excuse me, do you think you are speaking to a bank?"

"Why, yes," Eric replied, "to whom am I speaking?"

"I'm an American student going to school here in Paris," she explained, "I just walked down the street and heard this pay phone ringing!"

I have often reflected on this incident and continue to marvel at the remarkable sense of humor that Eric had. Most employees would have come in that morning, grumbling about how early they had to get up, and then, of all things, they ended up calling a pay phone! However, no one saw the humor in the situation better than Eric, and as he told us the story, the whole office laughed at his misfortune. I believe humor in the workplace allows us to feel more relaxed and handle stress and frustration more effectively.

If you have specific questions about incoming or outgoing international wire transfers, please contact me.
]]>, 17 Feb 2014 00:00:00 GMT
To B or not to B?
Dear John:

My customer wants me to complete a certificate of origin for the Panama Free Trade agreement. They gave me a form that looks much like the official NAFTA certificate. When I declared the preference criterion, I simply put B in the field. This is because I used the rules from General Note 35 of the Harmonized Tariff Schedule that provided for tariff change and regional value content.

My customer rejected my certificate and told me I had to claim B1 or B2 to indicate which part of the General Note 35 rule I had used. I don't understand. I thought I only had to claim A, B, or C preference criteria just like under the NAFTA.


Dear Ham:

Let us reflect on Shakespeare's existential question: "To be, or not to be?" In your case the question could be restated as: "To B1 or to B2?"

The quick answer is neither.

There has been confusion in the industry about how to make the preference statement under the various trade agreements. In the absence of clear instructions many in the trade have followed the solution advised by your customer. There have been other variations of the preference criterion statement that have lead to a lack of clarity and, frankly, a question as to whether or not the goods even originate.

Recently, U.S. Customs and Border Protection (CBP) brought some clarity to the issue when it posted CSMS #13-000564. In that message CBP advised the trade not to use simple preference criteria letters such as A, B and C, unless the trade agreement itself allowed for them. As an example CBP mentions that the NAFTA allows for these preference criteria symbols.

For other agreements CBP directed the trade to cite the full rule as described in the General Note of the HTS specific to that trade program, or to cite the full rule as described in the underlying agreement itself. CBP recommended relying on the General Note as it is more readily available to the trade and it will reflect the most current iteration of the trade agreement, should there be updates to the HS nomenclature or to the agreement.

From a practical perspective what does this mean? How are you supposed to complete the certificate of origin? What should you state in the preference criterion filed? The answers to these questions are found in the General Notes of the HTS for that program.

As an example below I have inserted the origination rules from the Panama Free Trade Promotion Agreement as stated in General Note 35 of the Harmonized Tariff Schedule.

General Note 35

(b) For the purposes of this note, subject to the provisions of subdivisions (c), (d), (n) and (o) thereof, a good imported into the customs territory of the United States is eligible for treatment as an originating good of Panama or of the United States under the terms of this note if 

(i) the good is wholly obtained or produced entirely in the territory of Panama or of the United States, or both; 

(ii) the good is produced entirely in the territory of Panama or of the United States, or both, and

(A) each of the non-originating materials used in the production of the good undergoes an applicable change in tariff classification specified in subdivision (o) of this note; or

(B) the good otherwise satisfies any applicable regional value content or other requirements set forth in such subdivision (o); and satisfies all other applicable requirements of this note and of applicable regulations; or 

(iii) the good is produced entirely in the territory of Panama or of the United States, or both, exclusively from materials described in subdivisions (i) or (ii), above.

Where under the NAFTA you might state criterion A, under the Panama agreement you would insert the following: "USHTS General Note 35(b)(i)."

In your example you said you had used the tariff change and RVC rules and you wanted to use the comparable NAFTA preference criterion B. CBP's instructions direct you to make the following statement if you used the tariff change rule of General Note 35(o):

USHTS General Note 35(b)(ii)(A).

I believe this is what your customer intended by requesting that you use the term B1.

If you used the second portion of the General Note 35(o) rule relying on regional value content or other parameters required by the rule you would state the following:

USHTS General Note 35(b)(ii)(B).

I believe this is what your customer intended by directing you to use the term B2.

Where under the NAFTA you might state the preference criterion C, you would make the statement: USHTS General Note 35(b)(iii).

The Panama and other agreements have additional origination requirements in addition to the above terminology. If you originate your goods under one of those provisions you would reference the portion of the General Note that allows for that method of origination.

Let us also be clear on another issue. Simply because your goods originate under one of the preference criteria of the NAFTA does not mean those goods automatically originate under another agreement. Neither can we assume that the various criteria are exactly the same. For example, regional value content as calculated under the NAFTA is done differently than under the other agreements. You will need to make sure you have originated your goods independently per the terms of each of the agreements before making a certification statement.

If you would prefer to make your origination statement by quoting the underlying agreement, you will find that language posted at the U.S. Trade representative's website.

For more information about implementation of the various trade agreements, CBP has posted information to its website for each agreement.

To B1 or to B2? In the end, Ham, 'tis nobler to suffer the slings and arrows of your customer than to claim B1 or B2. 'Tis better to deliver the entire soliloquy of your origination process.
]]>, 10 Feb 2014 00:00:00 GMT
Keeping Up with Changes to the Dangerous Goods Transportation Regulations
Staying current with your training certification is only part of your responsibilities as a hazmat/dangerous goods shipper. It's equally important to keep well-informed about any changes to the regulations and how they might affect your business.

Imagine you received your initial compliance training for shipping dangerous goods by air and the following year the regulations have a new mandatory requirement that previously didn't exist and wasn't covered in your initial training. Since the international air regulations—the International Civil Aviation Organization's Technical Instructions (ICAO TI)—only requires recurrent training every 24 months, a shipper who isn't vigilant about monitoring regulatory changes might find out about these new requirements the hard way—from a third party after the goods have already shipped.

Sometime it's a relatively easy fix; your non-compliant consignment will be refused by cargo acceptance staff, and you will receive a report of non-compliance with the returned shipment—if it's legal to return by truck. The term frustrated consignment is applied here, although I'm not sure if it applies just to the shipment.

What if you ship by FedEx to Glasgow? The FedEx U.S. hub is in Memphis and their European hub is in Paris. That's three flight acceptance checkpoints to ensure your consignment is correct. Now what if the error does somehow get overlooked on initial acceptance and arrives at another airport for possible interlining overseas, and the cargo acceptance staff pick up the mistake there? In that case you'll have: 1) delayed delivery; 2) extra costs to correct the error and re-ship; 3) a possible non-compliance fine; and 4) a frustrated shipment and shipper.

I'm reminded of an air shipment involving a Division 6.1 toxic solid going to Brunei, interlining via Schiphol. The total package weight was within the acceptable quantity limits for cargo aircraft, but because of a recent change in the International Air Transport Association (IATA) Dangerous Goods Regulations' packing instructions, the shipper was unaware that the weight of one of the inner containers was over the new acceptable limit for inner packages. The error wasn't noticed until a Dutch Civil Aviation Authority (CAA) inspector questioned the package, had it opened, and discovered the mistake. The shipper then had to find a re-packer in Amsterdam qualified to handle dangerous goods, reschedule the shipment, and pay a fine of 3,500 Euros. We now review their product packaging with an annual audit to ensure all there packaging formats are in compliance.

For U.S. domestic transportation only, checking with the latest version of the federal regulations (CFR49) is relatively easy. Simply go online to the Government Printing Office (GPO) website and check the electronic version or go to the Department of Transportation's Pipeline and Hazardous Materials Safety Administrations (PHMSA) website and click on the Regulations hyperlink. I would strongly suggest saving this link to your web browser's favorites list.

Shipping by air is a little more complicated since ICAO and IATA don't have electronic versions. They do publish the changes on the web, but you need to know where to look. The ICAO's regulations are found in ICAO Technical Instructions for the Safe Transport of Dangerous Goods by Air. This publication is produced biennially and is now in its second year (2013/2014). These regulations are the basic legal requirements for shipping dangerous goods internationally by air. There have been three addenda and three corrigenda since it first published in January 2013. All six changes can be found online.

As most airlines (operators) are members of IATA, their regulations for carrying dangerous goods, called the DGR, incorporates the ICAO's TI as its basis. There is nothing in the DGR that is less restrictive than the Technical Instructions. If you have been trained using the IATA DGR you'll know that the pointing finger in the margins means that particular part referenced is in addition to the ICAO TI regulations. IATA publishes its DGR annually, and even though their regulations aren't used as a legal reference, the fact remains it's tricky to work in the industry without having them as a reference.

These days air transport is a fragile business with operators and their businesses changing frequently. Interlining would be a major headache without this common reference. The current price for the DGR ($275) is now getting critical, and I see this becoming a possible cause for non-compliance with shipper's pinching budgets. There is little change from the ICAO regulations as of last month other than what is mentioned above. However there are still changes that you need to verify and see if they affect your operation: IATA DGR 55th Edition addendum 1.

For transportation by vessel the International Maritime Dangerous Goods (IMDG) Code has a unique sequence for compliance. The current edition, called the 2012 Edition incorporating amendment 12-36, actually became mandatory this year (2014). It was introduced last year and shippers could voluntary comply. There is always a one year overlap from the previous edition. The International Maritime Organization (IMO) had one change in December 2013: IMDG Code Errata & Corrigenda Amendment 12-36. This is another example of where your training probably did not cover these mandatory changes. The IMO requires shipper training to be that of the country of origin's competent authority. In the U.S., it's the Department of Transportation (DOT), and they require three years as the minimum. Again the regulations can change, and you must stay in compliance with the current regulations regardless of when your training occurred.

As you can see, regulatory compliance is not just about training. It also requires shippers staying vigilant about the regulatory changes that might affect them as well. Large corporations have regulatory departments. Having a regulatory specialist is a luxury for some companies and leaves the responsible small-business owner with more work keeping an eye out for possible changes that could be crucial. You can learn more about training and monitoring options at CARGOpak.
]]>, 03 Feb 2014 00:00:00 GMT
Six Basic Steps for Export Compliance
According to the U.S. Department of Commerce's Bureau of Industry and Security (BIS), fines for export violations can reach up to $1 million per violation in criminal cases, while administrative cases can result in a penalty amounting to the greater of $250,000 or twice the value of the transaction. In addition, criminal violators may be sentenced to prison for up to 20 years, and administrative penalties may include denial of export privileges. 

