Being an exporter is sexy. You get to travel the world, meet interesting people, find exciting new markets for your products, and negotiate huge deals. At least that's the public perception of exporting. But like so much of life, the real work of exporting is much more mundane.
Before those deals can be negotiated, there's a lot of work successful exporters of all sizes do behind the scenes and in their back offices in order to profit from their international sales. The following checklist includes some of the important work that needs to be done before your hotshot sales people can start earning those large commission checks.
1. Understand the Harmonized System.
Harmonized System (HS) or Schedule B numbers are vital to correctly classifying your goods, so it’s important that beginning exporters take the time to learn about and understand the harmonized system. Sometimes, it’s easier to understand just how important the HS system is by talking about what happens if it’s used incorrectly.
Here’s just a sample of what could happen if you use the incorrect code for your products:
- Your export paperwork—including the commercial invoice, certificate of origin, and shipper's letter of instruction—will be wrong.
- The electronic export information you submit through the Automated Export System (AES) will be incorrect, which could make you liable for penalties under the U.S. Foreign Trade Regulations.
- The goods will be entered into another country under an incorrect classification number.
- Customs may dispute the number.
- Import clearance delays may occur.
- The buyer may incur additional costs.
- The importing country may begin an investigation.
- Goods may be denied preferential duty treatment; and
- Penalty action may be taken.
It is generally a best practice to include your HS or Schedule B numbers on your commercial invoices, as doing so can help ensure your exports make it through customs without delay and are delivered to their final destinations, which can help you get paid faster. However, there are certain instances when you shouldn't include the number.
The Census Bureau provides a great tool for helping you identify the correct Schedule B code for your goods.
2. Find out the tariff rate for your products in each potential new market.
As your company evaluates new markets for your products, part of the assessment should be identifying the cost of importing your goods into those countries. Depending on the proper classification of your products (see checklist item number one above) and whether or not there is a free trade agreement with a country, the duties and taxes that may be added to the cost of your goods may prevent them from being competitive in a chosen market.
Check out the Landed Cost Calculator for help with identifying and comparing duties and taxes that will be assigned your products in various countries.
3. Understand Incoterms.
"FOB Factory. That's what we always use," says the new international sales rep before he turns a profitable sale into a big money loser for his company.
Before your company inadvertently becomes liable for transportation and loading charges you weren't expecting to pay, make sure everyone at your company understands and becomes conversant in Incoterms, the international terms of sale that almost everyone outside the United States use to identify the responsibilities of the buyer and seller in an international transaction.
Published by the International Chamber of Commerce (ICC), the current set of terms—Incoterms 2010—are the shorthand for who's responsible for what in the export and transportation process. Incoterms can:
- Give you an idea of what you’re expected to pay for during transport;
- Clarify what your buyer’s responsibilities are;
- Help you set pricing for your goods; and
- Reduce the risk of legal complications by giving exporters a single home base from which to reference trade practices.
When a seller and a buyer agree to employ a particular Incoterm, each accepts the corresponding obligations and responsibilities as clearly set forth and defined under that particular Incoterm.
Visit the ICC website for more information about Incoterms 2010 including their guide, ICC Guide to Incoterms 2010. In addition, government and private sector organizations offer seminars, webinars, books and other training opportunities about Incoterms 2010. You might find this Incoterms 2010 Chart of Responsibility helpful as well.
We've also published a variety of posts on Incoterms on this blog including:
- The Beginner’s Introduction to Incoterms
- An Introduction to Incoterms—Part 2: Why Do Incoterms Matter?
- From EXW to DDP: Incoterms Plain and Simple
- Where Does Risk Pass In Your International Shipments?
4. Understand the U.S. export regulations.
There's no faster way to torpedo a company's export strategy and tarnish its name domestically and abroad then by failing to understand and comply with U.S. export regulations. Exporting is a privilege, not a right, and that privilege can be denied to people and organizations who flagrantly violate those regulations.
In the article, The Three R’s of Export Compliance: FTR, EAR and ITAR, John Goodrich discusses at length the major sets of regulations and regulators of exports here in the United States. Here they are at a glance:
Foreign Trade Regulations (FTR)
The FTR are administered by the International Trade Management Division (formally known as the Foreign Trade Division) of the U.S. Census Bureau. The FTR have a dual purpose:
- They allow for the collection of statistical trade data, and
- They provide the tactical information required by the Bureau of Industry and Security (BIS) and Customs and Border Protection (CBP) to perform their export oversight roles.
The FTR are primarily concerned with the reporting of an export shipment.
