international logistics questions

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●The company shipping the iron ore cargo has a liability of $100,000 x 6 percent = $6,000. However, since it had a loss of $10,000 for the jettisoned cargo, it collects the difference of $10,000- $6,000 = $4,000 from the adjuster. Realistically, if the cargo owner is insured, it will collect $10,000 from its insurer and, eventually, the latter will collect $4,000 from the adjuster.

●The company shipping the coal has a liability of $80,000 ~ 6 percent

= $4,800, which it (or its insurance company) pays to the adjuster.

●The company owning the ship has a liability of $1,070,000 x 6 percent

=$64,200. Once the direct costs are deducted, though, it ends up collecting $65,000- $64,200=$800. Most likely, its hull insurance coverage would have covered the remainder.

For at least a portion of the owners of cargo on board, General Average means that the owners of the goods that arrive safely have a liability toward the owners of the goods that did not arrive. Companies which had sufficient insurance have only their goods to worry about; companies with no insurance will have to place a cash deposit with the adjuster of roughly one-third of the value of the goods on the

ship.17 .Because of its complexity-imagine a ship such as the Carla with 3,000 containers aboard, most likely owned by a similar number of different owners—the settlement of a General Average situation can take years to complete. Every year, there are approximately three situations in which a shipping company declares a

General Average involving cargo from United States shippers.18

8-3i Theft

Cargo theft is yet another concern for companies shipping by ocean: while the risks are much greater on shore, or specifically in transit to the port of departure and from the port of arrival, it is becoming a major concern of exporters and importers of cargo that is easy to resell, such as athletic shoes, cellular telephones, or computer equipment. The total value of cargo thefts is difficult to pinpoint, as the police often tally these data together with other types of thefts, but it is estimated to be at least US $10 billion per year in the United States and US $30 billion worldwide.

To protect itself from theft, a company can take several measures, Most try very hard to ship through unmarked containers and unmarked pallets, most try to restrict to an absolute minimum the number of people who have access to the documents related to the cargo (bill of lading, packing list, manifest), and all use some form or another of seals and items that show evidence of tampering. A few adopt original methods: New Balance Athletic Shoes Inc. of Boston claims that it separately ships left and right shoes to Brazil and Argentina for its top-of-the-line models.20 Although this is an ongoing rumor, the logistical nightmare and costs of reuniting shoes in the country of destination seem too high for it to be justified, In addition, at one point in the country of destination, the shoes are once again reunited before transiting in pairs to the retail establishments, negating some of the benefits of such an approach. Finally, should a container of left shoes be stolen—worthless to the thieves—it instantly renders its complementary container of right shoes equally worthless for the manufacturer. This strategy nevertheless could be effective because it could act as a deterrent.

However, the leg of the trip during which the cargo is most at risk is its inland portion: several firms, after having suffered substantial losses on their shipments to Mexico because of truck hijackings, have taken the unusual step of transporting their goods by armored tractor-trailers. It is estimated that there were approximately 1,000 armored tractor-trailers in Mexico as of October 2000.

8-3j Piracy

Piracy is the last of the major risks associated with shipping by ocean; although the mention of this term always raises a chuckle in any audience, consider that the

International Chamber of Commerce reported a total of 285 separate attacks on ships at sea or in port for 1999 (an increase of 40 percent over 1998), 22,459 attacks for 2000 and 335 attacks for 2001.The problem has grown so significant that the

ICC created the Piracy Reporting Centre in Kuala Lumpur, Malaysia, in October

1992, which issues a weekly piracy report.

Most of the piracy incidents involve thugs attacking a ship and stealing the crew's possessions. However, on a number of occasions, the ship's crew is transferred to a small boat and left adrift, while the pirates take the ship and its cargo. Still at sea, the ship is renamed, all evidence of its former identity is destroyed, a complete makeover is executed—including a new paint job—and a new set of paperwork is created. Although it may sound impossible to "pull this off," the reality, is that it is a strong possibility, especially for bulk cargo shipped on relatively small ships; there are roughly 40,000 such ships, none of which are particularly distinct from one another, and who change legal ownership fairly frequently. In addition, in those parts of the world where most of these attacks occur—South—East Asia, particularly the straight of Malacca, India, South America and China—the police are either too busy with other pressing matters or cannot be bothered. Despite those odds, in the last two years, the Piracy Reporting Centre has helped recover nine of the ten hijacked ships that were reported.26

This increase in piracy attacks has prompted several shipping lines to train their crew in anti-piracy techniques, specifically by increasing the number of crewmembers on watch in sensitive areas. It also prompted ship owners to invest in satellite tracking systems and other security measures. One company even offers the services of former British Commandos (Gurkhas) as on-board ship escorts, while another has a "rapid response team" that it can fly by corporate jet to any area of the world to recover a hijacked ship.

8-3k Other Risks

Numerous other risks exist in shipping by sea:

●The risk of collision at sea is not substantial, but is still present. Collisions usually happen in crowded shipping lanes, such as the Channel or the Strait of Gibraltar. Thanks to radar equipment, this risk has been minimized, but it still happens. In August 1999, the Ever Decent, a modern containership, collided with the Norwegian Dream, a newly built cruise ship in the English Channel.29 One of the possible reasons for the collision was the poor training of the crews of both ships; both ships were flying convenience flags, one Panamanian, one Bahamian, and these countries are much more lax on crew training requirements (see Section 9-4).

●There is also the risk of collision with non-vessels; floating or sunk containers or debris are present in shipping lanes as well, and represent some degree of risk for ships, but little for cargo. Oddly enough, there is still the possibility of collision with icebergs, including very large ones from Antarctica (see Figure 8-3). Iceberg A22B, a mass of ice 22 km by 63 km (14 by 39 miles) has been drifting in the Antarctic Ocean since October 1986 and entered shipping lanes of the South Atlantic in early 2000. Its progress, and that of other very large Antarctic icebergs, is monitored by the National Ice Center.

● Other collisions can happen as well: in May 1980, a freighter hit the Skyway bridge in Tampa, Florida, United States, and caused the collapse of a 420-meter (1,400-foot) span of the bridge,31 damaging part of the ship and its cargo. In February 1997, in the port of San Francisco, an indisposed pilot left the bridge of the Orion for a few minutes and the ship ended up crashing into the pier, causing US $250,000 worth of damage to a gantry crane.32

●The risk of having a cargo contaminated or affected by other cargo is also present. It is always possible for a cargo to be contaminated by residues of the cargo that was previously in the same container or in the same ship, particularly foodstuffs contaminated by chemical products. A shipper importing rice found that it was unsellable due to the smell it acquired in the cargo hold of the ship.33 Another found that its cargo of 2,500 tons of vinyl pellets was contaminated by a few pounds of styrene left in the hold Refining costs amounted to US $188,000.34

●In some cases, other cargo on board can be a hindrance to a shipper: for example, a ship was recently carrying a cargo of wheat to the Dominican Republic and stopped in Dakar, Senegal, to pick up an additional load of groundnuts. The nuts eventually proved to be infested with khapra beetles. After the beetles were discovered in the port of destination, the ship was fumigated twice, which nonetheless failed to rid the cargo of the pests. The ship was then ordered to dump all of its cargo—including the wheat—in the sea.35 The owners of the wheat cargo had done nothing improper; they just happened to have loaded it on the "wrong" ship.

●For some ships sailing out of impoverished countries, another increasing problem is stowaways: young men sneak in the cargo holds, or in containers, and hide until they are discovered at sea. In most cases, the stowaways only are a problem at the port of destination where police and immigration officials fine the ship and question the crew. In 1999, there were 200 stowaways found in the Pacific Coast ports of the United States and Canada. Many more were not discovered; the United States Immigration Service estimates that 10,000 stowaways entered the country between 1997 and 1999. In most instances, there is a slight delay in the schedule when stowaways are discovered. In a few instances, the fear of these delays and fines leads the crew to get involved in criminal behaviors, such as killing the stowaways or sending them adrift at sea on a makeshift raft.

The consequences for the cargo beyond the delay are many; most of the time, the cargo is damaged by the stowaways while they are living with the merchandise from a few days to a couple of weeks. Approximately 2 percent of all vehicles going from Mexico to the United States by rail are damaged by stowaways who sleep, eat, and defecate in the cars. Sometimes, the stowaways hide in cargo holds that are closed and where the cargo is often laden with toxic chemicals or fumigated with insecticides. The stowaways die and the cargo is then considered unfit for consumption and destroyed in the country of destination. There are unfortunately no practical ways to prevent this type of occurrence.

●In some cases, and for whatever reason, a government may decide to arrest a ship (i.e., keep it in port rather than let it sail away). Such was the case for five Yugoslav ships that were held in United States ports for more than five years, when the U.S. government seized all Yugoslav assets during the Bosnian civil war. The cargo destined for the United States was unloaded, but the cargo loaded for the return trip was on board for the entire duration of the ordeal.

●In other cases, the owners of a ship declare bankruptcy while the ship is away, or they just decide to abandon the ship and its crew for economic reasons. In 1998, there was a substantial number of ships, most of them from the former Soviet Union, the "East Block," or flying convenience flags, which had been abandoned by their owners. The crew of the Delta Pride was abandoned by its Karachi owners in the waters of Mexico; fourteen months later, the men finally made it to the United States and were flown home after a Pakistani charity got involved and the ship and its cargo were sold at auction.42 The Oituz, one of twenty-two Romanian ships abandoned by its owners, waited with its cargo of 14,000 tons of sugar for nine months off the coast of Mexico.43 The current whereabouts of the ship, its crew, and its cargo are unknown. There were a total of 3,500 seafarers abandoned by shipowners between 1995 and 1998, according to the International Transport Workers Federation.44

●In ports where the equipment is inadequate, or in ports where equipment is in short supply, some of the cargo may be unloaded from the ship by taking apart the crates and the merchandise, and reconstructing the goods and the crate on the quay. This can be quite damaging to the cargo. In Chapter 14, this issue, as it relates to packaging and packing the goods, will be discussed. Cigna, the insurance corporation, publishes a guide to the equipment in place in all the ports worldwide, called Ports of the World, 45 so that a firm may plan the size of its shipment accordingly.

●Some ports have a history of social unrest, and are shut down for several days by strikes or other civil disturbances. During the summer of 2000 French fishermen and French truckers blockaded the ports and then the refineries of the country" to protest high diesel fuel prices. The government eventually lowered taxes on that fuel. Soon, their counterparts in Spain, Britain, Italy, and Germany followed suit and, for about a month, all cargo traffic in Europe was affected. Time-sensitive cargo was delayed, and transportation costs increased. Strikes in the ports of Japan occur almost annually to force negotiations of higher wages for dockworkers.46 All of these actions affect cargo movements in many ways; even if cargo going from

Cairo to Bombay is not specifically caught in an Italian strike, it is delayed because the containership on which it was supposed to sail is delayed. The possible perils that cargo can encounter at sea and on its way to and from a seaport are many; this list illustrates the point that many of the risks that are associated with a sea voyage may be easily underestimated by an exporter or an importer arranging for ocean cargo services. The importer or the exporter, whichever is responsible for the cargo, must be quite alert in its management of these risks.