Penalties of this size and nature can be especially devastating to small and medium-sized businesses, which represent 97% of the approximately 300,000 U.S. companies that export, according to U.S. Census Bureau statistics. Small and medium-sized businesses may think they lack the time or money to train personnel in export regulations and the necessity of compliance screening. Even if they do have the necessary experience and training, export personnel may not have the support of senior management, who are often totally unaware of U.S. export regulations. 

BIS has published a book, Don't Let This Happen to You, which outlines exporters' compliance responsibilities and includes real-life examples of penalties they have recently issued against individuals and businesses. You can download a copy of the book at the BIS website

Protecting Your Business Against Export Violations

Businesses that are already exporting or are planning to start exporting need to follow some basic steps to ensure they are compliant with U.S. export regulations. While the following six steps are by no means all inclusive, they should provide companies with a starting point for implementing an export compliance plan. 

1. Properly Classify Your Products

Most exporters are familiar with the Harmonized System (HS) or Schedule B codes used to classify products for duty, quota and statistical purposes. However, exporters are often less familiar with the requirement that they determine whether or not their products are controlled for export by the Department of Commerce or the Department of State. 

The Department of Commerce's Bureau of Industry and Security (BIS) controls the export of most commercial products. While only a small percentage of exports under BIS's jurisdiction require an export license, it's a product's technical characteristics, the destination country, the end user, and a product's end use that factor into this determination. (Products under State Department control are typically products or services specifically related to defense and are outside the scope of this article.) 

The first step for deciding whether or not a product requires an export license is determining if it has a specific Export Control Classification Number (ECCN) by checking the U.S. Export Administration Regulations (EAR). If a product does have a five-character ECCN code, the EAR will also list one or more reasons why it is controlled. Companies use these reasons for control to help them determine if they need to apply for an export license based on the countries to which they are exporting (see step #2 below). 

You can search for an ECCN code in a printed copy of the EAR or online at the BIS website. In addition, Shipping Solutions' website includes a Product Classification Wizard that allows you to search for the correct ECCN code by typing in a short description of your products.

Products that do not have an ECCN code and are not subject to control by any other U.S. agency are designated as EAR99. Products classified as EAR99 are low technology consumer goods and usually do not require an export license. However, even EAR99 items require licenses for exporting to embargoed countries, to a restricted party, or in support of a prohibited end use. 

2. Determine if the Destination Country Requires an Export License 

There are several reasons the U.S. government prevents exports to certain countries without an export license. In the most extreme cases, the U.S. has placed embargoes on countries like Iran and Syria for supporting terrorist activities. In other cases, the U.S. restricts companies and individuals from exporting certain products to specific countries for reasons of national security, nuclear nonproliferation, chemical and biological weapons, or several other reasons outlined in the EAR.

Companies must use the ECCN codes and reasons for control described in step #1 above to determine whether or not there are any restrictions for exporting their products to specific countries. Once they know why their products are controlled, exporters should refer to the Commerce Country Chart in the EAR to determine if a license is required.

Although a relatively small percentage of all U.S. exports and reexports require a BIS license, virtually all exports and many reexports to embargoed destinations and countries designated as supporting terrorist activities require a license. These countries are Cuba, Iran, North Korea, Sudan and Syria. Part 746 of the EAR describes embargoed destinations and refers to certain additional controls imposed by the Office of Foreign Assets Control (OFAC) of the Treasury Department. 

The Shipping Solutions Professional export documentation and compliance software includes an Export Compliance Module that will use the ECCN code for your product(s) and the destination country and tell you if an export license is required. If indicated, companies must apply to BIS for an export license through the online Simplified Network Application Process Redesign (SNAP-R) before they can export their products.

3. Screen All Parties In Your Export Transaction

The U.S. government, as well as several other governments and organizations like the United Nations and the European Union, publish lists of restricted parties to whom you can't export without a license. That includes items that are EAR99 or otherwise don't require an export license based on the country of export. 

These restricted parties are individuals, businesses and other organizations that have been identified as engaging in activities related to the proliferation of weapons of mass destruction, known to be involved in terrorism or drug trafficking, or who have had their export privileges suspended. These individuals, businesses or organizations could be located within the U.S. 

While there is no requirement that companies check every export against these various restricted party lists, it is a violation of export regulations to export to anyone on the U.S. lists. Even the smallest exporters should check all the parties in every export transaction against the various restricted party lists to prevent penalties. Rather than manually checking each of the individual lists, the Shipping Solutions Professional software's Export Compliance Module allows you to quickly and easily check all the parties in your export transactions against a consolidated list of denied parties.

4. Watch for Red Flags: Know How Your Product Will Be Used

Even products that seem harmless can sometimes be used in ways not intended. Companies are responsible for knowing how their products will be used once they leave the country. Some of these end uses are prohibited while others may require an export license. For example, companies may not export to certain entities involved in the proliferation of weapons of mass destruction (e.g., nuclear, biological, chemical) and the missiles to deliver them without specific authorization, no matter what the items are. 

BIS publishes a list of Red Flags that may be indications that the use of a product may be prohibited. For example, companies should be reasonably suspicious that orders for items that are inconsistent with the needs of the purchaser, a customer's declining installation and testing when included in the sales price or when normally requested, or requests for equipment configurations that are incompatible with the stated destination could be violating U.S. export regulations.

BIS cites the example of a South African businessman who tried ordering several dozen replacement switches for a medical imaging machine. In this case, it's normal to order one replacement switch; it's not normal to order several dozen at one time. It turns out these switches were going to be used as detonators for nuclear bombs. If suspicion has been raised, a company should refrain from the transaction until an export license application has been submitted to and issued by BIS.

5. Be Aware of Deemed Exports

The export restrictions outlined in the EAR don't just apply to products being shipped outside the U.S. Companies are exporting technology by sharing technical data such as plans and blueprints of products or by allowing a visual inspection of a product to foreign nationals within the U.S. This is called a deemed export and requires that companies follow the same procedures outlined in steps #1 through #4 above just as if they were physically shipping goods internationally.

6. Document Compliance

When small and medium-sized businesses become aware of their legal obligations as exporters, often their first reaction is to try to avoid these responsibilities by hiring a freight forwarder or another party to handle their exports. While there is absolutely nothing wrong with outsourcing the export functions, companies must realize that they cannot outsource their liabilities.

Companies that hire third parties to manage their exports should require documentation that all export regulations are being followed, and they should retain copies of this documentation—as well as the actual export forms that must be generated for each shipment—onsite for at least five years. This documentation can be used to demonstrate compliance with the EAR or, in case some violations are found by the U.S. government, be used as evidence of a good-faith effort to comply, which could result in reduced penalties.

Implementing Export Compliance Procedures

Companies of all sizes need to be aware of their responsibilities as exporters. This article focuses on some basic steps that all export companies and their personnel should know, follow and document. It should serve as a starting point for creating a more comprehensive and written export management and compliance plan.

For any plan to be effective, it must be endorsed by companies' top management and shared with all employees involved in any part of the export process—from managers, to sales and administrative personnel, to the warehouse team. Such an effort can save companies thousands if not hundreds of thousands or even millions of dollars in fines, prevent restrictions on exporting that can cost companies millions of dollars in lost revenue, and even jail time for the most serious violations.

An effective export compliance program includes ongoing training of all company personnel involved in the export process including all management, sales and support staff. BIS sponsors a variety of seminars across the U.S. In addition, companies like International Business Training offer a variety of books, webinars and seminars on export rules and procedures.
]]>, 27 Jan 2014 00:00:00 GMT
Where Does Risk Pass in Your International Shipments?
Early in my career, I heard debates on the topic: Where does risk pass? It seemed, among bankers anyway, this debate belonged to lawyers for argument in court. Now, thanks to the undertaking of the International Chamber of Commerce (ICC), we have the answer to the question. 

A recent ICC publication, Incoterms 2010, includes definitions for each of the 11 trade terms. In a well thought out sequence, it lists each Incoterm and then stipulates where the seller delivers. Delivery is defined as: "…where the risk of loss of or damage to the goods passes from the seller to the buyer." 

Once the delivery event is identified, Incoterms 2010 lists 10 responsibilities for the buyer and 10 for the seller. It addresses who jumps through hoops and over hurdles. It explains who pays for loading the inland carrier, who pays the cost of shipping to the main carrier, who pays for loading the main carrier, who pays for the cost of shipping on the main carrier, who pays for the insurance, who pays for unloading the main carrier, the inland freight, import customs, etc. Each Incoterm clearly states which responsibilities belong to the buyer and which ones belong to the seller. 

A committee of 20 people (19 from Europe and one from Japan) wrote a predecessor publication, Incoterms 1990. Notice the absence of American representation. The ICC revised Incoterms in 2000 and again in 2010. Both times they invited one American, Frank Reynolds, to the committee. Understanding Incoterms is easier when read with a European mindset. Many European countries can export products with the goods never leaving the surface of the earth: by truck, rail, barge, etc. As a result some Incoterms may not apply for many U.S. imports and exports. 

The Incoterm you use must correctly match the payment term you use. The two most misused Incoterms are EXW and FOB. For example, I have seen letters of credit issued to beneficiaries in Colorado stating, "Ex Works the seller's warehouse." That's easy to understand and often exporters think it is the least hassle for them. It essentially means, "the goods are at my back door; come and get them."

However, if the exporter has a letter of credit calling for an on-board ocean bill of lading issued from a West Coast port, how will the exporter obtain the bill of lading? What if the merchandise is destroyed en-route to the port and they can't get a bill of lading? They've fulfilled their obligation under the Ex Works agreement, but they can't get paid. 

What about FOB? It's a term as easy for an American to understand as the American flag. However, the term FOB, as Americans understand it, does not have the same meaning to the rest of the world. Our own Uniform Commercial Code defines FOB essentially as FOB here, there, or anywhere. 

As defined in Incoterm rules, FOB is reserved for ocean shipments only. Very precise in its definition, risk passes from seller to buyer when the goods are loaded on board. The 2010 revision no longer uses the phrase "pass over the rail of the ship," as used in the 2000 rules. Notice the word ship. Terms such as "FOB our plant" or "FOB Airport" are used incorrectly for international shipments, and no authoritative document exists in case of a dispute. 

How can one solve the dilemma of Ex Works and FOB and letters of credit? The answer lies in asking for the correct transport document and either using an alternative Incoterm or payment term. 