Export Administration Regulations (EAR)
The EAR govern the export of items in the United States. The EAR control the export of so-called dual use goods and goods that are not controlled by other regulations, including distribution of technology or software related to the specifications of defense goods, their operation or their production.
Dual use refers to the idea that while a product may have been designed for commercial use, it may also be used in applications or destinations the U.S. would prefer it not be used. Most commercial shipments are subject to the EAR.
International Traffic in Arms Regulations (ITAR)
The U.S. State Department’s Directorate of Defense Trade Controls (DDTC) regulates the export of defense articles under the Arms Export Control Act. The details of this act are found primarily within the ITAR. Goods regulated by ITAR are detailed within the munitions list and are subject to an export licensing requirement by the State Department. This list includes weaponry and military equipment, but (like EAR) deals with unlawful distribution of technology or software related to the specifications of defense goods, their operation or their production.
Why is this such an important thing for exporters to remember? Understanding your responsibilities and following through on your due diligence is part of your contract as a U.S. exporter. When you understand your responsibilities, you not only do your part to protect the country from national security threats, you protect yourself from exorbitant fines, sanctions and even jail time.
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.
Export regulations may seem daunting, but we have written two free White Papers that help explain the regulations:
5. Attend the BIS seminar on export controls.
Every exporter—regardless of what type of products he or she is shipping—should attend this two-day seminar held around the country. This seminar provides valuable advice, and can help you:
- Learn how to classify products pursuant to EAR;
- Determine if your item has an ECCN classification;
- Find out if your item needs an export license; and
- Determine which federal department—and which set of regulations—applies to your products: Commerce, State or someone else.
You can visit the BIS website to see the current schedule and find an upcoming class near you.
6. Know who you can and can't do business with.
Exporters can’t do business with just anyone. The U.S. has placed sanctions on certain countries like North Korea and Iran in which, in most cases, you can't do business. In addition, various U.S. agencies and departments publish lists of denied parties—people and organizations located around the world (including the U.S.) with whom you can't do business.
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. 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.
Even the smallest exporters should check all the parties in every export transaction against the various restricted party lists to prevent penalties. A small select group of the lists of denied parties can be found on the BIS website under lists of parties of concern. Exporters can also use web-based software to more quickly and easily check dozens of lists at one time.
In addition, Shipping Solutions Professional'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 as part of your export document creation process.
The article, Six Basic Steps for Export Compliance, provides a detailed look at denied and restricted parties as well as related information on compliance-related issues like red flags and deemed exports.
7. Select a freight forwarder whom you can work with and trust.
Choosing the right freight forwarder can make your job as an exporter more pleasant, more productive, and even more profitable. It’s imperative to take the time to select a freight forwarder whom you trust and like, because you’ll be working closely with the forwarder in most, if not all, of your shipments.
Here are some considerations when selecting a freight forwarder from our article, How to Choose the Right Customs Broker and Freight Forwarder:
- Interview multiple forwarders to get an idea of what personality types and professional traits you prioritize.
- Choose a forwarder who is fully automated and with full connectivity to the tools necessary to partner with your company.
- Make sure your freight forwarder has a good reputation. Ask around your professional networks, and don’t forget to ask for references when interviewing a forwarder.
- Have a written work agreement, so there’s no doubt about who is responsible for what.
8. Select a bank that can help make sure you get paid.
Just as you should take time to interview and evaluate your prospective freight forwarders, you should introduce yourself to potential bankers and interview them. Keep these things in mind when selecting your bank:
- Interview several bankers from multiple banks. Get an idea of whom you’re comfortable with, whom you have a good rapport, and whom you can trust.
- Make sure your bank can help you. The bank you choose should provide valuable guidance in getting paid, but that’s not all. A good fit will help you with assessing creditworthiness, identifying best payment methods for your particular situation, and guiding you through the process of using the Export-Import Bank of the United States for financing your exports.
- Your bankers need to know the details about each type of document and supporting information you need in order to facilitate a smooth letter of credit. They also should know the sticking points regarding letters of credit and any other payment type, and can advise you regarding the best payment methods for your exports.
9. Make sure you know your local U.S. Export Assistance Center.
There are more than 100 U.S. Export Assistance Center in communities nationwide and in 80 countries around the globe. These centers are supported by five federal agencies, and they can serve as one-stop-shops to help your business with hands-on export marketing and trade finance support.
With this global network of staff, they can help you identify potential new markets for your products; potential customers, partners or distributors in those markets; and even arrange visits with those people and companies. In addition, they can help address each of the first eight items on this checklist.
You can find out more about U.S. Export Assistance Centers, including which office is located closest to you, at the export.gov website.
This article was first published in April 2015 and has been updated to include current information, links and formatting.