8-4 Perils Associated with Air Shipments

Compared to what can happen to an ocean shipment, the perils to which an air shipment is exposed are minimal, a situation mostly due to the fact that air transport is, by nature, less perilous than ocean transportation. In addition, the airline industry is still dominated by companies located in, and therefore regulated by, developed countries' governments, which tend to have stringent rules regarding safety, pilot training, and maintenance. Despite the large number of aircrafts in operation there are approximately 13,670 commercial airplanes in the world, including 1,680 freighters47 and the correspondingly high number of voyages, the number of accidents per year is very small, reflecting the emphasis on safety of the entire industry.

The risks of fire and explosion are greatly diminished, mostly because countries routinely prohibit shipments of dangerous goods by air. The risks of total loss to cargo due to aircraft crashes is essentially nil, as are the risks of losses while the aircraft is aloft. The two biggest concerns for shippers should be:

Cargo movements While in the aircraft, the cargo is subjected to rough weather and sudden and quick accelerations and decelerations. Since freighter airplanes do not have to worry about passenger comfort, their pilots do not fly around turbulences the way passenger airline pilots do, and the cargo on board can be subjected to sudden and fairly violent "bumps." In a similar fashion, the aircrafts will brake faster on landing, bank at a wider angle on approach, and altogether be less gentle than with passengers on board. However, a good percentage of cargo also moves in passenger airplanes. Nevertheless, the greatest hazards are still in the shipping and handling that precedes the flight: in the truck on the way to the airport, in the warehouse, and in their counterpart activities in the transit airport and the airport of arrival.

Theft and pilferage While airports tend to have a fairly good handle on controlling theft while the goods are on the airport premises, it is not often the case in the vicinity of the airports, where problems abound in warehouses, truck terminals, and other satellite locations. Since most cargo sent by air has a high value, it is interesting to thieves, and since it tends to be packaged in cardboard boxes and not palletized, it is somewhat more easily pilfered and stolen. The key to controlling losses in these instances is to make sure that the cargo documents are handled by as few people as possible and that the boxes are not marked in any way to indicate their content.

There are a number of other risks associated with air shipment, particularly the cold and the changes in air pressure that can be found in some freighters.

Cargo tends to be kept at lower temperatures and at lower air pressure during the flight than what is practiced in passenger airplanes, for obvious reasons of cost.

For most cargo, these slight differences may not be significant but, for some cargo, it can be a problem. Since, by definition, sensitive cargo moves by air, care should be exerted in making sure that perishable cargo is not kept at temperatures than it cannot handle or that live cargo and sensitive mechanical instruments are not subjected to air pressures that are too low. For temperature, though, the greatest risk is usually not while the airfreighter is in flight, but while the cargo is on the tarmac, waiting to be loaded, or already loaded and waiting to take off :it can be exposed to extremes of temperatures as some air cargo hubs are located in pretty challenging locations (Anchorage, Alaska, for example).

8-5 Insurable Interest

There are several parties interested in the safe arrival of an international cargo shipment. The first, obviously, is the owner of the goods. Whether the owner is the exporter or the importer is dependent on a number of factors, principally the

"Terms of Payment" of the transaction (see Chapter 5). However, there are many cases in which non-owners are interested in making sure that the goods arrive safely to their destination. The Terms of Trade or Incoterms used in the transaction between the exporter and the importer (see Chapter 4) determine the cases in which the exporter is responsible for the goods before the title transfers to the importer. However, even if the importer is not responsible for the goods while they are in transit, it still has an interest in making sure that the goods arrive safely to their destination.

All of these situations illustrate the concept of "insurable interest":

An insurance contract is legally binding only if the insured has an interest in the subject matter of the insurance and this interest is in fact insurable. In most instances, an insurable interest exists only if the insured (were to) suffer a financial loss in the event of damage to, or destruction of, the subject matter of the insurance.

The use of Incoterms helps the exporter and the importer determine where their respective responsibilities start and end. It should therefore follow that the insurable interest of the exporter ends when possession shifts to the importer, at which time the importer is the party with an insurable interest; unfortunately, while this is correct, it is not that simple.

The issue is, once again, muddied by several factors. Several examples can be used to illustrate them:

Foreign exchange exposure An exporter in a developing country sells to an importer in a developed country on a CIF basis: responsibility transfers once the merchandise crosses the ship's rail (see Section 4-9), but the exporter is responsible to provide minimum cover insurance (i.e., Coverage C of the Institute Marine Cargo Clauses—see Section 8-8d). Assuming that the importer is in agreement with such minimum coverage, there is still the problem that, should there be a loss, the importer would have to file a claim with the insurer in the developing country, or, at least, an insurer not chosen by the importer. It is possible that the claim processing will take a few months, leaving the importer with the risk of foreign exchange devaluation. Since the terms are CIF, the exporter delivers the goods as agreed—when the goods cross the ship's rail—and therefore the invoice has to be paid by the importer, causing a cash-flow problem as well. In this case, the importer has an insurable interest and can obtain coverage in its country to minimize its foreign exchange risk exposure. A similar situation can arise in a CIP shipment.

Trust An exporter may sell FCA to an importer in a country that mandates that the importer buy insurance in the importing country. The exporter usually ships without evidence of coverage, and correctly so, since the responsibility shifts to the importer as soon as the goods are in the carrier's care. However, should they be damaged in transit, the importer may refuse payment, despite the fact that the accident happened under its responsibility. The exporter has therefore an insurable interest in the completion of the trip: note that the problem would be avoided if the exporter sold on a Letter of Credit basis, as the documents for the shipment, including the intermodal bill of lading, would be in order, and the Issuing Bank would have to pay (see Section 5-5a). The same situation would arise in FAS, FOB, CFR, CPT, and DAF shipments; it could also happen in an EXW transaction.

Insufficient coverage An exporter agrees to sell to an importer on a CIF basis. The importer requests that the terms be modified to "CIF maximum cover" (i.e., Coverage A of the Institute Marine Cargo Clauses, see Section 8-8a) but, since it is an Open Account shipment, it does not obtain evidence of this coverage. The goods are slightly damaged in transit by condensation, and the importer seeks to collect compensation under the terms of the insurance policy provided by the exporter. However, the claim is turned down because the exporter did not contract for Coverage A, but for Coverage B or C, which do not allow claims for such damage. Clearly, the importer has an insurable interest in this cargo and can obtain coverage in its country to protect itself from such losses.

While the owner of the goods has a clear insurable interest in the merchandise while it is in transit, non-owners, such as the buyer in the first and third example above, have an insurable interest which is less direct; it is usually qualified as a "contingent" insurable interest.

8-6 Risk Management

There are three ways in which a company can manage its risks, whether they are international cargo insurance or any other type of risk: it can retain the risk, it can transfer the risk, or it can take a mixed approach and retain some risks and transfer others.50 This section will concentrate on the management of international logistics risks, mainly the risks associated with transporting goods from one country to another.

8-6a Risk Retention

The strategy of risk retention is fairly clear; the company decides that it is more economical to not purchase insurance for those risks. In general, there are four reasons for which a company will decide to retain its international logistics risks:

1. Very large international traders—importers or exporters—are likely to follow this strategy as they act somewhat as an insurance company in some respect: they have a lot of merchandise in transit, and therefore would have to pay large premiums, but would only occasionally collect on a loss. Therefore, the many savings incurred by not paying premiums end up covering the few losses they experience. Those firms have decided to "self-insure," which is the euphemism for acting as an insurance company and pay all risks with current cash flow.

2. Exporters or importers which have little exposure: they are shipping or buying goods of fairly small value, in fairly small shipments, and therefore a loss would not have substantial financial or cash-flow consequences.

3. Exporters or importers which have little relative exposure because international transactions represent such a small percentage of their business. The individual amount may be large, but relative to the size of their domestic sales, it is insignificant.

4. Firms which did not evaluate the international transaction risks clearly.

They are not insuring because they do not insure their domestic transactions or, for whatever reasons, think that the risks of shipping internationally are not very high. Generally, the firms that are choosing to retain these risks by ignorance are also the ones that are more likely to incur losses because of improper packing or improper security measures for the same reasons. Relying upon the liability coverage provided by the shipping line is also imprudent; the current liability for shipping lines under U.S. law—the Carriage of Goods by Sea Act (COGSA)—provides a maximum coverage of US $500 per package, which is often interpreted as a "container," and the shipping lines have seventeen specified defenses they can invoke, essentially shielding them from liability except in the most egregious cases.

8-6b Risk Transfer

The strategy of risk transfer is also fairly clear: the firm decides to transfer all of its risks to an insurance company. In exchange for paying a premium, the firm is certain to be covered against losses experienced during international shipments. This strategy is followed for three reasons:

1. Firms may have a lot of exposure. The value of the goods they ship or import is high, and the loss of some or all of these shipments would be a substantial financial blow to their operations. In those cases where goods are expensive, though, the insurance companies often request, in cooperation with the firms, to restrict the total amount at risk on any single shipment. Usually this is achieved by having the shipment split over several carriers.

2. Firms may have a relatively high exposure. Even though the amount may be small, it ends up being relatively high for the firms. A perfect example of such a situation is found in personal effects shipments, which generally are worth fairly small sums, but are relatively quite valuable to their owners.

3. Firms that lack experience in international trade will insure because they are uncomfortable with the risks involved or because they are unable to properly assess their exposure.

8-6c Mixed Approach

The mixed approach is one where the firm decides to retain some of the risk and transfer the rest. This strategy can be achieved in two different ways:

1. The decision is made based upon the maximum amount of exposure that a firm is willing to risk: this objective is traditionally achieved with the use of a deductible. A deductible can be managed on a per-claim basis—the insurance company is responsible for the portion of a given loss which is greater than the deductible and the firm is responsible for the amount of the deductible, as well as all losses which have a value lower than the deductible. It can also be a cumulative deductible, where the firm pays for losses until the cumulative deductible amount is reached, and the insurance company pays for the losses incurred beyond the amount of the deductible.

2. The decision is made based on the types of risks that the firm is willing to take, and those that it would rather transfer to an insurance company. For example, a firm may choose to insure using Coverage B of the Institute Marine Cargo Clauses (see Section 8-8c) and retain the risks not covered by this policy, among which are condensation, pilferage, leakage, and breakage.