In the case of Ex Works, since the seller has no shipping responsibility, there is no transport document. One might reason that the seller could obtain a receipt from the first carrier who picks up the goods, such as a freight forwarder or a trucker. However, this exceeds the responsibilities of the exporter. Worse, what if the buyer sends a truck to pick up the goods or the trucker refuses to provide a receipt? I am of the opinion that EXW and letters of credit do not work together. 

The term FOB is restricted to ocean shipments. For all other modes, FCA or Free Carrier, is preferred. The exporter has responsibility to deliver the goods to the carrier nominated by the buyer at the named place. Americans can easily understand FCA because of its similarities to the beloved term FOB Factory. An Incoterm rule exists for almost any situation, and traders should choose the right one to prevent misunderstanding. Frank Reynolds' book, Incoterms for Americans, provides valuable insight to enable American companies to avoid misunderstanding and problems.

Contact me for information on ordering Incoterms 2010 and Mr. Reynolds' book.
]]>, 20 Jan 2014 00:00:00 GMT
Five Basic Rules for Effective International Negotiations
It happens more than I would like to admit. A company tells me that they have downsized their international customer base or pulled out of international markets altogether. International markets are just not profitable, they say. Upon closer investigation, a common issue is the lack of international negotiation skills. While some of the savviest companies attend extensive training in this area, here are five rules that can help address some of the biggest issues:

Rule #1: Do Your Homework

My fellow Americans are notorious for shooting from the hip or improvisational negotiations in other parts of the world. It means that we typically do little to no research on our partners or clients, on the local business norms, or on the industry in country before entering into negotiations. In most parts of the world, your counterparts will have done a great deal of research about you, your company, your culture, and anything else relevant to maximizing negotiation success. For my free checklist for international negotiations preparedness, please click here.

Rule #2: Prepare Counteroffers

A client recently told me that their staff normally approach international business negotiations as a series of concessions and price discounting. It is no wonder few international deals were profitable! Instead, know what options you have to counteroffer. For instance, a suggested lower price could be countered with a reduced scope or work or a less-expensive product. This quickly reveals what the other side values—were they looking to get a better price or do they truly have less money to spend? Sometimes a marketing testimonial or introductions in your home country can be exchanged in the negotiation instead of merely playing tug-o-war with the final contract price. Be ready with all available options.

Rule #3: Assign Roles to Team Members

International negotiations are not the same as those in the American business culture. Most overseas cultures expect more structure in negotiations—introductions of the negotiation teams, an agenda, a spokesperson for each team, etc. While a team needs to know the cultural rules expected by the other side, there are some general guidelines that apply most places. First, assign a leader who sits in the middle of your team. Second, never openly contradict something said by another person from your side. Third, if you need time to react to something that has been introduced into the negotiation, call for a break and then discuss it as a team. And finally, try to match the titles of the other team. If they are bringing a technical resource, then you should as well. If their CEO will be present, then if possible bring your CEO, too. All of this will help negotiations go smoother.

Rule #4: Start with the End in Mind

Anyone negotiating needs to know two things: 1) What is the price range and other terms that you can accept on behalf of your company? 2) If the terms are not acceptable and won't move into the right range, you need to be able to walk away from a negotiation. With this in mind, it is important to know the normal range of price movement that the other side will expect. In some countries, price normally is negotiated down more than 50%. That means that the initial price needs to be marked up accordingly so that it can drop down and still stay in the acceptable range. For any company still pricing products and services based on cost plus mark-up, this is a good time to abandon this outdated pricing strategy that works heavily against international sales.

Rule #5: Negotiations are Ongoing

Americans and their counterparts (such as the Swiss, British, Germans, Canadians) that base business deals on contracts sign the contract and then promptly file it away as a done deal. This is rarely the case. An international business relationship needs to be evolving to match the changes in external forces. When your Chinese supplier comes back asking for better terms, it is a chance to negotiate better terms for your side as well. Likewise, when something in the relationship is becoming unfavorable for your company, you can approach the other side to renegotiate in order to turn the situation around.

I hope you found these rules helpful. For more articles on international business negotiations, please visit The International Entrepreneur.
]]>, 13 Jan 2014 00:00:00 GMT
Training Employees Ensures Compliance with Hazmat Shipping Regulations

Hazmat compliance is not to be taken lightly. Compliance with the U.S. Department of Transportation's (DOT) hazmat regulations really starts with the hazmat employer taking responsibility as an offer or of the articles or substances that are deemed classified as hazardous materials.

These materials must be offered for transport with a statement included in the shipping papers that certifies that a hazardous material shipment is in full compliance. Most bills of lading have wording similar to this incorporated in the fine print somewhere near the bottom of the page:

I hereby declare that the contents of this consignment are fully and accurately described above by the proper shipping name, and are classified, packaged, marked and labeled/placarded, and are in all respects in proper condition for transport according to applicable international and national governmental regulations.

How does a shipper achieve this? The hazmat employer is responsible to provide training. This ensures that all the relevant employees (hazmat employees) who directly affect the safety of a shipment are knowledgeable in the all the specific job-related functions that may directly apply to them such as identification, classification, packaging, marking, labeling/placarding and shipping papers.

The DOT requires validation of this by way of testing the competency of the employee. This can be in any verbal or written form. As this is the employer's responsibility they must also establish what is a satisfactory passing score.

Certification is done by way of recording the details of the training. Each hazmat employer must create and retain a record of current training of each hazmat employee, inclusive of the preceding three years, in accordance with the regulations for as long as that employee is employed by that employer as a hazmat employee and for 90 days thereafter.

A hazmat employer must make a hazmat employee's record of current training available upon request, at a reasonable time and location, to any DOT inspector. The record must include:

  1. The hazmat employee's name;
  2. The most recent training completion date of the hazmat employee's training;
  3. A description, copy or the location of the training materials used to meet the necessary requirements of five major areas of training;
  4. The name and address of the person providing the training; and
  5. Certification that the hazmat employee has been trained and tested.

Hazmat training must address five areas: general awareness/familiarization, function-specific, safety, security, and driver training.

The requirements for the first four ensure the hazmat employee can competently determine that a shipment is in compliance with the Hazardous Materials Regulations in Part 172, Subpart H of CFR49 and any other international requirement whether shipping or receiving. The driver training requirement is located in 49 CFR 177.816 and applies to anyone who transports any quantity of a DOT regulated hazardous material.

If you ship internationally, training for international shipping requires compliance with each particular mode:

  • Vessel—IMO-IMDG Code

This training can be used as an alternative to satisfy the function specific requirements as they apply.

What are the hazmat employer's options to provide adequate training? There are a limited amount of options for the hazmat employer to address all of these requirements.

The first option is to have someone in-house appointed as the DG/hazmat regulatory specialist. The upside is everything is under the same corporate structure. The downside is the cost of hiring someone full-time, which most companies can't justify because there isn't enough time to warrant the cost. Assigning the role to an existing employee, usually an environmental, health and safety staffer, is the alternative. They usually have enough regulatory issues to deal with and have no hazmat training experience. They are usually the designated department responsible for compliance and as such rely on outside help for this.

The second option is having employees enroll in online courses. These are fairly inexpensive, and although online classes may be cheapest way to approach compliance, they provide a very limited understanding in achieving true compliance with any subject matter as there is no interaction with student and trainer.

Another traditional method is sending each hazmat employee to a public course. These can be very expensive depending on location and the amount of staff needed to be trained. A typical three-day public class is approximately $750 per attendee plus the expense of travel if the class location is not local. Most open enrollment public seminars provide a lot of information and frankly, three days of regulatory details usually overwhelms the average shipper. If you have a variety of products and classes or perhaps you are in the forwarding business and need a broad spectrum approach, this is ideal.

Legally, the hazmat employer is only responsible for what they ship. So realistically these generic classes cannot possibly provide you with all pertinent training specific to each shipper's needs. Yes they provide a lot of relevant information, but they don't specifically address the particulars of each individual's situation. For instance, there are nine hazardous classes that range from explosives, flammable liquids and solids, compressed gases to radio-active materials, oxidizers, infectious substances, and corrosives. There are also modal specific requirements for air, rail, truck and vessel as well as the packaging standards for bulk and non-bulk. I could go on.

Why sit through details on topics you will never be required to use? This is not a DOT requirement! I have sat through enough of these classes where another attendee has too much to say about their particular issues and after three days, can be very disruptive.

A more effective approach is site-specific training classes. The instructor addresses the necessary regulatory information and specific details that only apply directly to the shipper's needs at the shipper's location. All dangerous goods/hazmat staff is trained privately as a team for their particular job functions. Another added convenience to this format is the shipper can decide on the location and date based on their preference. Rates vary for each class format but a good rule of thumb is approximately $1,500 to $2,000 per day.

Depending on the assortment of products, packaging formats, and modes of transport, most clients' needs can be addressed thoroughly in one or two days. One of the big benefits I have seen with site-specific classes is that real communication is achieved by the trainer by physically touring the facility and getting valuable insight of the operation, which he then can relate to in class.

Compared to public classes, onsite classes are an informal open forum that provides constructive discussion between all the participants concerning their site specific compliance issues. They are also conducive to inter-department discussion and promote possible alternative solutions to existing hazmat shipping problems. Attendees can ask specific questions without disrupting the class as they are all involved in the same process. One of our popular tools is preparing a typical mock consignment in class using actual packagings, labels and forms. This is not as effective in public classes because the variety of participants.

Consistency is also achieved as all the staff is trained at one time from the same instructor. Making sure clients' needs are effectively achieved, a good trainer will request a Client's Needs Assessment prior to the training. This provides them with all the relevant details needed to obtain 100% compliance for their clients.

Hazmat compliance should not be taken lightly. Enforcement is strict business and fines can be costly. An investment in training is a healthy investment for providing an increase in safety awareness for reducing accidents and peace of mind for the employer knowing they have completely fulfilled their legal regulatory requirement.

]]>, 06 Jan 2014 00:00:00 GMT
The NAFTA Producer Solicitation—Part 1: The Exporter's Conundrum 
Editor's Note: As we come to the end of 2013, we are reprinting the two most popular articles we've published this year. Here's number two of two. Enjoy!

