When I started my career in international trade, I was working at a startup selling medical equipment to Colombia. And I quickly learned the challenges of international business the hard way.
Working with customs can be a challenge to those new to international trade, at the best of times. My supplier was using CIF (Cost, Insurance, Freight) and of course being a startup, we decided to cut costs by doing everything ourselves. This resulted in 100k of medical equipment often stuck at customs, incurring expensive warehousing costs. Which of course made cash flow hard to manage as the last payment term was due when the client received and inspected the goods.
My life would had been so much easier if I had known that my business model was drop shipping and that I needed to employ a customs broker. Someone that could have helped me determine the HS code, understand the documentation requirements (such as licenses and permits) and ultimately clear customs to my CIF (incoterm) shipment so that the delivery was on time and met the Letter of Credit requirements.
But, at the time I didn’t even know what those words meant. So, here’s my guide.
10 Words I Wish I Knew Before Engaging in International Trade
- Customs Broker: licensed (by customs authorities) company, in charge of processing the paperwork, paying the duties and taxes on your behalf so that your goods are cleared to enter the country.
- Freight forwarder: a company that coordinates the shipment of your goods through various methods of transport (plane, train, truck, or ship) as needed. They may sometimes arrange for paperwork processing
- Bill of lading: a document that the transportation company provides with details of the shipment and specifications of who has the title of the goods.
- Incoterms: terms by the International Chamber of Commerce that define who has the responsibility of the cost, insurance and risk, while the goods are travelling to the final destination.
- Drop shipping: is the arrangement of goods from the manufacturer to the final consumer. In drop shipping, the seller does not handle the goods physically but rather takes the order from the buyer and then asks the manufacturer to ship directly to the consumer.
- Letter of credit: think of it like a money draft version for businesses. Basically, the buyer’s bank confirms that the buyer has the funds available to pay the seller’s bank. The money is taken from the buyer’s account and the buyer’s bank holds it until the seller fulfills the contract. The money goes from bank to bank and so both parties have peace of mind as the money is released once the contract is fulfilled. There are different types of LC’s.
- Harmonize System Code (HS): a 10-digit code that specifies how much duties your product will pay upon importation. The HS code is unique to the good being imported.
- Advance Ruling: is a decision taken by a customs officer in advance of your goods importation. This is for goods that are a bit more complex to classify in the Tariff. An officer will find the correspondent HS code applicable to the specific good.
- Customs clearance: the approval by a customs officer for your goods to enter the country.
- Proof of Origin: A document that specifies where the goods originate from, meaning where the goods are sourced, transformed and manufactured. A common misunderstanding is that if the goods come from a country, it originates from that country. But origin is a bit more specific. For example, I am Colombian and when I came to Canada I transit through the US but it didn’t make me a US citizen right? Well same for your products. If the goods are sourced, manufactured in China but come from a store in the US, it does not classify for origin in the US and therefore is not applicable for NAFTA.