Either of these strategies can be followed for a number of reasons as well: however, while the choice of a monetary deductible is essentially based upon the maximum amount of exposure that a firm is willing to bear, the strategy of splitting risks between the firm and an insurance company is a much more difficult strategy to implement, as it involves identifying risks, determining whether they are significant enough to transfer, and negotiating with an insurance company a specific contract of insurance, taking advantage of the fact that" customize cargo policies are limited only by the imagination of the carriers offering them."51

8-7 Marine Insurance Policies

An international trading firm—exporter or importer—intent on transferring all or part its international shipping risks is generally only interested in purchasing

Marine Cargo Insurance, since it just needs to protect itself from damage to the cargo as well as from its liability toward the ship owners and the rest of the cargo in a General Average case. However, there are a couple of additional insurance coverages available in international shipping that should be mentioned: they pertain mainly to vessel or aircraft owners, but, on rare occasions, those policies matter to an exporter or importer chartering an entire ship for a bulk shipment.

8-7a Marine Cargo Insurance

Marine Cargo Insurance can be purchased either under an open ocean cargo policy or under a special cargo policy:

Open Policy

An open policy is an insurance contract with which a firm insures every international shipment it makes for a fixed period of time. Such a policy is formally known as an Open Ocean Cargo Policy and it automatically covers all the shipments of the insured, as long as the firm reports every shipment to the insurance company. This reporting is done using a set of declaration forms, either every time an export shipment is made—or an import shipment is received—or on a monthly basis. There is a presumption of goodwill on the part of the firm in that the insurance company will cover damage to an undeclared shipment, as long as the firm intended to notify the insurance company. Since the premiums are based upon the value of the shipments made under such a policy, it presents one great advantage: the firm knows the costs of its insurance coverage and can easily incorporate it in its pro-forma invoices without having to request a quote for each shipment.

Special Cargo Policy

The second alternative is for the exporter or importer to purchase an individual policy, called a Special Cargo Policy, for each of its shipments. This alternative allows a firm to specifically purchase coverage that pertains best to a shipment. However, it tends to be cumbersome to enter a contract every time the firm gets involved in an international transaction, and this method is not very commonly used.

Obtaining Insurance Certificates

On a large number of occasions, the exporter is requested to provide a Certificate of Insurance to the importer and its bank, usually as this Certificate is required by the Letter of Credit. This requirement is usually not a problem under a Special Cargo Policy, since there is evidence from the insurance company that a specific shipment is insured.

Under an Open Ocean Cargo Policy, however, this requirement used to present some difficulties until recently. The practice used to be that the insurance company would provide the exporter with a Certificate of Open Insurance; however, this certificate did not specifically address the insurance status of a given shipment, and some (few) banks did not accept evidence of an open policy as a proot of insurance as required in the terms of the Letter of Credit. Therefore, the practice is now for the insurance company to give the insured a supply of blank Special Cargo Policy forms, which are then filled by the exporter to show that a specific shipment is covered. These forms appear—to the Issuing Bank—as if a special Cargo Policy has been contracted for the shipment, even though it is covered under an open policy.

Purchasing Marine Cargo Insurance

Marine Cargo Insurance can be purchased from two sources:

1. An insurance agent, who can assist the firm in obtaining the most appropriate coverage, given its product mix and its risk management strategy; as such, agents sell most open ocean cargo policies.

2. A freight forwarder, who can provide "generic" coverage for a given shipment almost immediately; as such, freight forwarders sell a lot of special cargo policies.

8-7b Hull Insurance

Hull insurance is contracted by the ship owners to cover the risk of damage to their ship when it is involved in a peril, such as grounding or fire. It also covers the owner in case of a complete loss, such as a sinking. This policy also covers the owners' liability toward the cargo owners in the case of a General Average and its damages in the event of a collision with another ship. An equivalent hull insurance is available to owners of aircrafts.

Hull insurance rates are dependent on the seaworthiness of a ship, the way it is maintained, and the equipment it has on board, all three of which are appraised by Classification Societies. Ships are placed in different classes and hull insurance rates are dependent on the class of a ship. The Lloyd's Register of Ships—in its 236th year, and now available on CD-ROM—keeps information on almost all ships in the world and their classification. Hull insurance is effectively paid indirectly by the cargo owners, as the cost of the insurance is included in the freight rates quoted.

8-7c Protection and Indemnity

Protection and Indemnity is yet another form of insurance for a ship owner; it is a protection against liability to other parties when a ship sinks or is damaged. In the last few decades, it has meant liability for oil spills—specifically cargo spills, but also ship fuel spills—on beaches, and their extensive clean-up costs. However, it also includes the ship owners' liability toward the crew (injury, death) or in repatriating stowaways.

Protection and Indemnity insurance is not a traditional insurance, as it is a mutual P&I Club to which ship owners contribute, and which absorbs the costs of one of the owners' mishaps. The liability of a single P&I Club is limited to an amount of US $5,000,000; for claims that are higher than that, the fourteen P&I Clubs form an alliance and mutually insure each other, up to a limit of approximately US $78,000,000.56 Claims beyond this amount usually involve a cargo of crude oil and are covered by an international fund, called the International Fund for Oil Pollution Compensation.57 If it is not a claim involving oil cargo, the p & I Clubs are reinsured through Lloyd's for the remainder of the claim.

8-8 Coverages under a Marine Cargo Insurance Policy

There are two major groups of policies that can be purchased in order to protect cargo during an ocean or air shipment. The first group is governed by British Law and was completely rewritten in 1982. This group of insurance policies seems to have become the standard for other countries as well. They are known as the Institute Marine Cargo Clauses, Coverage A, B, or C.

The second group is older, with some antiquated clauses and more modern ones, and is mostly written by U.S.-based insurance companies, although some of the coverage can be written using older British clauses. These traditional policies are known as "All Risks;' "General Average,' and "Free of Particular Average."

To make things more interesting, these six general policies can be modified to add coverage that is not included in the original contract, such as the risks of strikes and civil unrest. However, none of the policies will cover five specific risks, against which it is impossible to find insurance:

Improper packing The goods must be adequately packed for an ocean voyage and be well protected against shocks and water damage, as well as well secured in the container or the crate. Chapter 12 discusses this issue in depth.

Inherent .vice The goods shipped have a natural propensity to be affected In a certain way; for example, steel will exhibit surface rust after being exposed for some time to air and moisture, agricultural product shipments will foster insects and rodents, and wood will warp and split. None of these "inherent vices" are insurable.

Ordinary leakage Also known as "ordinary loss in weight and volume" and "ordinary wear and tear;' this states that several products, when shipped, will leak or lose weight; for example, any agricultural product, such as wool, will lose some weight as its moisture content decreases; petroleum oil trans- ported in bulk will partially evaporate; and an automobile carried on a roll-on/roll-off ship will show additional mileage. Again, none of these risks are insurable.

Unseaworthy vessel This exclusion is not a problem for goods shipped by regularly scheduled container or break-bulk ships; however, it puts a burden of care on the shipper in the case of a shipment going by bulk ship, as the shipper must make certain that the ship is classified by a Classification Society as seaworthy.

Nuclear war This risk is always specifically excluded from policies. Note that the risk not covered is the direct result of nuclear war, such as irradiation or destruction. However, should a shipment be damaged by a fire caused by nuclear war, the shipment is covered-if the risk of fire is covered in the policy---because the fire was the peril that caused the loss.

8-8a Institute Marine Cargo Clauses---Coverage A

The first general policy is referred to as Coverage A of the Institute Marine Cargo Clauses. Coverage A is quite similar to a traditional "All Risks" policy (see Section 8-8b), in that it covers "all risks of loss or damage to the subject-matter insured; yet it is not identical to one. For one, it is written in plain English, which makes it much simpler to decipher. Moreover, unlike traditional "All Risks" policies, which can be written with U.S. or British clauses-and the different interpretations they imply—a policy written with Coverage A of the Institute Marine Cargo Clauses is identical in all countries.

Despite its name, a Coverage A policy-and an M1 Risks policy is not truly an All Risks policy, as it covers all perils except the ones mentioned earlier (improper packing, inherent vice, ordinary leakage, unseaworthy vessel, and nuclear war), as well as a number of risks for which specific additional coverage must be purchased separately as endorsements to the main policy: strikes and other civil disturbances (see the Strikes, Riots, and Civil Commotions clause in Section 8-8g) and acts of war and seizure by a government (see the Free of Seizure and Capture clause in Section 8-8h).

Nevertheless, Coverage A of the Institute Marine Cargo Clauses is the maximum coverage that an exporter or an importer would need to purchase in the case of a shipment for most trade lanes in the world, specifically from a developed country to another, as long as the route does not cross a particularly hot spot of the world.

8-8b All Risks Coverage

An "All Risks" policy is an older-but still very commonly used, particularly in the United States type of policy. Since an M1 Risks policy can be written as an American contract or as a British contract, it will contain different wordings of the clauses and other relatively minor changes, which will make an American policy different from a British policy on a few points; therefore, careful reading of such policies should always be done to ensure that there is a proper match between the risks that the shipper., exporter or importer-is willing to assume and the ones that the policy excludes.

For a United States All Risks policy, the goods have to be shipped "under deck" which means that the goods must be stowed inside the ship, for the obvious reason that goods inside a ship are exposed to fewer perils than goods stowed "on deck" However, this presents a practical problem since the shipper usually is unaware of the way the goods are stowed in a ship, and since some containerships no longer have a deck and are instead equipped with stack bars. The problem is solved by requesting that the insurance company cover the goods based upon the Shipper's Letter of Instruction, which requests that the goods be shipped under deck, and not based upon the way the goods are actually stowed by the steamship line. Such coverage can be obtained as an endorsement to the main policy, usually at no additional charge.59 Once this endorsement has been granted, the All Risks policy is even more similar to a Coverage A policy, and therefore an All Risk poticy is also quite appropriate for shipments of any nature between two developed countries.

8-8c Institute Marine Cargo Clauses--Coverage B

Another general policy is referred to as Coverage B of the Institute Marine Cargo Clauses. It is also called a "named perils" policy, as it lists specifically the risks that it will cover. The list of covered perils includes fire, stranding, sinking, collision, jettison, washing overboard, water damages, and total losses during loading and unloading; however, losses due to bad weather are not covered, and neither are partial losses happening during loading and unloading of the ship. For a complete list, please refer to Table 8-1, where a comparison is given for all six standard coverages.

Coverage B of the Institute Marine Cargo Clauses is appropriate for goods that have a good tolerance for bad weather, such as bulk raw materials including coaliron ore, polymer pellets, and lumber. It would not be appropriate for machinery; paper, and any type of finished goods, unless they were particularly resilient.

8-8d Institute Marine Cargo Clauses---Coverage C

The last of the general Institute Marine Cargo Clauses is Coverage C. It is also a "named perils" policy, as it lists specifically the risks that it will cover. The list of covered perils is limited to fire, stranding, sinking, collision, and jettison; it does not include washing overboard, rough weather damages, water damages and losses during loading and unloading. For a complete list, please refer to Table 8-1, where a comparison is given for all six standard coverages.