We've all seen them. Either we've drafted them, received them, or rolled our eyes at them. They are the infamous NAFTA solicitation letters we receive from our customers each year. The first time I heard that solicitation was a part of the NAFTA I blushed. Obviously I had the wrong idea. I've since learned that solicitation refers to letters like the following:
Dear Supplier:
We respectfully request you send us a NAFTA certificate of origin or equivalent manufacturer's affidavit for the following articles we purchase from your company and that you manufacture. See the attached list.
If you are not the producer of these goods, we respectfully request you pass along a NAFTA certificate issued by the producer or an equivalent manufacturer's affidavit from that producer.
The official NAFTA Certificate of Origin, CBP form 434, and its continuation sheet, form 434A, are available from U.S. Customs and Border Protection. The PDF version of these forms is conveniently available within the forms menu at Instructions for completing the NAFTA Certificate of Origin are printed on the back of the form. An example of an acceptable manufacturer's affidavit form is also attached as an alternative.
A third form is attached, which may be used to inform us of the country of origin of goods that do not originate under the NAFTA. Use this document for goods of any nation including U.S., Canadian and Mexican goods that you know are made in North America but you do not know or cannot prove they meet the higher standard of origination under the NAFTA.
Thanks you for your prompt response and cooperation.
Sincerely Yours,
Very Important Customer
Most of the letters I've seen follow some version of the script above. One would think that this would be effective and that, after about 20 years of doing NAFTA, suppliers would be schooled in working with the forms.
One would have another think coming.
Anecdotal experience indicates that the state of the NAFTA Producer's Certificate of Origin is in disarray. I would even go so far as to say it is in chaos.
One frustrated NAFTA participant inked the following producer's solicitation letter and, in a moment of poor judgment, sent it to all of his domestic suppliers.
Dear Ignorant Domestic Supplier:
Against our better judgment we are asking you, once again, to complete a NAFTA certificate of origin, hoping against all hopes that in the past year you might have attended a seminar on the subject and finally have gotten your act together.
We are only doing this because, well, we really need to ensure that our goods meet the NAFTA rules when exporting to Canada and Mexico. This gives us and you a competitive advantage in the marketplace.
If you are still not confident in the method of completing this document, please, Please, PLEASE do not guess. The instructions are on the back of the form. When you fill out the document incorrectly it makes you look really, well, uh... stupid. There! It's been said. You know how you can tell when your teenager is lying? Well it is the same way with the NAFTA certificate. It is obvious but difficult to explain. A couple of clues for you:
  1. The signature date is the date you sign the document. DUH! It is amazing how many of you appear to come into the office on your New Year's holiday to sign these forms.
  2. Be consistent with your date order. Please don't give me MM/DD/YYYY in one field and DD/MM/YYYY in the next. By the way, this is a U.S. form. I would prefer you use U.S. date order. If you are going to use some other date order, please label the date accordingly.
  3. The first instruction on the back of the certificate says to complete the certificate in full. Please don't leave any fields blank.
  4. If field 1 "Exporter"” and field 4 "Importer" are confusing to you, we suggest you create a document that looks just like a NAFTA certificate of origin. Label it "Producer’s Affidavit." Change field 1 to "Buyer." Drop field 4. Is that easer for you now?
  5. While "A" might be a good grade in school, it is usually the wrong preference criterion on a NAFTA certificate, at least for manufactured goods like yours.
  6. Oh yeah, field 9 "Net Cost" is not asking you for the price of your goods.
  7. We purchase 250 items from your company yet you responded with a single line that says "fasteners, spare parts, bearings and electrodes." You may as well have filled the description field with the word "stuff." Yes, we really do need a separate line declaring NAFTA eligibility for each of the items we purchase from you.
To top this all off, you are completing a federal form. There are legal ramifications for making false NAFTA claims. As the controller of your corporation you should know this, but you signed it anyway. Yours was the single worst certificate of origin we received from all of our suppliers last year.
Speaking of which, we know you are acting as the distributor for many of the goods we purchase from you. We really would like to get a statement of origin from the underlying producer of the goods. We need this because we export some of your goods as aftermarket parts to our Canadian and Mexican clients. If we do not have a producer's document we have to make a claim of No1 in field 8 of our exporter's NAFTA certificate. This is a weak statement and is frequently challenged by the destination import authorities. As a result we do not claim NAFTA on these goods. This results in the client paying duty when it probably isn’t necessary.
Please, Please, Please share a copy of the producer's certificate with us. We promise, crisscross applesauce, we will not disintermediate your company and work directly with the producer. We would be happy to put that promise in writing. What? You do not have a producer' NAFTA statement to share with us? Are you crazy? In other words you haven't done your homework, but you were willing to make a false statement on a federal document just to get us off your back? We realize you think you know that the goods originate. NAFTA, however, is not a belief system. It requires documentary evidence that a good qualifies for the program.
And no, we are not going to dictate to you nor teach you how to complete the certificate of origin. That includes providing HS codes. That is your responsibility.
Please do not interpret our commercial urgency as a threat that you must misrepresent your goods as being North American. We simply need to understand the facts within our supply chain so that we can, in turn, respond confidently and truthfully to our clients.
If you are still confused, we can only recommend that you attend a seminar on the subject. We have found the folks at International Business Training have the best course out there. They present the information in such a way that even your company will understand it. Their instructors are also consultants willing to work directly with your company to implement a NAFTA process.
Finally, please respond to this letter.
Condescendingly Yours,
Your Soon to Be Former Client
After receiving such a letter you don't think the producers are going to remain silent, do you? Stay tuned for the producer's response in our next installment.
]]>, 30 Dec 2013 00:00:00 GMT
The Nigerian Cement Story
Editor's Note: As we come to the end of 2013, we are reprinting the two most popular articles we've published this year. Here's number one of two. Enjoy!

When Nigeria struck oil in the mid 1970s, it became a cash-rich country. As a result, the Nigerians began to import large quantities of consumer goods. The goods arrived at a much faster pace than the out-of-date ports could handle. Ships sprouted up in the harbor like weeds in an untended garden. Because the ports had become so out-dated, they could bring only one ship in to dock at a time, unload it, send it back out, and bring in the next ship.

Crowded conditions slowed unloading by as much as six months. (Some stories claim that it took as long as 24 months, which I cannot verify.) In addition, Nigeria charged the ship owners up to $4,000 a day in demurrage charges (a charge for the detention of a ship beyond the time allowed for unloading).

The government conducted a survey of the situation and determined they would need five million metric tons of cement to upgrade the port facilities. The problem compounded when five ministers in the government thought they had responsibility to order the cement. Consequently, they placed orders for 22 million tons of cement.

When more than 250 cement ships arrived, they only further added to the congestion and, of course, they could not unload. After about six months of waiting on the high seas in the hot and humid weather, you can probably guess what happened to the cement! It took on moisture, hardened and became useless while on board the ships.

The government immediately instructed the banks, "If you issued letters of credit for shipments of cement, don't pay." What did the banks do? They obeyed the law of the land and they didn't pay. If a shipper of cement had an irrevocable letter of credit from a Nigerian bank, suddenly it became a useless piece of paper.

How does one foresee a risk such as this? The answer: You don't. You could have the best international economist on staff who monitors and plots every possible economic trend he can find, and this risk could still be unforeseen. What makes this story so bizarre is each of the five Nigerian ministers simultaneously making a stupid decision. Since economists don't track stupid mistakes, they can't possibly predict, "Well, I think the trend shows we are due for a stupid mistake!"

How can exporters protect themselves in a scenario such as this? By having the letter of credit confirmed by another bank in another country. When a bank confirms another bank's letter of credit, the confirming bank essentially guarantees payment. Effectively, the confirming bank has issued the letter of credit themselves thereby obligating themselves to pay even if they cannot collect from the issuing bank. In this story, some confirming banks found themselves in the position of having to pay the exporters even though they were unable to collect from the Nigerian banks. It's the protection—or insurance—that an exporter wants and the risk a bank willingly takes when it confirms another bank's letter of credit.

This lesson provides an excellent example of sovereign risk. Let's define sovereign risk with the question, "Can the government intervene in any way to prevent payment from being made?" Sovereign risk includes the stability of the government and the economy.

Now, the end of the lesson: What happened to the ships? Rumor has it that the cost of chipping the cement out of the holds exceeded the cost of the ships. So, the ships were intentionally sunk and remain on the bottom of the ocean off the coast of Nigeria.

Note: I first heard this story when I attended a seminar conducted by Jim Harrington in the late 1970s. Since then I have verified what I could and have slightly revised and embellished the story based on others' recollections of this incident.

]]>, 23 Dec 2013 00:00:00 GMT
International Communications: Making the Most of Conferencing Technology
International conferencing has helped accelerate international business expansion. Those of us involved with international business typically find that we cannot have as many face-to-face conversations with clients and partners around the world as would be ideal. Inevitably we turn to voice and video conferencing as a way to bridge the distance. It may have its technology glitches and communication challenges, but conferencing saves time and money for companies needing to coordinate international teams and service international clients. 

Here are tips on how to make the most out of this communication medium while minimizing some of its risks: 

Upgrade to a Better Technology Platform 

Most of us have used Skype or GoToMeeting to communicate with a business associate or client overseas. If your business is very small and your budget even smaller, then this may be a good approach for you. If your company is growing and your brand is anything but the low-cost leader, then it's time to upgrade to a higher performing conferencing platform. Not only will this drastically reduce technology hick-ups and eliminate embarrassing dropped calls, locked screens, and garbled voices, it will improve the chances of smoother communications. 

I have recently found a niche conferencing company that actually specializes in international conferencing services: Adigo. It delivers higher quality sound and video particularly for international calls than its low-cost/no-cost alternatives.

Use a Meeting Agenda

Casual meetings that flow from topic to topic may work in some face-to-face settings, but for international business they come across as disorganized and unimportant. Be sure to create a clear and focused meeting agenda that it sent out to all attendees ahead of the meeting. 

Choose Your Words Carefully

A big mistake I have heard many business professionals make on international calls and video calls is to speak quickly and use lots of colloquialisms. Instead, you should always speak specifically to your intended audience. How will they interpret what you say? If your counterpart is from Germany, don't use baseball analogies. Speak a little slower with more care to word choice. Simpler words are better. And be particularly careful with using humor as it can often be misunderstood as you cross cultures. 

Uncomfortable Conversations are Better in Person

International conferencing can be helpful in building relationships, advancing a sales process, or maintaining a business relationship. But what happens when the conversation is difficult because of issues in the relationship? If the client or strategic partner is important to your business, then it's time to pay a visit in order to have a face-to-face conversation. Trying to patch things up over the phone or video has a much lower success rate.

I hope these tips were helpful. For more information on doing business internationally, please visit my website: The International Entrepreneur. Good luck in all of your business dealings!
]]>, 16 Dec 2013 00:00:00 GMT
An Unconfirmed Letter of Credit by Any Other Name Is Still Unconfirmed
A number of years ago I worked with someone who grew up in Cuba. Since she spoke English as a second language, interesting nuances became apparent when we discussed letters of credit. I remember on one occasion I referred to a letter of credit as unconfirmed. She gently corrected me, "If a letter of credit is unconfirmed, that means a bank first confirmed it and then removed the confirmation, making it unconfirmed. But," she went on, "a bank cannot undo a confirmation once it has been made."

Was she right? She spoke grammatically correct, of course, but it raises an interesting question. Can a bank add its confirmation to a letter of credit and then, at a later date, notify the beneficiary that they no longer want to have their name, reputation and obligation attached to the letter of credit? Where can we turn to find an answer for a question such as this? The Uniform Customs and Practices for Letters of Credit (UCP), of course!

The removal of a confirmation requires an amendment. According to the UCP, "[A] credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary" (Article 10 a). In summary, a bank can rescind its confirmation but only if the beneficiary agrees. While possible, it is not probable.

After that conversation, my co-worker and I agreed to refer to letters of credit as confirmed or advised. An advised credit implies a bank has not added their confirmation.
]]>, 09 Dec 2013 00:00:00 GMT
Auditing Your Export Information; Retrieving Data from AES
Dear Cathy,

We were just acquired by a larger company, and they have advised us that they will be conducting a compliance audit of our international procedures and processes in January. They gave us a checklist of documents that we are to have available for the exports we've shipped during the past 12 months.

We asked them how they knew about our shipments in the past year, and they said with our management team's assistance that they had requested and received our Census data report. They gave us an extract from the report, but we only have our documents: the commercial invoice, packing list, and inland bill of lading.

We've identified the freight forwarders who filed the Shipper's Export Declaration (SED) with the Census Bureau. Do you think they will help us? What do we do?

Panic Stricken in Indianapolis!

Dear Panic Stricken in Indianapolis,

You are not alone in your predicament; there are many firms (large and small) who do not have the records they are to keep for five years on file at their offices.

Census released a notice to the trade community on October 30, 2013, regarding the retention of export information. (You'll find it on their blog.) Census advised that the record retention policies for the Census Bureau (15 CFR 30.10), Bureau of Industry and Security (15 CFR 762.6(a)), and the State Department (22 CFR 122.5) require keeping documentation for five years. The Census Bureau's record retention requirements do not relieve filers from adhering to other government agency's record retention policies.

All documents, correspondences and other relevant information to the export transactions should be maintained. These should include, but are not limited to, items such as:
  • Electronic Export Information (EEI)
  • Shipping documents
  • Invoices
  • Orders
  • Packing list
  • Other documents relevant to the specific transaction
Your new owners deserve and need honesty from you and your team. There are several reasons; they include liability mitigation, determining if prior disclosure with Census is necessary, understanding the gaps in process and procedure at your firm, and the ability to assist you in obtaining the documentation required from the freight forwarders who filed the Electronic Export Information (previously the SED).

Many freight forwarders will want to charge you a fee or claim that they are not able to provide the relevant export records to you. Your new owner and their legal counsel may be able to persuade the forwarders to find and release the documents you need.

All the best!
]]>, 02 Dec 2013 00:00:00 GMT
Make Sure Your Confirmed Letter of Credit is Properly Confirmed
Exporters generally understand the protection they receive with a confirmed letter of credit. They know the confirming bank obligates itself to pay even if unable to collect from the issuing bank. However, some exporters do not fully understand how to effectively ask for a confirmed letter of credit. Let's begin by emphasizing one very important principle and then provide a right way and a wrong way to ask for a confirmed letter of credit. 

An astute exporter understands the need to be proactive when dealing with letters of credit of any kind. Stressed in a number of the lessons in this series of articles, this strategy holds true for obtaining a confirmed letter of credit as well. 

A second bank will consider confirmation of a foreign bank's letter of credit only if asked by the foreign bank. A bank will not confirm a letter based only on the request of the exporter. In order for the confirming bank to have any recourse to the issuing bank, the issuing bank must request another bank to add its confirmation. 

It follows that a foreign bank will only request the confirmation if asked to do so by their customer, the buyer. It further follows that the buyer has no motive to ask the issuing bank to request the confirmation unless the seller insists that the buyer do so; hence the need for the exporter to be proactive. Either party can offer to pay the fee for the confirmation. 

Now, let's consider the wrong and the right way to ask for a confirmation. The wrong way is to instruct the buyer to send a confirmed letter of credit. An exporter recently did just that. They received a hard copy of a letter of credit issued by a bank in the Philippines, very prominently entitled, "Confirmed Letter of Credit." The advising bank gave no indication that they had confirmed the letter of credit because the issuing bank did not ask them to confirm it. 

What did the exporter really have? Can a bank confirm their own letter of credit? No! It serves no purpose for a bank to confirm their own credit. It does not protect the exporter against the risk of default due to sovereign risk or the risk of the issuing bank not having the resources to pay. For an exporter to gain full benefit with a confirmed letter of credit it must carry the confirmation of a second bank in a second country. 

To ask for a confirmed letter of credit, use the following wording: "The letter of credit is to be confirmed by (name of your favorite bank)," and fill in the blank. You may indicate you want the letter of credit confirmed "by a bank acceptable to us," or you may insert the name of a bank. 

If you use a bank's name, contact them first to verify they will confirm the credit. They will want to know five factors: (a) the country; (b) the name of the issuing bank; (c) the dollar amount; (d) the tenor, e.g., sight, 30 days sight, etc. and (e) the expiration date. At that time the bank can also give you a quote for the price of confirming the letter of credit so you can build it into the price of your product.
]]>, 25 Nov 2013 00:00:00 GMT
How Stable is Stable Enough? Choosing International Markets
If your company is doing business around the world, at some point you need to decide: How stable does a country need to be for us to do business there? Watching the U.S. Congress go through their puzzling brinkmanship last month over the federal government's budget and debt ceiling certainly left most Americans questioning our own country's economic and political stability. But the reality is that there is much more uncertainty in politics, market stability, regulations, exchange rates, armed conflict and/or inflation in places like Zimbabwe, Egypt, Turkey, Afghanistan, Syria and Venezuela. 

There are many companies doing business in remote corners of the world. Here are some criteria that you should consider when assessing your company's international business risk tolerance: 

Company as Risk Taker, Risk Avoider, or In Between 

There are companies afraid to venture into ANY foreign market for fear of the unknown. These firms overlook any potential to make profits outside of their country's borders. This risk tolerance level would be considered extremely low. There are companies that will literally go anywhere in the world if there's a market or a raw material. Oil companies come to mind for this category. But most company cultures fall somewhere in between. The best way to gauge risk tolerance is to opening discuss risk versus opportunity with company leaders. How do they feel about international markets? Have they had positive or negative experiences in the past that color their perceptions? Without management support, international expansion usually fails at the first sign of internal conflict. 

Level of In-Country Engagement with the Sale 

What level of in-country resources do you need to have to make a sale, deliver the product or service, and follow up with customer support? If your company sells something that requires intensive in-person interactions, then a country's overall business risk tolerance may need to be lower. For example, if my company is in the commercial building construction business, then I have to employ many in-country workers to build my projects. I also need to rent or own many pieces of construction equipment. If there's a national worker strike or if inflation skyrockets, I have more operational challenges to stay profitable. On the other end of the spectrum are services delivered via the Internet. As a consulting firm, The International Entrepreneur can do business in relatively unstable countries with little or no operational risks. In-country customer engagement accounts for wide variance. 

Ability to Mitigate Likely Risks 

It would not be fair to discuss international business risks without also discussing a company's options to lessen some of the worst scenarios. First, international business insurance can ensure your in-country assets from damage or nationalization. It can also reduce damages from work stoppages. Security requirements increase in countries where your employees could be harmed. Financial transactions can be made in a neutral currency to help reduce currency fluctuation risks. Contracting at a future currency rate also allows the company to know the final sale price. And finally, having a solid international law firm and accounting firm can help spot risks before they become issues that threaten the company's success. 

For more information on entering international business markets, please read more at The International Entrepreneur.
]]>, 18 Nov 2013 00:00:00 GMT
The Informality of Importing
When boarding a plane recently I noticed a guy dressed in cutoff shorts and flip flops and mentally noted how times had changed. I am old enough to remember when flying in an airplane was an event for which one dressed up. With a "que sera, sera" mindset, I withheld judgment. That is until the guy stuck his overly ripe, flip-flop clad feet under my airplane seat. (Cough! Sputter!! Gasp!!!) I don't care how informal our culture has become; wearing flip-flops on a plane is just wrong! 

Now my friends and family will tell you I am a bit of a snob, and you might be inclined to agree. I don't dispute that, but I would prefer to say I have a discerning sense of style. I prefer to dress nicely and live well. I am not uncomfortable in formal clothing such as a suit and tie or, if the event calls for it, a tuxedo. So when I learned that importing involved making formal entries, well, I was all in! 

I've learned that dressing appropriately for an event is important. Showing up in a suit and tie at a family picnic can be a bit off-putting and can make the wearer uncomfortable. Likewise dressing in flip-flops and a cutoff shorts for a wedding is also not appropriate, unless that wedding is on a beach. That goes ditto for airplanes! 

And so it is with importing. There are times it is appropriate to be formal and there are times one may be informal, at least in the type of entry that the importer files. 

What am I talking about?

U.S. Customs and Border Protection (CBP) makes a distinction between the types of entries importers may file. Standard commercial entries exceeding $2,500 in value are referred to as formal consumption entries. This is noted by the code 01 within field 3 of the entry document (CBP form 3461) and field 2 of the entry summary document (CBP form 7501.) 

Importers filing formal entries do not need to wear tuxedos or gowns. Rather they are subject to bonding requirements, and the entry remains open for approximately one year until it is liquidated. Formal entries are also subject to the full merchandise processing fee of 0.3464% with a minimum of $25 and a maximum of $485. 