Coverage C is the minimum coverage required by the Incoterms CIF and CIP

It is minimal enough as to be inappropriate for most goods, and companies doing business on CIF or CIP term should definitely extend this coverage to "maximum cover" (i.e., Coverage A of the Institute Marine Cargo Clauses), or, if they are importing on those Incoterms, purchase Difference in Condition Insurance (see Section 8-8J).

Coverage C is generally insufficient for most containerized goods, with the possible exception of goods that are unlikely to be affected by an international voyage in any way, and, if lost overboard, would not be a major loss. There are few cargos that fit this description, with the possible exception of scrap merchandise, such as scrap metal or recyclable paper. Coverage C is appropriate for bulk cargo, as it is unlikely to experience a loss unless there is major damage to the ship.

TABLE 8-1 Marine Insurance Coverage Summary

Perils Covered Against A B C AR WA FPA

Fire × × × × × ×

Explosion × × × × × ×

Stranding × × × × × ×

Sinking × × × × × ×

Collision × × × × × ×

General average × × × × × ×

Jettison × × × × × (*)

Loss overboard × × × × (*)

Seawater damage × × × × (*)

Lightening × × × × (*)

Condensation × ×

Improper stowage by carrier × ×

Theft × ×

Pilferage × ×

Leakage × ×

Breakage × ×

Damage while loading/unloading× × × ×

Damage on land before loading × × × × × ×

(*)Under an FPA policy, any partial loss incurred would not be covered unless it is due to a ship sinking, burning, becoming stranded, or being involved in a collision; a total loss would be covered.

A Coverage A of the Institute Marine Cargo Clauses

B Coverage B of the Institute Marine Cargo Clauses

C Coverage C of the Institute Marine Cargo Clauses

AR All Risks Coverage

WA With Average (Typical Coverage)

FPA Free of Particular Average (Typical Coverage)

Note: Since so many different types of WA and FPA policies exist; the table is only indicative. Please refer to the actual policy for definitive coverage.

8-8e With Average Coverage

The "With Average" policy is generally written to include coverage in between an "All Risks" policy and a policy with Coverage B of the Institute Marine Cargo Clauses. A With Average policy is also named a "named perils" policy, as it lists specifically the risks that it will cover. Again, since a With Average policy can also be written as an American contract or as a British contract, care should be given to ensure that the shipper is not unwillingly accepting a risk that it does not want to retain.

A With Average policy covers risks such as fire, explosion, stranding, collision, and so on (see Table 8-1), but covers damage to cargo from heavy weather, as well as partial losses while loading and unloading the vessel, and the bursting of boilers, none of which Coverage B provides.

The way a With Average policy insures partial losses is through the use of a franchise, which is to say that for partial damage below a certain percentage—say 3 percent of the value of the merchandise, the goods are not covered. For partial losses greater than this franchise, the entire loss to the insured is covered. A franchise is therefore different from a deductible, which would consider that, if a loss of 10 percent of the value of the merchandise occurred, the insured would be responsible for the first 3 percent and the insurance company would be responsible for the remaining 7 percent. In a With Average policy with a franchise of 3 percent, the insurance would cover the entire 10 percent.

A standard With Average policy is appropriate for some percentage of the merchandise shipped internationally; however, since some other coverages such as fresh water damage, condensation, or breakage and pilferage are often added, it seems that shippers use a With Average policy to tailor their coverage to include those perils to which the merchandise they export or import is sensitive.

8-8f Free of Particular Average Coverage

The last general policy is referred to as a "Free of Particular Average" policy, which is also a "named perils" policy. A "Free of Particular Average" policy is a policy that will cover total losses, but will only cover partial losses in some circumstances. The major issue is whether the policy is a "Free of Particular Average-English Conditions" policy or a "Free of Particular Average-American Conditions" policy. Under an American Conditions policy, partial losses are covered only if they result directly from a fire, a stranding, a sinking, or a collision. Under an English Conditions" policy or a "Free of Particular Average-American Conditions" policy. Under an American Conditions policy, partial losses are covered only if they result directly from a fire, a stranding, a sinking, or a collision. Under an English Conditions policy, the partial losses are covered if they occur on the same voyage that a fire, a stranding, a sinking, or a collision occurs, without these perils having directly caused the loss.

A "Free of Particular Average" policy is even more restrictive than Coverage C of the Institute Marine Cargo Clauses. It does not cover many of the risks associated with an international shipment and it is rarely sufficient or appropriate for an international shipment of containerized or break-bulk cargo, unless the cargo considered is particularly inexpensive and a loss would be no substantial problem for the shipper. It would be appropriate (with some reservation, since no partial losses are covered) for some bulk cargo of minimal value.

Finally, a Free of Particular Average' policy would not be enough to cover the minimum Insurance requirements of a CIF or CIP shipment, which both require the minimum cover" of Coverage C of the Institute Marine Cargo Clauses.

8-8g Strikes Coverage

All the previous standard policies include a clause, called the "Strikes, Riots, and

Civil Commotions" (S.R. & C.C.) clause in the American policies and the "Strikes Exclusion" clause in the Institute Marine Cargo policies, which excludes coverage of damage to cargo due to strikes and other civil disturbances.

Should a shipper be concerned about the possibility of such problems in a specific port or during a specific period, a possible amendment to include such coverage can always be added, generally called an S.R. & C.C. Endorsement. However, the coverage would include only direct physical damage to the goods or the additional costs incurred in storing the goods during the strike, but would not include incidental damage caused by delay to market, nor the financial losses that accompany a delay in the sale of a cargo.

8-8h War and Seizure Coverage

All the previous standard policies also include a clause, called the "Free of Capture and Seizure" (EC. & S.) clause in the American policies and the "War Exclusion" clause in the Institute Marine Cargo policies, which excludes coverage of damage to cargo due to war and war-like situations, such as the seizure of a ship by a foreign government or the accidental collision of a ship with a mine.

It is possible for a shipper to insure its cargo against war damages, but it is through an additional policy, called the "War Risks Only" policy, which would cover hostile acts by a foreign government or by an organized power. For obvious reasons, a war risks policy is cancelable by the insurance company with forty-eight hours' notice; however, it cannot be canceled for cargo that is in transit (i.e., that has already left the port of departure), which is really the coverage that any shipper would want. Most open cargo policies are accompanied by a separate war risks policy, according to Cigna Insurance Companies.63

8-8i Warehouse-to-Warehouse Coverage

Another common additional coverage to an open cargo policy is the "Warehouse-

to-Warehouse" coverage, which covers the goods from the time they leave the exporter's warehouse until the time they arrive at the importer's warehouse, or fifteen days after they arrive m the port of destination, whichever occurs first.. The Warehouse-to-Warehouse coverage grew from the demands of shippers who were tired of only finding coverage for the ocean portion of the voyage.

First, the All Risks and With Average insurance policies added a "Shore Perils" endorsement to include the perils occurring while loading and unloading ships; this clause was also made part of the Institute Marine Cargo Clauses. Finally, a true

"Warehouse-to-Warehouse" clause was added to most open cargo policies. In addition, in some policies, there is also a "Marine Extension Clause," which essentially expands the Warehouse-to-Warehouse coverage to ensure unforeseen changes in the voyage and unexpected transshipments. Such a clause was developed during World War II to account for unusual and unknown transshipments, since all shipping data was classified. It fulfills few practical purposes today

The Warehouse-to-Warehouse coverage is an extension to the traditional All

Risks, With Average, and Free of Particular Average policies, but it is an integral part of the Institute Marine Cargo Clauses policies, for Coverages A, B, and C, in which it is called a "transit clause?'

8-8j Difference in Conditions

Another addition of significance to open cargo policies would be "Difference in Conditions" coverage. Difference in Conditions coverage is designed to fill the gap between what an importer would like to have covered under its open cargo policy and what is covered under its supplier's CIF or CIP coverage.

Since the International Chamber of Commerce only requires Coverage C of the Institute Marine Cargo Clauses for a CIF or CIP shipment, it can be difficult to ensure that a supplier will actually cover the shipment more fully, even though the importer may request maximum cover. In those cases, it is simpler for the importer to purchase a Difference in Conditions endorsement and not have to worry about what the supplier will provide.

8-8k Other Clauses of a Marine Insurance Policy

There are many other clauses in a marine insurance policy, either as a part of the general policy or as an endorsement to the general policy. This section will give a brief overview of some of them.

General Average Clause

All insurance policies contain a "General Average" clause, which specifies that the insurer will cover the General Average responsibilities of a shipper.

Constructive Total Loss Coverage Clause

All insurance policies contain a "Constructive Total Loss Coverage" clause, which essentially specifies that the insurer will reimburse the shipper for goods that have been abandoned after a stranding or a sinking, as long as the costs of recovering the goods and making them marketable is greater than their value. If it is possible to recover the goods at a cost lower than their value, then the insurance company pays for these costs.

Sue and Labor

All traditional insurance policies—All Risks, With Average, and Free of Particular

Average--have a clause called "Sue and Labor" (policies written under the Institute Marine Cargo Clauses have similar wording but do not use this clause name), which direct the shipper to act in the best interest of the insurance company when a loss occurs. The principle is that, after a loss, the insured should protect the cargo from further damage, as it would if it had not been insured, in order to keep the loss to a minimum.

Inchmaree Clause

One of the quaint vestiges of the old marine insurance policies is the "Inchmaree" clause, so named after a lawsuit between the owners of the Inchmaree, a vessel, and the insurers of its cargo, which determined that damage caused by a burst boiler (steamship engine) was not covered by the traditional marine insurance policy Of the time. Insurers quickly added this coverage to their policy and it has remained to this date m the All Risks, With Average, and Free of Particular Average policies. The Inchmaree clause also covers cargo owners in the event that the ship owner is guilty of errors in navigation and seamanship.

Coverages A through C of the Institute Marine Cargo Clauses do not include the inchmaree clause and do not mention coverage of poor navigation. An analysis of the American Carriage of Goods at Sea Act, in Chapter 9, will cover this issue of seamanship further.

8-9 Elements of an Airfreight Policy

Fortunately, airfreight policies tend to be much less complicated than ocean marine cargo insurance policies: they are all written as "All Risks" policies, with the exclusions already described in Section 8-8:

Improper packing The goods must be adequately packed for an air shipment and be reasonably protected against shocks and rainwater damage, as well as well secured in the container or the crate. The standards for airfreight packing are much less stringent than for an ocean shipment.

Inherent vice This problem is essentially moot in an air shipment as the goods are in transit a much shorter period of time. Nevertheless the risk is specifically excluded from coverage.

Ordinary leakage Also known as "ordinary loss in weight and volume; and "ordinary wear and tear,' this is also much less of a concern for air shipments as transit times are much shorter.

Unairworthy aircraft This exclusion is not a problem for goods shipped by air; governments do extend much greater efforts to the oversight of aircrafts than they do for ships. The absence of" flags of convenience" is also a positive factor.

Nuclear war This is a traditional exclusion.