Informal entries are administratively simpler and are used primarily for shipments of $2,500 or less. Unlike the formal entry the importer does not have to post a bond. CBP also approves the declaration upon entry and liquidates it. Technically an entry form 3461 is not required, and the entry summary form 7501 can perform as both entry and entry summary. An informal entry is denoted by the code of 11 in the entry type filed. From a practical perspective informal entries are subject to a $2 merchandise processing fee if filed electronically, and customs brokers usually charge less for filing them. 

So with a $2 merchandise processing fee and lower brokerage charges, who wouldn't want to wear flip-flops, I mean file an informal entry? 

There are some restrictions on the use of informal entry procedures. The full details of goods eligible for informal entry are found beginning with 19 CFR §143.21. The regulations allow for informal entry in the following situations: 

(a) Shipments of merchandise not exceeding $2,500 in value (except for articles valued in excess of $250 classified in Chapter 99, Subchapters III and IV, HTSUS). 

(b) Any installment, not exceeding $2,500 in value, of a shipment arriving at different times. 

(c) A portion of one consignment, when it does not exceed $2,500 or $250 if classified as per (a) above. 

(d) Household or personal effects or tools of trade entitled to free entry under Chapter 98. 

(e) Household effects used abroad and personal effects whether or not entitled to free entry. 

(f) Books and other articles classifiable under subheadings 4903.00.00, 4904.00.00, 4905.91.00, 4905.99.00, 9701.10.00, 9701.90.00, 9810.00.05, imported by a library or other institution described in subheadings 9810.00.05 and 9810.00.30. 

(g) Theatrical scenery, properties, and effects, motion-picture films, commercial travelers' samples and professional books, implements, instruments, and tools of trade, occupation, or employment, as set forth in 19 CFR §10.68. 

(h) Products of the United States classified under heading 9801, when the aggregate value of the shipment does not exceed $10,000 and the products are imported 
• For repair or alteration prior to re-exportation, or 
• After having been rejected or returned by a foreign buyer to the US for credit. 

It is this last provision that has caused some confusion for some importers and customs brokers. Not all U.S. goods subject to treatment under classification 9801 are eligible for entry under informal procedures. Informal entry is only allowed under the two situations detailed above. CBP may require additional documentation certifying that these two provisions apply. 

Likewise, because an entry includes items detailed above does not mean the entire entry may be filed informally. If the value of the entire shipment exceeds $2,500 a formal entry will be required. 

In other words, while flip-flops may be appropriate, sometimes a suit and tie is required.
]]>, 11 Nov 2013 00:00:00 GMT
The Transformation of Vietnam—Part 4: Challenges
With a population of 88.8 million, Vietnam is the 13th most populous country in the world. Economic reforms introduced in the 1980s have helped this Communist country achieve significant economic growth including a doubling of the size of its middle class during the past five years. 

Like China, Vietnam's nominally communist one-party system crushes dissent, keeps its military under tight control, and changes government policies and leadership slowly. While Vietnam offers an attractive environment for investment, the country is not without its drawbacks. In addition to widespread corruption, red tape and high inflation, Vietnam's infrastructure is still underdeveloped. 

Regulatory and Political challenges 

In order to retain command and control over the economy, the ruling party uses Vietnam's state-owned enterprises. Mismanagement, corruption, bureaucracy, lack of audit system, and inefficiency are common. The country has experienced bouts of macroeconomic turbulence in recent years—double-digit inflation, depreciating currency, capital flight, and loss of international reserves—that erodes investor confidence. 

Vietnam is now losing out to countries such as Indonesia in terms of efficiency and value for its money. Inflation is on the rise as the dong currency has weakened and untrimmed borrowing by the state-owned enterprises has put a strain on the banking system and left banks heavily indebted. The issues of surging inflation, repeated devaluations of currency, a deteriorating trade balance, and rising interest rates undermine investor confidence in recent times. 

Corruption and Bribery 

As in many developing countries, corruption remains a problem in Vietnam, which a recent report ranks as the fifth most corrupt country in Asia. The anti-corruption organization Transparency International ranks Vietnam 116th out of 178 countries in its annual corruption perception index. A survey by the Vietnam Chamber of Commerce and Industry showed that half of business people admitted bribing officials to win contracts. 

Intellectual Property Right (IPR) Protection 

In Vietnam, the regulatory system to protect intellectual property rights was first put in place in 2005 through the Law on Intellectual Property. However, over the years, inherent deficiencies and administrative loopholes have severely undermined the efficacy of the system and made it difficult for owners of IPR and authorities alike to take action against infringers. Since the enforcement of IPR is low, very few cases make it to the courts. 

Many counterfeit products that find a way into Vietnam originate from China. Counterfeiters use this country's warehouses as a great big transit lounge before boarding ships and flights to other destinations. The goods involved are mainly milk, fertilizers, cosmetics, electronic products, copies of DVDs and CDs, vehicle parts and medicines. Additionally, Vietnamese private workshops also manufacture counterfeit products and market them as genuine branded products. The prices of these products are relatively high in keeping with recognized global brand name products, but the information about the origin of the products is vague. 

Restrictions on Use of Communication Media 

Government maintains strong control over media and social movements. The government does not allow independent or privately owned domestic media to operate, and it exerts strict controls over the press and internet. Criminal penalties apply to authors, publications, websites and internet users who disseminate materials that oppose the government, threaten national security, reveal state secrets, or promote reactionary ideas. For example, since September 2011, all internet service providers in Hanoi have been required to shut down internet transmission at all internet retail providers from 11:00 p.m. to 6:00 a.m.

Skill and Talent Shortage 

Limits to Vietnam's talent, both in terms of English and technical talent, will continue to constrain the growth of segments where these skills are critical. A recent survey by Grant Thornton, a global accounting and consulting firm, found that companies are more worried about attracting and retaining critical staff in Vietnam than anywhere else in the world. Once workers are trained and educated by a multinational corporation they quit and find other jobs. Many young people under the age of 25 are poorly educated and lack professional skills and are, therefore, unemployed. 

Distribution and Logistical Problems 

Running about 1,000 miles from north to south, Vietnam is primarily a rural country. Distribution of products becomes a challenge and requires innovative strategies. Transportation is also an area of concern. There is only one national road running from the north to the south. During and after floods the road often cannot be used. The only running railway running from north to south is no substitute. The sea offers a less expensive substitute, but harbor capacity is limited. Vietnam competitiveness is also under threat because power generation has not kept pace with demand, logistical costs and real estate. 

Environmental Constraints 

Since Vietnam is located in the tropical monsoon area in Southeast Asia, it is one of the most hazard prone areas in Asia Pacific Region. According to a 2012 World Bank report, major storms, flood events and other natural hazards result in annual economic losses equivalent to between one and 1.5 percent of gross domestic product (GDP). Seventy percent of Vietnamese people are estimated to be exposed to risk from multiple hazards, especially in rural communities. Businesses operating in these areas equally affected. 

Human Rights Related Issues 

The government of Vietnam continues to suppress political dissent and severely limit freedom of expression, association and public assembly. The government of Vietnam continues to expand control over all religious activities, severely restrict independent religious practice, and repress and arrests individuals and religious groups it views as challenging its authority. According to McKinsey Quarterly's Human Rights Watch Report (2011), Vietnamese courts remain under the firm control of the government and the Vietnam Communist Party and lack independence and impartiality. Vietnamese law continues to authorize arbitrary administrative detention without trial. 

Final Words 

Despite many challenges identified in this series of articles, Vietnam is still quite attractive to foreign investors. Vietnam has replaced China and Taiwan as the newest favorite location of companies setting up overseas operations owing to open economic policies, geographical position, political and economic stability, abundant and cheap labor, and huge consumer market. Opportunities and challenges identified in these articles will help the potential investors and exporters to formulate appropriate investment and risk management strategies to achieve their respective goals.
]]>, 04 Nov 2013 00:00:00 GMT
Assessing Country Risk and Customer Risk—Part 6

This is the sixth part in my series of articles on country risk and customer risk assessment. 

To recall, it is important to classify both countries and customers, because a rogue customer in a good (from a risk perspective) country is not a much better risk than a good customer in a rogue (from a risk perspective) country. 

In my last article I discussed the remaining five categories of the Doing Business: Measuring Business Regulations project. In this article I will discuss the competitiveness data from the World Economic Forum, as at 1 October 2013. Remember these data are freely available publicly from the World Economic Forum website.

Whether you are a trader or a service provider, competitiveness considerations are highly important. Competition is what drives us to be more successful than others. Fair competition is good; unfair competition is not good. So called predatory behaviour is not a good approach to doing business as it typically works on the exploitation of the weak, who are typically disadvantaged and, consequently, victimised. This behaviour has questionable ethics, to say the least. It is important to remain human, even when engaged in business dealings. 

The World Economic Forum (WEF) genesis dates to January 1971 when a group of European business leaders met under the patronage of the European Commission and European industrial associations. The initial meetings focused on how European firms may be able to catch up with United States management practices. The European Management Forum was set up in those early days and its name was changed to the World Economic Forum in 1987. 

The activities of the WEF have gradually expanded to include a number of international projects including health and hunger issues. Importantly, in the context of this series of articles, WEF has developed a knowledge centre where freely accessible useful information and reports may be found. One of such reports is the Global Competitiveness Report, the latest one of which is the 2013–2014 edition, available on the WEF website as a PDF file.

This reports measure the competitiveness of economies across 12 pillars, as outlined below (WEF Competitiveness Report 2013-2014). Linking comments to business processes are provided, as appropriate, under each pillar.

1. Institutions 

"The institutional environment is determined by the legal and administrative framework within which individuals, firms, and governments interact to generate wealth" (p.4).

Issues that fall within this pillar include: regulations and bureaucracy (red tape), transparency, and government policies and their implementation.

2. Infrastructure 

"Extensive and efficient infrastructure is critical for ensuring the effective functioning of the economy, as it is an important factor in determining the location of economic activity and the kinds of activities or sectors that can develop within a country" (p.5). 

Infrastructure is a critical component of the business environment and it processes as it affects things such as transportation, energy supply and distribution, and communication. These in turn affect the economic efficiency of a country. 

3. Macroeconomic Environment 

"The stability of the macroeconomic environment is important for business and, therefore, is significant for the overall competitiveness of a country" (p 6). 

Government fiscal policies, interest rates, and inflation are issue that fall within this pillar—with an obvious impact on business. 