In addition, policies will also exclude war coverage and S.R. & C.C. coverage, as they are for an ocean cargo policy, as well as two risks inherent to air travel: damage caused by cold and changes in atmospheric pressure. All of these risks can be covered, however, by purchasing additional coverage.

Practically speaking, most air cargo policies are included as a clause in the open cargo policy of a firm, which allows the firm to manage its shipping risks with a single document, whether its goods are moving by ocean or by air.

8-10 Lloyd's

Lloyd's of London is the oldest insurance market in the history of shipping.

Although it is commonly perceived as an insurance company, that perception is incorrect. Since its humble beginnings in Lloyd's coffee shop, the company has acted as an intermediary between people who wanted insurance and those willing to provide it. Lloyd's does not provide insurance coverage; when one hears of an athlete whose legs are insured "by Lloyd's of London,' it is an inaccurate statement: the athlete's legs are insured through Lloyd's.

8-10a Principles

Before explaining how the functioning of Lloyd's is different from the functioning of an insurance company, it seems relevant to explain how the latter works. An insurance company attempts to strike a balance between the collection of a large number of premiums, each of a moderate monetary amount, and the payment of a few claims, each of a large monetary amount. The correct calculation of a premium relies upon the determination of the expected monetary value of claims (their probability multiplied by their expected costs) divided by the number of policyholders. Over time, the law of averages arithmetic averages allows an insurance company to be profitable.

Lloyd's of London acts as a market through which unusual risks are insured, unusual risks are those that a traditional insurance company would not consider covering because there is no way to collect a large number of premiums and therefore the law of averages does not apply. For example, consider a firm that would like to insure the launching of its communication satellite. Although there may be as many as fifty satellite launches worldwide every year, the number of companies launching a satellite-the possible number of premiums, to collect- is too small to spread the high expected monetary value of a single loss. Therefore the firm would be faced with a series of years m which it would collect premiums without a loss, and then would have one or two losses in a single year, which would have a substantial adverse effect on its income.

Lloyd's of London is the place where companies and people wanting to have such risks insured find a group of individuals willing to assume (insure) this risk.

These individuals are called Names and are organized in a Syndicate. Each Name is actually "wagering" that the loss will not happen, and collects a portion of the premium that the Name shares with the remainder of the Syndicate. This share of the premium is therefore income to the Name. Should a loss occur, the Name is then asked to pay his or her share of the loss, along with every other Name in the remainder of the Syndicate. This payment comes out of the Name's income or assets. The Names, organized in a Syndicate, are the Underwriters of the insurance.

From a Name's perspective, participation in a Syndicate can be quite a profitable venture. It is not truly an investment, since the Name only collects premiums (additional income) while a portion of his or her assets can continue to be invested in other vehicles on which he or she collects market rates. However, since each Name has unlimited liability on his or her personal assets, this can also be an extremely risky venture. Because of this risk, each Name must have substantial personal assets as of October 2000, the required net wealth was £ 350,000, only

50 percent of which have to be invested with Lloyd's in order to be allowed to participate in a Syndicate.

Over the years, the type of insurance coverage provided through Lloyd's has increased to include more traditional risks, such as automobile and home insurance. However, most of the Lloyd's Syndicates will cover risks that a traditional insurance company will not consider. As of 1999, there were 139 underwriting Syndicates.65

8-10b Current Status

Some of the risks that Lloyd's Syndicates covered in the last few decades included the risk of asbestos product liability: such was the extent of the liability, though, that many Names were brought to personal bankruptcy, despite efforts by Lloyd's to spread the risk to more Syndicates than had originally been involved. The number of Names soared from 14,000 in 1978 to 34,000 by the end of the 1980s. Some of the Names who joined in the 1980s claim to not have been informed of the extent of the liabilities that Lloyd's Syndicates faced, and filed lawsuits alleging fraud In November 2000, Lloyd's was found not guilty of fraud by the British courts, but the language used by the judge in its decision was quite strong, calling

Lloyd's "grossly negligent."67 Some criminal lawsuits against Lloyd's are still pending as of November 2002.

In 1994, Lloyd's decided to allow Corporate Names (i.e., allow corporations to

become Names), These Corporate Names were given the advantage of having limited liability and joined Syndicates in which individual Names retained unlimited liability. This decision, which allowed the Syndicates to have more capitalization, also created some friction, as individual Names—"bespoke Names" in Lloyd's vernacular— resented the creation of two classes of Names and responsibilities. Today, it is estimated that 75 percent of Lloyd's underwriting ability is provided by corporations By 1999, the number of individual unlimited liability Names had dropped to 4,712, with 668 Corporate Names.

From the perspective of an exporter or importer, the Lloyd's market would only be used for some of what is referred to as "project cargo" or cargo of exceptional dimensions which would not fit in a traditional container or would need special arrangements with the shipping line. An example of such extraordinary project cargo would be a firm shipping several large pieces of equipment to a customer or a subsidiary overseas. Since such cargo may not be insurable by a traditional insurance company, it could be insured through Lloyd's.

8-11 Commercial Credit Insurance

Another area where a firm involved in international matters can transfer some of its risks is in the commercial credit area.

Increasingly, competitive pressures are pushing firms to sell on an "Open

Account" basis, as customers try to acquire the best possible payment alternatives. Several countries used to offer subsidized terms on export insurance to their exporters and, although these practices have officially ended with the creation of the World Trade Organization (WTO), which prohibits export subsidies, the mindset was established. In France, for example, nearly 25 percent of all export sales are insured by the Compagnie Francaise d'Assurance pour le Commerce Exterieur (COFACE), which was privatized in May 1994, but was still heavily subsidized by the French government, to the tune of FFr. 2.5 billion US $500 million in 1996.

A firm may have to cover several types of transactions for which it feels uncomfortable:

●A sale to a foreign customer on an "Open Account" basis, where the firm is concerned about its exposure, or the amount of money it has at stake in the sale.

●A sale to a foreign customer on credit terms: the customer has requested that payments be extended over a period of several months. The terms are also "Open Account" since the seller's competitors have offered this alternative to the customer. The exporter is concerned about its exposure to this stream of payment.

●A construction firm retained by a foreign customer to build a plant; however, in order to earn the contract, it must post a number of performance bank guarantees (or performance bonds). It is concerned about its exposure in the case of unexpected delays, such as if the customer calls on the bank guarantee. For more information on bank guarantees, please refer to Section 5-9.

8-1 la Risks Involved

In each of these transactions, there are two components to the risk of non-payment:

Political risk This is the risk presented by the country in which the transaction takes place. This risk can take many forms. The country s government can decide to increase tariffs on certain imports and the customer refuses delivery, the country's government can decide to freeze accounts held in foreign currencies and the customer cannot pay, the country's government can decide to prohibit the sale of a particular product, the country's government can commit a political faux pas and an embargo is declared by the remainder of the world, which means that no payments can be forwarded by the customer, and so on.

Commercial risk This is the risk presented by the customer defaulting on its obligation to pay, for whatever reason. Generally, the customer encounters financial difficulties or the customer has a complaint about the product which it cannot resolve any other way in its management s mind, at least than by withholding payment to the exporter.

8-11b Risk Management Alternatives

As in the case of international cargo insurance, the firm exposed to these risks has three alternatives available to manage them: it can decide to retain the risk, it can. decide to transfer the risk to an insurance company, or it can follow a mixed strategy of retaining some of the risks and transferring others.

There are many different reasons for choosing one strategy or another, most of which were covered in Section 8-7, so they will not be repeated here.

8-11c Insurance Policies Available

Should a company decide to cover its risk with insurance coverage, there are many alternatives available, which can be obtained from a large number of insurance companies and governmental or quasi-governmental agencies. Most of these sources have multiple programs, presenting a dizzying array of possible contracts. Most companies interested in such programs should contact an insurance agency specializing in these types of policies, as well as contact their banks or govern mental export support agencies in their country for further and more specific information.

A quick summary of the programs available in the United States gives an example of what is possible:

Government Programs

There are three government-related organizations in the United States that provide exporters with commercial and political insurance coverage:

The Ex-lm Bank The Export-Import Bank was created as an independent government agency in 1934. Its mission is to help create jobs in the United

States by supporting export sales. It has a very large number of programs, from political and commercial credit insurance to loan guarantees (for banks lending money to an exporter) and loans extended to foreign purchasers of American products. For years, the Ex-Im Bank was the only provider of political risk insurance in the United States.

There are two difficulties in dealing With the Ex-Im Bank. The first is the lengthy delays that usually accompany an application which means that an exporter involved in a negotiation with a foreign customer should attempt to secure coverage very early. The second is that it is an arm of the U.S. government and therefore subject to political pressures, such as abrupt cancellation of, coverage, for certain countries of the world. In addition, the product sold abroad must have at least 50 percent American content. Nevertheless, the Ex-Im Bank provides programs that are extremely popular with exporters and their bankers, such as the Ex-lm Bank Guarantee, which covers loan repayments by foreign purchasers. The complete program of the Ex-lm Bank is available at its website (www.exim.gov.)

OPIC The Overseas Private Investment Corporation is also a governmental agency, created in 1971 with the purpose of encouraging private investments in developing countries. Its purpose is quite political, as it seeks to further U.S. values overseas, but it offers several programs of loans, political insurance, and private equity investment funds, all quite advantageous to corporations interested in investing in developing countries. As of October 2002, there were more than 140 countries eligible for its programs, details of which can be found at www.opic.gov.

Unfortunately, OPIC presents the same challenge as the Ex-Im Bank—long processing times—but, because the products it offers cover long-term investments owned by U.S. firms, these delays are less critical.

SBA The Small Business Administration has created a couple of programs designed to help exporters finance their sales abroad: working capital loans and long-term loans for capital investments. However, the SBA does not pro- vide insurance of any sort for exporters.

Private Insurance Companies

There has recently been a substantial increase in the number of programs offered by private insurance companies in the United States, but it still is a business restricted to a few players. The practice of insuring a company's foreign receivables is still not as well established in that country as it is in many European countries.

In the United States, there are few insurance agencies specializing in this field, with approximately twenty of them underwriting most of the business.

The insurance companies that dominate the market are:

FCIA The Foreign Credit Insurance Association was created in 1961, primarily to offer products that combined the Ex-Im Bank's political insurance coverage and commercial credit insurance products. Today, many of the Ex-Im Bank products that contain credit insurance are using the FCIA for that portion of the coverage. The FCIA, though, is not a government agency, but is owned by Great American Insurance Company, a conglomerate of insurance companies. The FCIA products are mostly commercial credit insurance products, ranging from short-term to medium-term coverage for receivables. More information on the company's products can be found on its website (www.fcia.com).

Euler-ACI American Credit Indemnity is the other large player in the field, offering a similar array of commercial credit insurance products. It was recently purchased by the Euler Group, a French insurance conglomerate. More information on ACI's products can be found on its website (http://www.aciins.com).

American International Group American International Group (AIG) is the largest U.S.-based provider of commercial credit insurance, a product it calls Trade Credit Insurance; more information is available on its website (www.aig.com).

Lloyd's Certain Lloyd's Syndicates have added coverage of political risks to their underwriting portfolio and present the advantage of offering insurance for countries for which the United States' government will not provide any, such as Afghanistan, Albania, or Belarus. Although the United States government allows trade with any of these countries, it will not provide political insurance coverage; however, a Lloyd's Syndicate will.

End – of – Chapter Questions

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1. Describe some of the risks that an ocean shipment faces.

2. Describe some of the risks that an air shipment faces,

3. Explain the concept of General Average, and explain, with a numerical example, how it is utilized,

4. Explain the concept of "insurable interest." Explain who has an insurable interest in three different transactions conducted under three different Incoterms.

5. What possible risk management strategies can an exporter/importer follow? Explain each strategy's advantages and disadvantages from the perspective of a small exporter.

6. What insurance coverage is required under CIF or CIP Incoterms? Explain which risks are not covered, and how an importer can still protect itself against them.

7. Choose three possible Marine Insurance clauses and describe their usefulness.

8. Explain the concept of International Credit Insurance and explain how it is possible to contract a policy covering commercial and political risks.

Endnotes

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1. Mongelluzzo, Bill, "Ports looking inland for success" The Journal of Commerce, March 17, 1998, p. lB.

2. Baldwin, Tom, "It's time to inspect the containers.., (Don't attempt this one at home, folks)" The Journal of Commerce, November 13, 1997, p. 2B.

3. Baldwin, Tom,"Container industry braces for law-suits,' The Journal of Commerce, November 12, 1998, p. 1A.

4. Baldwin, Tom,"Container industry braces for law-suits," The Journal of Commerce, November 12, 1998, p. IA.

5. Hall, Kevin G. and Rip Watson, "Georges makes waves on Gulf Coast" The Journal of Commerce, September 25, 1998, p. 14A.

6. Baldwin, Tom, "Container industry braces for law-suits," The ]ournal of Commerce, November 12, 1998, p. I A.

7. Baldwin, Tom, "Storm-tossed boxship splits: Crew rescued" The Journal of Commerce, November 26, 1997, p. 12A.

8. Cottrill, Ken, "A Poseidon adventure,' Traffic World, January 20, 1999.

9. Journal of Commerce Staff, "Complexity, speed of modern ships increases risks," The journal of Cornmerce, November 19, 1999, p. 9.

10. Baldwin, Tom, "Ship hit by fire and explosion has lost 85% to 90% of its cargo" The Journal of Commerce, November 25, 1998, p. 16A.

11. Jowit, Juliette, "Inspection plan ordered for tankers" The Financial Times, May 5, 2000, p. 8.

12. International Underwriting Association, http://www.iua.co.uk,

13. aldwin, Tom, "Salvors struggle to stabilize the Carla in stormy Atlantic," The Journal of Commerce, December 2, 1997.

14. Baldwin, Tom, "Storm-tossed boxship splits: Crew rescued," The Journal of Commerce, November 26, 1997.

15. Baldwin, Tom, "The case of the reappearing rock, and other unchartered navigational hazards," The Journal of Commerce, April 30, 1998, p. 2B.

16. Associated Press News Release, "Cruise ship hits caribbean reef, December 15,1998.

17. Hastings, Warren, Marine Insurance Compendium, 1999, General Management Services, Inc., Publisher, 76 Mamaroneck Avenue, Suite 6, White Plains, NY10601, USA.

18. Fabey, Michael, "Remember the Titanic? Your business does not have to sink, even if your cargo does" World Trade, January 1998, p.54.

19. Barth, Steve and Michael D. White, "Hazardous cargo" World Trade, November 1998, pp. 46-48.

20. Barnett, Chris, "Taking steps to trip cargo thieves,' The Journal of Commerce, April 3, 1998, p. 1A.

21. McCosh, Daniel J., "Theft drives firms to armor trucks,' The Journal of Commerce, August 30, 1999, p. 1.

22. "Piracy report reveals major increase in attacks in1999," Press Release of the International Chamber of Commerce, January 24, 2000, http://www.iccwbo. org/home/news _archives, October 5, 2000.

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28. Mullins, Ronald Gift, "Now there's a lojack for ships,'The Journal of Commerce, July 13, 1998, p. lB.

29. Richardson, Paul, "A marine accident just waiting to happen; The Journal of Comnmerce, August 30, 1999.

30. Kaser, Tom, "Iceberg ahead! Mariners alerted" The Journal of Commerce, October 2, 1998, p. lB.

31. Associated Press News Release, "Skyway disaster lives remembered" May 8, 2000.

32. TirschweU, Peter,"Pilot's trip to restroom leads to expensive damage to crane" The Journal of Commerce, February 19, 1997, p. 3B.

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Chapter 9

International Ocean Transportation

Outline

9-1 Types of service 9-3d Combination Ships

9-2 Size of Vessels 9-3e LASH Ships

9-2a Dead-Weight Tonnage 9-3f Crude Carriers

9-2b Registered Tonnage 9-3g Dry-Bulk Carriers

9-2c Displacement 9-3h Gas Carriers

9-2d Plimsoll lines 9-4 Flag

9-2e Size Categories 9-5 Conference

9-3 Types of Vessels 9-6 Liability Conventions

9-3a Containerships 9-7 Non-Vessel-Operating Common Carriers

9-3b Roll-On/Roll-Off Ships End-of-Chapter Questions

9-3c Break-Bulk Ships Endnotes

KEY Terms

bunker post-Panamax

cabotage product carrier

conference secondary registry

dead-weight tonnage(DWT) stores

displacement tonnage tariff

flags of convenience tramp

gross registered tonnage(GRT) trot-on/trot-off

Hague Rules tweendeck

Hague-Visby Rules

Hamburg Rules

laker

LASH barges

LASH mothership

light tonnage

lightering

liner

nautical fault

net registered tonnage

open registry

Panamax

In order to manage international logistics, it is fundamental to have a good understanding of the transportation alternatives open to an international shipper. The next three chapters provide an overview of the many options given to an exporter or an importer interested in making transportation arrangements for a given shipment.

The first chapter(Chapter 9) deals with the alternatives available in ocean transportation and the complexities of the international framework of rules that enable shipping lines to operate. The second chapter(Chapter 10) deals with air transportation and its rules and regulations. The third chapter(Chapter 11) deals with land transportation—rail and road—but also covers multi-modal transportation, which is not really a mode of transportation, but a shipping alternatives that simplifies the work of the shipper—exporter or importer—by allowing it to send its freight with only one shipping company. It also covers pipelines and several other unusual modes of transportation, mostly used in very limited markets.

9-1 Types of Service

The first differentiation to be made is the one between inner and tramp ships.

Liner ships travel on a regular voyage, following a pre-established schedule, and with determined ports of call. A scheduled voyage may include only two ports(Santos, Brazil to Miami, USA, and back) or, more commonly, a series of ports in one region of the world(for example, Bremerhaven, Germany; Rotterdam, The Netherland; Felix towe, Great Britain) to another (for example, Boston, USA, Baltimore, USA; Nassau, Bahamas). Quite a few liners follow” round the world”(RTW) schedules, either eastbound, or westbound, passing through the Panama Canal and the Suez Canal. There are many types of liner ships, a large number of which are adapted to specific routes, their size and equipment dependent on the ports of call they visit, and on the specific types of cargo that their trade route entails.

Unlike liners, tramp ships operate wherever the market dictates. They do not operate on a regular schedule but travel wherever the company using the vessel wants the cargo delivered. Because of the way they operate, tramp ships usually carry only one type of cargo at a time, for one exporter or importer. Most tramp ships therefore are designed for one type of cargo exclusively, even if they carry several “dry” cargoes or several gredes of petroleum products. A possible analogy is that a tramp vessel is a taxicab, whereas a liner ship is a public bus.

Liner A ship that operates on a regular schedule, traveling from a group of ports to another group of ports.

Tramp A ship that does not operate on a regular schedule and is available to be chartered for any voyage, from any port to any port.

9-2 Size of Vessels

Ships are also often categorized by their size, which is expressed in tons. Unfortunately, there are several ways of evaluating the tonnage of a vessel, and the “tonnage” of a vessel can bu used for very different purposes. All of this leads to some differentiations which are pretty difficult to comprehend.

9-2a Dead-Weight Tonnage

The dead-weight tonnage(DWT) is the total capacity of the ship(i.e., the maximum weight of the cargo that a vessel can carry) expressed in long tons(2,240lbs) or in metric tons(2204.6lbs).It is the measurement used by companies interested in shipping cargo, and is often just called” tonnage.” It is measured using the weight of the difference in water displacement when the ship is empty and when it is fully loaded to its maximum. The dead-weight tonnage of a ship includes the fuel that the ship needs to travel—called bunker—and the supplies that it needs to function—called stores—therefore, it is more the theoretical capacity of the ship than its actual capacity. A vessel, when loaded with a very dense material such as iron ore-can utilize its weight capacity before it reaches its volume capacity; conversely ,it can reaches its volume capacity before it reaches its weight capacity if it is loaded with a light but voluminous cargo, such as timber.

dead-weight tonnage(DWT) The maximum weight that a ship can carry.

bunker The amount of fuel that a ship carries on board and that it needs to travel.

stores All the supplies that a ship carries and that it needs to function.

9-2b Registered tonnage

The gross registered tonnage (GRT ) is the total volume capacity of the ship, expressed in hundreds of cubic feet (2.83 cubic meters), It only measures the capacity of the ship below its deck, so this measurement is not appropriate for determining the cargo-carrying capacity of a ship since a good number of vessels carry cargo above deck .This measurement is used to determine how much tax a ship owner will have to pay to the country in which the ship is registered, or to the authorities of the ports it visits or the canals it uses. Once the volume occupied by the engine room, the crew, and other space necessary for the good operation of the ship is removed, the net registered tonnage is obtained.

9-2c Displacement

The displacement tonnage is the total weight of the ship , when fully loaded ,measured by the weight of the volume of water it displaces. The light tonnage is the weight of the ship, measured the same way, when the vessel is empty .Both are generally measured in long tons, and are used for naval architecture in order to determine the vessel’s stability , the stress it endures ,and other engineering issues

gross registered tonnage(GRT) The total volume of a ship’s carrying capacity, measured as the space available below deck, and expressed in hundreds of cubic feet.

net registered tonnage The net registered tonnage of a ship is obtained by subtracting the volume occupied by the engine room and the spaces necessary for the operation of the ship from the gross registered tonnage.

displacement tonnage The total weight of the ship, when fully loaded, measured by using the weight of the water being displaced.

light tonnage The total weight of the ship , when empty, measured by using the weight of the water being displaced.