4. Health and Primary Education

"A healthy workforce is vital to a country's competitiveness and productivity. Workers who are ill cannot function to their potential and will be less productive. Poor health leads to significant costs to business, as sick workers are often absent or operate at lower levels of efficiency. Investment in the provision of health services is thus critical for clear economic, as well as moral, considerations. In addition to health, this pillar takes into account the quantity and quality of the basic education received by the population, which is increasingly important in today's economy. Basic education increases the efficiency of each individual worker" (p.6). 

A poor health system negatively impacts on productivity, and a poor education system limits a worker's ability to be involved in more advanced processes and also limits their ability to be innovative. 

5. Higher Education and Training 

"Quality higher education and training is crucial for economies that want to move up the value chain beyond simple production processes and products" (p.6). 

It is commonly accepted that a more highly educated workforce positively contributes to economic success for a nation overall and also for individual firms. Higher education levels enable workers to be part of more sophisticated and complex processes and be at the cutting edge of innovation.  Research activities associated with future growth and development typically occur in nations with higher skilled workers. This has implications for foreign investment, sourcing opportunities, and developing/penetrating new sales markets. 

6. Goods Market Efficiency

"Countries with efficient goods markets are well positioned to produce the right mix of products and services given their particular supply-and-demand conditions, as well as to ensure that these goods can be most effectively traded in the economy" (p.6). 

Marketplace competitiveness, as reflected by the amount of regulation and competitive behaviour rules, is an important aspect of doing business. Within this pillar issues such as taxes, business ownership, and attitudes towards foreign direct investment (FDI). 

7. Labor Market Efficiency

"The efficiency and flexibility of the labor market are critical for ensuring that workers are allocated to their most effective use in the economy and provided with incentives to give their best effort in their jobs" (pp. 6-7). 

Mobility of labour between industries is a factor considered within this pillar. Ideally workers should be able to transfer across industries easily and with little wage fluctuation. 

8. Financial Market Development

"The financial and economic crisis has highlighted the central role of a sound and well-functioning financial sector for economic activities. An efficient financial sector allocates the resources saved by a nation's citizens, as well as those entering the economy from abroad, to their most productive uses. It channels resources to those entrepreneurial or investment projects with the highest expected rates of return rather than to the politically connected. A thorough and proper assessment of risk is therefore a key ingredient of a sound financial market" (p.7). 

The global financial crisis has certainly highlighted the need for a banking sector that is trustworthy and transparent, one that operates in a prudentially controlled environment with adequate regulation on securities and other financial product. Finance is the lifeblood of any business. 

9. Technological Readiness

In today's globalized world, technology is increasingly essential for firms to compete and prosper. The technological readiness pillar measures the agility with which an economy adopts existing technologies to enhance the productivity of its industries, with specific emphasis on its capacity to fully leverage information and communication technologies (ICTs) in daily activities and production processes for increased efficiency and enabling innovation for competitiveness" (p. 8).

This pillar does not include innovation, rather it considers the ability of a nation to adopt technology and absorb it.  This is often achieved through FDI through which new technologies may become available. 

10. Market Size

"The size of the market affects productivity since large markets allow firms to exploit economies of scale. Traditionally, the markets available to firms have been constrained by national borders. In the era of globalization, international markets have become a substitute for domestic markets, especially for small countries. Vast empirical evidence shows that trade openness is positively associated with growth" (p. 8). 

We know that globalisation has assisted in opening up markets, although barriers still exist. Foreign countries, however, remain good sources of potential additional sales (beyond domestic borders) and also provide opportunities for different sourcing options. Both of these aspects can be quite beneficial for firms. 

11. Business Sophistication

"Business sophistication concerns two elements that are intricately linked: the quality of a country's overall business networks and the quality of individual firms' operations and strategies" (p. 8). 

Clustering, that is the interconnection of firms from close-by geographically areas, allows for increases in efficiencies and optimisation of processes, whilst at the same time reducing barriers to entry. 

12. Innovation 

"Innovation can emerge from new technological and non-technological knowledge. Non-technological innovations are closely related to the know-how, skills, and working conditions that are embedded in organizations and are therefore largely covered by the eleventh pillar" (p.18) 

Technological innovation is where the biggest benefits come from. In order for this to occur, though, there needs to be investment in R&D from both public and private sectors. In the private sector this is typically through financing projects; in the public sector it is typically through the provision of higher education and the establishment of high-quality scientific research centres in, usually, universities. 

Although there are 12 different pillars, some of these are linked. For example, it would be difficult to imagine how innovation (Pillar 12) could exist without financial investment (Pillar 8) in a nation where high levels of healthy well educated individuals can participate in the workforce (Pillars 4 and 5); where there is an efficient market (Pillar 6) that is able to absorb new technologies (Pillar 8). 

What is the benefit of this information to an existing or would be exporter or importer? By combining the different data in the report, we can consider to what degree a nation meets certain requirements that we may seek as an exporter or an importer. For example as an exporter we would be interested to find out what sort of market mechanisms may be in place to ensure fair competition. If we are an importer we may be interested in the education of the workforce as this is likely to impact on the quality of supplies sourced from that nation. Innovation is important to both exporters and importers, as innovative ideas potentially generate ideas for different uses for existing products or the development of new products.

In my next article I will look at banks and their role in international trade finance facilitation and the notion of banks risk. However I will also be pointing out other areas where one can go to look for more information in subsequent articles as part of this series.
]]>, 28 Oct 2013 00:00:00 GMT
The Infamous Monday in Brazil
An exporter in Denver sold goods to a distributor in Brazil (and many other countries). After a long and satisfactory relationship with the Brazilian distributor, they agreed on payment terms of 150 days on an accepted draft basis. After shipment, the exporter's bank sent the documents to a bank in Brazil with instructions to release the documents after the buyer accepted the 150-day draft thereby obligating themselves to pay it at maturity. 

Some traders refer to this method of payment as a documentary collection with a time draft, sometimes as Documents Against Acceptance, abbreviated DAA or D/A. (Send me an e-mail to request a flowchart for documentary collection.) For years this relationship worked well and the distributor always met their obligations. 

In October of 1989, the exporter shipped goods valued at $76,000. The distributor in Brazil accepted the draft with the maturity date falling on a Monday in March of 1990. On the Friday preceding the maturity date the government of Brazil announced that at the end of business that day the old Cruzado would become invalid and a new currency, Cruzeiro, would be introduced on Monday. 

On Monday, the due date, the distributor authorized their bank to pay $76,000. The bank informed them they could not transfer the funds until the central bank set a new rate of exchange for the new currency and implemented new regulations relative to wire transfers. 

Days and weeks elapsed before they implemented the new regulations. The distributor then discovered that, according to the new regulations, they could only wire $1,200 a year out of the country. It doesn't take a calculator to figure out collection of the $76,000 would take some time! 

This illustrates sovereign risk—the government intervened to prevent payment from being made. The distributor had the capacity and willingness to pay, but due to government controls, could not pay. 

The exporter in Colorado informed the distributor that they would suspend future shipments until they received the $76,000. The distributor in Brazil, however, depended on receiving these goods for their livelihood. In order to keep their reputation clean, they arranged for payment from an account that they happened to have at a bank in Miami. Subsequently, payment terms for all future shipments were letter of credit only.
]]>, 21 Oct 2013 00:00:00 GMT
That Sinister Left Hand: Avoiding an International Incident
As a left-handed American, I rarely think about my dominant hand. Sure, the world is set up for right-handers, but we lefties have learned to adjust. In Italian, the word for left is sinistra. While I've never found bias against my left-handedness in Italy, there are many places in the world where I could stop traffic or invite disgusted looks from an entire restaurant for openly flaunting my left-handedness. 

So what's the problem with being left handed? The main issue is one of hygiene. In parts of the world, including much of Asia and Africa, the left hand is designated for toilet-related responsibilities. Therefore, anything else the left hand touches is considered unclean. In such cultures, those born left-handed are retrained at an early age to use the right hand. So what's a lefty to do when traveling to India or Qatar or Morocco for business? 

Watch What You Do With Your Hands 

Before a trip or even a meeting where I know my left-handedness may be an issue, I try to pay attention to how I use my left hand for normal activities. Writing and eating are the most important two activities. But beyond that, be sure to note what you normally touch in daily interactions. Do you pick up a book with your left hand? How about touching a door knob? Try training yourself to be aware of your hands and then consciously choose your right hand over the left. If you find this to be an annoying distinction, then think of it from the other side—would you want to touch something that someone had previously touched if they used their left hand instead of toilet paper? 

Sit on Your Left Hand While You Eat 

I know it sounds stupid, but I have found that this works. If I allow my dominant hand to rest in my lap, then at some point in the meal I will forget and potentially cause embarrassment to myself and my hosts. The other thing I do before the visit or meeting is to practice eating right handed. It's tough at first, especially with chop sticks, but with practice it can look much more natural. 

Upgrade Note Taking to a Tablet 

It's much more noticeable when I write with a pen, but when I pull out my iPad for taking notes, no one notices my left-handedness because I use both hands. It also makes you look a bit more contemporary than writing hand-written notes. 

I hope this helps my fellow southpaws to avoid scandal in your international business interactions. Please share this unexpected cultural difference with any of your left-handed colleagues! 

For more information about how to navigate other business cultures, please read more at The International Entrepreneur.
]]>, 14 Oct 2013 00:00:00 GMT
Observations of an Itinerant Trainer
It has been some mumbleteen years since I began leading trade compliance seminars. During that time I've had the opportunity to meet thousands of people—some interesting, some not so much. Fortunately the former have been more numerous than the latter. I've also had a range of experiences—some rewarding and others I would prefer to forget. 

There was the time early in my career when I opened my mouth to make a point and a juicy housefly decided it would be the opportune moment to land on my tongue. Time stood still, as it often does in these instances, as I weighed the pros and cons of swallowing or spitting. Spitting won out. After a brief break and a rinse with mouthwash, class continued. 

There are the occasional interruptions at seminars. In Independence, Ohio, smoke began pouring from the ceiling vents of the meeting room. Astonishingly the hotel manager stood in the hallway saying there was not a problem. We didn't stick around to find out. 

Sometimes the interruption comes in the form of laughter from the neighboring meeting room. If the laughter continues I often ask the class to laugh back at them. There is no way I will allow a meeting of oncologists to have more fun than us, a happy-go-lucky crowd of trade compliance professionals. 