9-2d Plimsoll lines

One more difficulty arises when one understands that ships are considered “fully loaded” at different drafts(how deep they sit in the water) in function of the season in which they are operating, of the latitudes under which it plies its trade , and of the density of the water, The deepest a ship can sit is called the “tropical line”, followed by the “summer line,” the ”winter line,” and the “winter-North Atlantic” line. A “flash water” line is also present, as fresh water density is lower; a ship will sit lower in fresh water than it would in saltwater with the same quantity of cargo, All of these lines are painted on the hull and form a diagram called the plimsoll mark (see Figure 9-1). The dead-weight tonnage is generally determined at the summer line or at the line that represents accurately the conditions under which a ship is used .For example,a vessel used consistently in the Caribbean would have its DWT calculated with the tropical Plimsoll mark.

Figure 9-2

A Panamax Containership in the miraflores locks.

Photo courtesy of Maersk Sealand.

9-2e Size Categories

One of the biggest distinctions made on ships’ sizes is the one made between the ships that can travel through the locks of the Panama Canal and the ones that can not. A ship of the maximum size that can possibly fit through these locks is called a Panamax ship; such a ship can have up to 75,000 tons of dead-weight tonnage and its outside dimensions allow it to barely fit within the locks, with only a few inches of clearance between the locks’ walls and the ship(see Figure 9-2). The locks are 1,000 feet long and 110 feet wide. The longest ship to cross the Panama Canal is the Marcona Prospector, which is 973 feet long and 106 feet wide. The widest is the USS New Jersey, which is 108 feet wide. All ships built that are larger than this size are called post-Panamax ships. Other terminologies used are:

· Suez-Max ships: This term is used to describe ships sized at roughly 150,000 dead-weight tons and which are of the maximum size that can fit through the Suez Canal(about 285 meters long,35 meters wide, and 23 meters of draft).In 1996,the Suez Canal was deepened and widened, so the Suez-Max terminology is losing some of its validity.

· Capesize ships: This term is used to describe large dry-bulk carriers of a capacity greater than 80,000 dead-weight tons.

· Very large crude carrier: This term is used to describe an oil tanker of up to 300,000 dead-weight tonnage, which is about 350 meters long,55 meters wide, and has 28 meters of draft. That’s 1,150 feet long,180 feet wide, and 92 feet of draft.

· Ultra large crude carrier: This term describe an oil of more than 300,000 dead-weight tonnage. One of the largest ULCCs built, the Sea Giant, is of 555,000 dead-weight tonnage, is 415 meters long,63 meters wide, and has a draft of 35 meters. That represents a surface of 2.5 hectares, which translates to 1,360 feet long,207 feet wide, a draft of 115 feet, and an area of 6.5 acres. Such ships generally are unable to go into traditional ports and remain in deep sea at all times: their cargo is removes using a process called “lightering”(see Section 9-3f).

Panamax A ship of the maximum size that can enter the locks of the Panama Canal.

post-Panamax A ship whose size is too large to enter the locks of the Panama Canal.

For comparison purposes, one of the largest containerships, the Regina Maersk, is 302 meters long, 43meters wide, has a draft of 12 meters, and has a dead-weight tonnage of 65,600 tons.

9-3 Types of Vessels

Even thought there are around 45,000 commercial ships worldwide, almost every single one of these ships is designed differently. It is therefore difficult to classify them much better than in broad-based groups, with many ships not fitting neatly into one category.

9-3a Containerships

The containerized is growing rapidly: approximately 60 percent of the world trade is containerized, and container transportation volume is growing by 9 percent per year. Even in trade lanes where containers are solidly implanted, such as Asia-North America or Europe-North America, the growth in the volume of shipment is estimated at 6-8 percent.Given the fact that goods that traditionally traveled in bulk are now shipped using containers-for example, forestry products or grain-and given the fact that intermodal transportation is responding well to customer needs, it seems that the container, which was created in 1956, will dominate international trade yet further.

Containerships, also known as “box ships,” carry containerized cargo on a scheduled voyage. Vessels dedicated to the container trade can carry up to 6,600 TEUs—twenty-foot equivalent unit, or the space equivalent of a twenty-foot container—but there is a large number of mixed-cargo ships that can also carry containers, sometimes as few as 100 TUEs. Most containerships rely upon the port cranes to unload their cargo, but some do have cranes on board. All containerships used to be capable of going through the Panama Canal and carried around 3,000 containers. When the first post-Panamax containerships were delivered, they carried upward of 4,500 TUEs and forced some substantial changes in ports. For example, they were so wide and so high that some ports had to upgrade their crane equipment (see Figure 9-3). Moreover, some ports became entirely inaccessible; some of the post-Panamax ships cannot enter some of the ports on the East Coast of the United States, as they do not “fit” under the bridges or the channels are not deep enough (for example, the Port of New York-New Jersey).

As there ate plans to build yet larger ships, there will be additional demands made on port infrastructure, and it will certainly reduce the number of alternative ports from which to ship. While 8,000 TUEs ships are expected to be common place in the next decade, some call for ships as big as 18,000 TUEs, which will reduce the number of ports to which these giant ships can berth to a handful worldwide. The trend in the industry is therefore seen as the creation of a system of large “hubs,”to and from which the mega-ships would travel, coupled with a number of smaller ships, called “feeder ships,” which would travel between these giant hub ports and smaller ports. Those feeder ships would cause transshipments to occur, it is estimated that it would lower transportation costs.

Traditional containerships hold containers “under deck” as well as “on deck.” Some containers are first loaded in the holds of the ship, then the hatch covers (the deck) are put in place, with the remainder of the containers are placed on top of that. Containers placed under deck are usually held in place by vertical guides, along with the crane operator slides them. On-deck containers are usually stacked on top of each other, and latched to each other with metal bars and twistlocks .since the early 1990s, several shipping lines have tried to speed up the process of loading containers by equipping their ships with vertical guides for on deck containers as well, and eventually some have eliminated the deck altogether , simply choosing t equip the vessel with much larger bilge pumps (the pumps that remove the water from the inside of a ship). Eventually, it is conceivable that the concept of “deck” will no longer exist in the container trade.

Another possible change in the container industry would be the creation of fast ships, or ships capable of crossing the Atlantic Ocean in 3.5 days, a project pursued by a company aptly named FastShip. Those ships would carry 1,500 TUEs and travel between two specifically equipped ports—Philadelphia, USA, and Cherbourg, France—reducing the transit time from supplier to customer to seven days, or somewhat similar to the six days that an airline can achieve. While the costs of shipping would be 60 percent higher than for a traditional trans-Atlantic crossing, the founders of the venture estimate that some time-sensitive cargo could benefit from their service. skeptics abound, but there is certainly a trend toward faster transportation and reduced inventory costs. In addition, it is likely that it will reduce the costs of airfreight as it increases competition, so most shippers should benefit.

9-3b Roll-On/Roll-Off Ships

Roll-on/roll-off (RORO) ships were created to accommodate cargo that was self-propelled, such as automobiles or trucks, or cargo that could be wheeled into a ship, such as railroad cars. They are essentially floating parking garages.

The concept is fairly straightforward. Since it takes a long time to load such vehicles “over the rail” (i.e., by using a crane), it is preferable to load them by rolling them onto the ship. RORO ships therefore have a portion of their hull that opens up and acts as a ramp on which the vehicles are driven before being parked on the many decks of the ship and secured with chains. The hull opening is either on the side of the ship or on its stern(rear).

RORO ships have an advantage in that specialized lifting equipment is not required, even for the heaviest of loads, since the cargo rolls under its own power or is pulled by a tractor. It therefore only needs some docking space and a substantial number of dock workers to load or unload its cargo. There are distinctions between apure car-carrier (PCC) ship, which loads only cars and has decks with only five feet of overhead clearance, and other, more versatile, “true” RORO ships which can accommodate larger cargo. Many RORO ships are equipped with adjustable decks, which allow them to transport any sort of rolling cargo.

As the number of cars manufactured worldwide increases, it seems that the future of the RORO concept is secure.

Becoming a” Master Unlimited”

Maneuvering an ultra large crude carrier (ULCC) is a job that few people can handle, but it is the daily responsibility of captains who have reached the prestigious title of “Master Unlimited”-there are only about 3,000 of them world-wide and they are the only ones accredited to command ships of more than 5,000 tons GRT. It can be quite a hair-raising experience. Consider that a ULCC can be as long as four football fields, and that, at cruising speed and fully loaded, it stops in a mere six miles if its engine is stopped. If put in full reverse, the distance “shrinks” to two miles.

In order to learn how to pilot these behemoths, captains either practice on computer simulations or travel to the unusual training camp of Port revel in the foothills of the Alps in France, where they are placed in models of large shops, Like their real-life equivalent, these model ships are extremely underpowered: a ship of this size is “like a large lorry (truck) with a moped engine and no brakes” says an instructor at Port Revel, nothing that the forty-foot-long model Europe, weighing 41,000 lbs, has a motor of less than one horsepower with which the skipper has to maneuver it. After a few days on the pond at Port Revel, these gifted sailors are capable of maneuvering these ships so well that they can squeeze a 700-foot behemoth in the 750-foot space left between two other ships in port without the help of a tug. In other words, simple parallel parking.

There is a specific group of dry-bulk carriers that serve the ports of the Great Lakes, between the United States and Canada, called lakers.(Their characteristics are determined by the size of locks of the Welland Canal, which gives them long and narrow hulls, Lakers trade mostly in three commodities: iron ore and iron ore pellets, coal, and finished steel. They are not true” ocean-going vessels,” but fit the general description of dry-bulk carriers.

Although not altogether the same as dry-bulk carriers, there is also a large number of ships that carry specialized cargoes that can be considered as dry bulk. Examples are refrigerated ships—also called” reefer ships” –which are slowly being replaced by refrigerated containers aboard containerships, which therefore carry liquid bulk cargoes such as molasses and vegetable oils; chemical tankers, which carry liquid chemicals; and cement carriers.

9-3h Gas Carriers

Another important bulk trade is the transportation of liquefied natural gas (LNG) and of liquefied petroleum gas ( LPG). These types of carriers have a very distinctive shape. These ships hold several spheres of compressed gasses, only part of which are visible above their main deck (see Figure 9-12). The LNG and LPG trades tend to be slightly different than the average bulk transport, as they are used in a particular trade for long periods of time, on long-term contracts—called time charter parties (see Section 7-5e) –and therefore nearly have a sailing schedule, not unlike liner ships.

The End of the Shipping Line

Most ships, after a mere twenty-five years at sea, end up so damaged by the sea and the elements that they are no longer economically viable vessels (it costs too much to maintain then). In addition, as the size of ships increases, shipping lines have a surplus of capacity that they are loathe to sell, as they do not want to encourage new competitor

Where do all of these old ships end their lives?