On one occasion a group of guys dressed in athletic gear descended on my meeting room. They didn't look like my typical attendees. I asked if they were there for Export training. They insisted they were. After devouring the entire catering table the realized they were supposed to be two doors down attending employee training for the health club X-Sport. 

I think I've experienced it all through the years:
  • I've been poisoned by the salad bar.
  • The hotel threw my books away. Fortunately the dumpster had not yet been emptied. Class proceeded with coffee-stained books.
  • Another hotel provided a table that was leaning at 60 degrees. When I tried to straighten it, it collapsed injuring my finger. Lest you worry, I can still offer up a fervent one-finger salute, albeit a crooked one.
  • I found a post-it note on my keyboard notifying me that my fly was down. (Blush!)
  • I've shown up for a seminar on the wrong day. Fortunately I was a day early.
  • I've destroyed more suits and ties schlepping books and moving tables than I care to admit. 
The experiences are not all negative, although those are the more humorous stories. 

After misplacing my books, the hotel had them reprinted by 10:00 a.m. Wow! The same hotel printed my presentation for me when my projector fizzled. Go DoubleTree! 

There was the catering captain who recognized I was developing laryngitis. The next morning I found honey and lemon at my table. (Thanks, Alex!) 

And then there are the many of you I have met over the years. While I might be the instructor, you have taught me more about your businesses and your lives. I feel fortunate to have had this opportunity to get out from behind a desk and to have met each of you. But enough with the sentimentality! 

With experience comes wisdom they say. Following are words to live by:
  1. Always travel with a backup copy of your presentation and book.
  2. Paying a little more for a good hotel is worth the expense.
  3. Don't waste money on an expensive suit or tie.
  4. NEVER eat at the salad bar.
  5. If a fly lands in your mouth, spit.
See you at the next seminar, friends!
]]>, 07 Oct 2013 00:00:00 GMT
The Transformation of Vietnam—Part 3: The Value Proposition
With a population of 88.8 million, Vietnam is the 13th most populous country in the world. Economic reforms introduced in the 1980s have helped this Communist country achieve significant economic growth including a doubling of the size of its middle class during the past five years. 

Previously China, Hong Kong and Taiwan were known for cheap labor, and many foreign companies chose to manufacture their products in these countries. In addition to a stable political environment, Vietnam today offers the global community a value proposition that is hard to ignore. 

Mineral Resources 

Vietnam is richly endowed with mineral wealth, holding some of the world's largest reserves of bauxite (seven percent of world reserves) and tungsten (expected to have seven percent of world production in 2013) and significant deposits of rare earths titanium and iron ore. Other mineral resources include copper, gold, nickel, lead, chromite and manganese. Resources are largely untapped as many remain unexplored. 

Vietnam ranks third in Southeast Asia for petroleum resources. Vietnam is endowed with significant deposits of bulk and niche minerals including bauxite, rare earths, titanium, phosphate, coal and iron ore. With the exception of coal, the majority of current mining projects are small in scope, representing an untapped opportunity for development on a large scale. While Vietnam's mining industry has been growing at a rapid pace, the industry constitutes only 1.9 percent of Vietnam’s GDP in 2010. Ownership for metals and minerals is highly fragmented. Opportunities for multinational corporations are ripe in this sector.  

Technology Infrastructure 

Vietnam's internet penetration rate of 29% ranks it as the 18th most active internet country in the world. 3G networks are currently available and 4G networks are emerging. From social networks to online gaming and commerce, the population is highly active online with broadband usage growing at 49% per year. Seventy-five percent of population has mobile phones. This offers opportunities for mobile payments, banking, gaming and other value added services. 

Favorable Demographics 

Vietnam's demographics and rising income levels support strong continued growth in domestic consumption. With 68% of 92 million residents under the age of 40, the country's expanding workforce is expected to drive consumer spending over the next 10 to 15 years. With a young population entering the workforce, per capita consumer expenditure in Vietnam will continue to grow from 2012 to 2016. 

Emerging Middle Class 

Vietnam's emerging middle class is a primary driving force in its economy, pre-staging an increasingly affluent lifestyle and high discretionary spending. In 2012, there were eight million people responsible for $48 billion of consumption spending, which accounted for 51% of total private consumption. The demand for branded goods has been increasing rapidly in Vietnam and has led to the establishment of shops introducing themselves as the authorized distributors in Vietnam. 

Middle class in Vietnam is made up of public servants, office employees, intellectuals, skilled craftsmen, traders and small landowners. The monthly income of the middle class group ranges from approximately $220 to $700 per month. Based on various studies, the number of people classified as middle class in Vietnam ranges from eight to 18 million people, which accounts for an estimated 20% of the population. Looking at Vietnam’s per capita income of $1,600 in 2012, it is difficult for many foreigners to understand how Vietnamese can buy a Louis Vuitton bag or pair of Salvatore Ferragamo shoes for $1,500. 

Vietnam's rising middle class exhibits increasing brand consciousness and is growing in numbers and in wealth. The middle class is driving growth; the rising affluence in this group accounts for the expansion in financial services and in basic sectors such as food and beverage, which will continue to account for more than 50% of total consumption. Large supermarkets such as Metro of Germany and Big-C of France are filled on weekends with shoppers buying goods in bulk. 

The children of the middle class increasingly eat Western food, use mobile phones and the internet, and enroll at international schools that until a few years ago catered almost exclusively to expatriates. Car sales keep growing, although Vietnam is one of the most expensive places in the world to buy a vehicle with import tariffs of up to 90%.
]]>, 30 Sep 2013 00:00:00 GMT
Assessing Country Risk and Customer Risk—Part 5
This is the fifth part in my series of articles on country risk and customer risk assessment. 

To recall, it is important to classify both countries and customers, because a rogue customer in a good (from a risk perspective) country is not a much better risk than a good customer in a rogue (from a risk perspective) country. 

In my last article I discussed the first five categories of the Doing Business: Measuring Business Regulations project. In this article I will discuss the remaining five, with data as of 3 August 2013. Remember these data sets are freely available publicly from the internet. 

Protecting Investors 

This category may be useful if you are thinking of investing in a foreign enterprise. The only useful link to trade in goods is probably the structure of companies with directors' liabilities, shareholders' rights and investor protection. 

Paying Taxes 

I am reminded of the words supposedly said by Benjamin Franklin: "The only things certain in life are death and taxes." Yes, taxes are a necessary part of life and business; it is the system we have. 

The interesting thing about taxes is that unlike duties that are an international matter, taxes are a domestic matter. Governments levy taxes primarily to raise revenue so public services that would otherwise not exist can be provided. Examples of these are infrastructure, security and welfare. You cannot tell a government how much to provide its citizens or how. That is part of sovereignty, and the government of the day will decide the standard of the provision of services. 

The differences in tax rates are a significant consideration for anyone wanting to do business internationally. Pricing a product is not merely an exercise of cost recovery plus a bit of margin. Determing a sale price is a complex mix of decisions that take into consideration things like invoice currency, freight charges, delivery lead-times and delivery terms (Incoterms 2010), the security of payment, and the length of credit time given for that payment to materialise. 

What is also important in this mix is the price competitiveness of your product at the end of the supply chain—that is, at the consumption stage. This may be an end user, such as a retail customer, or a business client that may use the material for further manufacturing processes. Unless your product is competitive at the end of the cycle, you will not sell it. How can domestic taxes be ignored? They can't. 

I can now hear someone saying: "But we sell EXW so it is not our problem." Well it may be your problem once you discover that the price is not right, and you either miss out on the business altogether or you fail to realise the maximum revenue because you pricing model is wrong since you ignored the tax factor. It is important for you to know about taxes and other charges that occur during the distribution channels so you know what you can sell for or what you can buy at. This is very important advance information for successfully negotiating the deal. 

If we compare the Value Added Tax (VAT) of the three countries I used as an example in my previous article we find that Madagascar has a VAT of 20%, Taiwan is 5%, and Singapore is 7%. Hopefully, this has convinced you that the application of taxes in international trade is an important consideration. 

Trading Across Borders 

The data in this set is of vital relevance and importance. As I will be speaking about regulatory issues in greater detail in another article in the series, I will limit discussion to other aspects at this stage. 

There is a considerable amount of detail in this data set including the average time to export and import, the number of documents required, and the approximate cost to export or import per container. Additionally, data are provided for domestic related processes such as average times for port and inland transport and handling (in days) and customs clearance and document preparation. 

From a logistics and costing perspective this information is excellent. I can now work out ahead of contacting my prospective buyer or seller what the average supply times are, and I have a reasonable idea about some of the border control costs. I can use all of this information to do some preliminary costing to see what parameters of the sell/buy price I can work with. Sure, things will change during the negotiation, but I have a better understanding of my cost drivers and, even more importantly, I also have an insight into the costs incurred in the foreign country. 
Forewarned is forearmed! 

Enforcing Contracts 

Nobody looks forward to a legal wrangle, except perhaps lawyers. Enforcing contracts in foreign countries is notoriously difficult, exceedingly expensive and requires a lot of patience—nothing is resolved quickly, as it typically takes a few years for full litigation to finish. The best approach is to avoid litigation and perhaps some of the available data will serve to convince the reader of just this. 

In Singapore there are, on average, 21 procedures taking about 150 days at a cost of 25.8% of the value of the claim. 

In Taiwan there are, on average, 45 procedures taking about 510 days at a cost of 17.7% of the value of the claim. It may cost less legally, but the process takes nearly three and half times longer. What is the cost of money? And the opportunity cost incurred? Is it really any cheaper? I doubt it; I would say the opposite. 

In Madagascar there are 38 procedures taking about 871 days at a cost of 42.4% of the value of the claim. Are comments really required here? It takes about two and half years, but if you think Madagascar is bad, in India the average is 46 procedures, a cost of 39.6 % of the claim, and a time of 1420 days. That's nearly four years! 

Resolving Insolvency 

The data in this set has a link to getting credit and the ability to recover money from insolvent parties. For Singapore the recovery rate is 91.3 cents in the dollar; in Taiwan it is lower at 81.8; and in Madagascar it is a lowly 12.9. These data add more paint to the country and customer risk canvas. 

I should also point out that the Doing Business data set have comparison values from the previous year's ranking that can be used as quick check to see whether things have improved, remained the same, or deteriorated in the short term based on the parameters of this project. 

In my next article I will look at the last of the four data sets that are publicly available on the internet. However I will also be pointing out other areas where one can go to look for more information in subsequent articles as part of this series.
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