Many of them end up on the beaches of Pakistan, Bangladesh, or India, where they are dismantled, by hand, into sellable chunks of scrap steel and other metals. At the present time, 90 percent of older ships end their lives in these countries, and half of them die in Alang, a beach in the Indian State of Gujarat where 600or so scrap business dismantle 400ships every year. These are dangerous and poorly paid jobs, but it is estimated that they provide direct and indirect employment for at least 200,000 workers.

Despite governmental protests about the impact of this business on India’s image and its workers’ health, more and more ships are dismantled in this area of the world, and, as the world fleet ages and is replaced with more modern and technologically advanced ships, this trend shows no sign of abating.

9-4 Flag

By international convention, each vessel engaged in international trade must be registered in a specific country, and therefore” flies” a specific country’s flag. In many ways, the vessel is an extension of the territory of this country, and all its laws and regulations apply on board the ship. In addition, the vessel must pay the taxes that this country imposes. There is one significant caveat to this situation: with very few exceptions, a ship owner can choose the country in which its ship is registered, or choose the flag that it flies.

The flags of developed countries tend to impose very substantial regulations on the way a ship is operated in such areas as the composition of the crew on board, its minimum training requirement, its nationality (since it is a country’s extension of its territory, its immigration rules apply), the work rules on board (such as the number of hours worked per day and week, before overtime pay is earned), the vacation time earned by the crew, and so on. In addition, taxation can be significantly higher. However, regulations and taxes for some developing countries are minimal. It is estimated that flying an American flag rather than a developing country’s flag can add at least 30 percent to the operating costs of a vessel. A 1997 Maritime Administration study showed that a break-bulk ship flying the U.S. flag required a crew of thirty-four and cost US $13,300 per day, whereas the same ship flying a developing country’s flag would require a crew of twenty-four and cost US $1,400.

A small number of countries have created what is called an open registry(, which means that any ship owner can choose to have its vessel fly this flag. There are no requirements regarding the citizenship of the owners of the ship. Since these countries tend to have minimal on-board requirements and taxes, many ship owners decide to fly such countries’ flags, which have been derisively called flags of convenience. Most of these open registries emanate form developing countries, but, fairly recently, some developed countries established their own versions of open registries, which are called secondary registries,( with much less stringent requirements than their “normal” registries in order to prevent their merchant fleet from being entirely registered with flags of convenience. Norway, Denmark, and France are three notorious examples. Table 9-1 shows the largest fleets in the word, a list dominated by ships flying open registry flags with minimum requirements such as Panama, Liberia, and the Bahamas—Greece is an exception.

It should be noted that the choice of a flag regulates the qualifications of the crew, its compensation, and the amount of the taxes that the ship owners pay. It does not influence the seaworthiness of the vessel, which is evaluated by Classification Societies and determines the insurance premiums (hull insurance and P&I insurance) that the vessel owners have to pay (see Section 8-7). A competent crew and a seaworthy vessel are guaranteed if the vessel is registered in a developed country, if it is operated by a reputable shipping company, or if it is classed with one of the major classification societies; however, problems are more likely to arise with vessels registered under a flag of convenience.

TABLE 9-1 Major Merchant Fleets of the World, July 1, 1999

Country	Dead-Weight Tonnage (in 000s of tons)	Rank by Dead-Weight	Number of Ships>=1,000 DWT	Rank by Number of Ships
Panama	152,308	1	4,615	1
Liberia	96,365	2	1,657	2
Greece	42,841	3	702	10
Bahamas	41,593	4	1,365	6
Malta	41,293	5	1,044	7
Cyprus	35,408	6	1,365	6
Singapore	33,012	7	883	8
Norway	30,279	8	657	12
China	22,238	9	1,457	4
Japan	19,419	10	682	11
United States	16,286	11	285	25
The Philippines	11,646	12	517	14
Saint Vincent	11,182	13	811	9
Marshall Islands	11,129	14	129	37
India	10,856	15	295	24
Total worldwide	780,361		28,600

Source: U.S. Maritime Administration Annual Report, 1999.

Countries attempt to influence, as much as possible, the flags of the ships that enter their ports. Although they cannot outright ban certain nationalities, they can prevent ships not registered in their country from carrying certain freight. For example, the Cargo Preference Act of the United States requires that at least 50percent of U.S. government cargo be carried by U.S.-flagged ships. The Jones Act requires that that cargo transported from one port in the United States to another port in the United States—a trade called cabotage(—must be carried exclusively on U.S.-flagged ships. This is the case for cargo going from the West Coast to Hawaii, for example. Finally, all cargo in trade supported by the Ex-Im Bank must be shipped though U.S.-flagged ships.

The United States’ situation is yet more complicated. It compensates ship owners who elect to flag their vessels with the stars- and-stripes to the tune of $2.1million per year per vessel, but not just because it is more expensive to run a U.S.-flagged ship. The reason is purely military; because of its geographic situation, the United States would need a lot of ship transport capacity to ship troops and military materials abroad in the case of a conflict. In that eventuality, the U.S. government can then requisition all merchant ships registered with the U.S. flag. in order to ensure that it does have some requisition, the U.S. government subsidizes ship owners who choose this alternative. In 1997, two large shipping companies re-flagged some of their ships with the U.S. flag—Maersk and APL—because of this incentive.

Flying the Flag

The choice of a flag has many consequences beyond the crew’s training and the taxes that the ship owners have to pay:

*Cabotage rules require that American flags and crews be used for ships traveling from one port in the United States to another port in the United States. Cruise ships, not one of which flies the U.S. flag, therefore cannot travel between two U.S. port. Cruise ships destined for Alaska leave from Vancouver, Canada, and cruise ships destined for Hawaii leave from Ensenada, Mexico.

*Most of the cruise ships fly flags of convenience, such as the Bahamas, or secondary registries, such as that of Norway. Because those registries do not exert much oversight over working conditions on their vessels, working cruise ship crews are generally employed for substandard wages and in miserable jobs. Very low wages are commonplace, and so are twelve- to fifteen-hour days. Passengers are usually oblivious to the discrepancies between their lifestyle on board and that of the crew around them.

*when Hong Kong rejoined the People’s Republic of China in July 1997, a flag issue surfaced. Since it is common courtesy to fly a host port’s flag on a ship, it meant that Evergreen’s (a Taiwanese shipping company) ships would have had to fly the PRC’s flag when they called on the port of Hong Kong, and that Hong Kong ships would have had to fly the Taiwanese flag when they were in Taipei. Neither alternative was welcome; the issue was finally resolved when both sides decide not to fly any flag in each other’s ports.

*During the conflict between Iran in the Persian Gulf, several Kuwaiti ships were temporarily placed under the U.S. flag so that they could gain the protection of the U.S. Navy, a protection it refused to extend to U.S. owners of tankers flying flags of convenience. The U.S. Navy finally relented, and all crude carriers were temporarily re-flagged as American while they were in the Persian Gulf.

9-5 Conferences

One of the unusual characteristics of international liners is that they often (used to) operate within the confines of a conference(, or a legal cartel within which all shipping line members of the conference operate. Conferences are organized on trade routes, usually a series of ports in one country and another in another country; for example, a conference will cover the trade between United States’ Atlantic ports and European ports. Within the conference, the prices charged by the shipping lines are identical by commodity, for the same volume and the same weight. All of these rates are called tariffs( and are published. The complexity of such arrangements is extraordinary: there are some auditing firms whose sole job is to make sure that the shipping lines charged the proper amount for a given shipment .shipping lines, on the other hand, try to flight the purposeful misidentification of cargo by shippers who try to get a lower rate.

Additional enforcement of such standardized prices on some government agency; in the United States, it is the responsibility of the Federal Maritime Commission. It may seem paradoxical that the United States’ government has an agency in charge of preventing cartels and collusions (the Federal Trade Commission), while at the same time it has one in charge of enforcing some, but this is nevertheless the case.

The reason behind the existence of conference is that the liner trade is extremely capital intensive, and that most costs for a liner ship are fixed costs. It is estimated that they can amount to 80 percent of the costs of a shipping company,

Leaving only20 percent of the costs dependent on the weight of the cargo. The existence of regulated conferences prevent shipping lines from competing on price, potentially a very detrimental behavior, as was observed in the 1980s in the ernment which would want its economy to have access to reliable ocean transportation ,there are other reasons for the existence of conferences: it is also a way to ”move” cargo expeditiously from a given port and free it from clutter. Since all rates paid on conference ships are the same, no shipper will wait for the next cheaper ship, and this will increase the probability that the cargo will just take the next available ship to that destination.

On May1,1999,the Ocean Shipping reform Act(OSRA) took effect in the United States, and it brought many changes to the conference system. Although conferences are not eliminated, and although shipping lines retain their antitrust immunity, the creation of private, confidential price agreement between large shippers and shipping lines is now authorized. Since this date, several shipping lines have left conferences and negotiated private, confidential contracts with their coustomers, At the date of this writing, the future of the conference system in the United States is in doubt, although the concept is still alive and well in other countries—China just proposed to institute one.

The impact of OSRA is not yet fully known, although it seems to have had a similar impact on the market as deregulation: tremendous uncertainty in an industry that was used to “business as usual” for a number of years. Undoubtedly, OSRA has had a positive impact for large shippers and, specifically, for companies making a lot of multi-modal shipments. It may also have lessened the competitiveness of smaller shippers, which are not large enough to negotiate rates below the ones published by the shipping lines. OSRA has also triggered a call forr reform—or abolition—of the antitrust immunity of shipping lines in the United States and the rest of the world.

9-6 Liability Conventions

The Ocean Shipping Reform Act also seems to have had one significant impact: it brought yet one more level of complexity to the conventions regulating the liability of shipping lines by allowing private, confidential contracts between shippers and shipping lines, where traditional liability constraints are replaced by negotiated ones. But, first, a review of the complex array of alternatives is necessary.

In 1924, an “International Convention for the Unification of Certain Rules of Law relating to Bills of Lading” was adopted by twenty-six participating countries. This convention, known as the Hague Rule , limits the liability of a ship owner toward the cargo owners to US$500 per package “or customary freight unit, ”and it allows ship owners to escape liability in seventeen specified cases—called the seventeen “defenses”—including the infamous nautical fault , or errors of the crew of the ship in its management or navigation. In1936, the United States adopted the Hague Rules by incorporating them in the Carriage of Goods by Sea Act(COGSA).

The US$500 limit per package became a problem with the advent of containers, when shipping lines began claiming threat they were ”freight units” and attempting to limit their liability to US$500 per container. The Hague Rules were therefore revised in 1968 to clarify the definition of “package” to the units listed on the bill of lading. It also increased the liability of the carrier to US$666.67 or US$2 per kilogram, whichever was higher. These revised rules are known as Hague-Visby Rules . The United States has not ratified this treaty, although it has been ratified by all of all of its major trading partners. In 1979, the Hague-Visby Rules were amended to reflect the declining value of the U.S. dollar, and the liability limits were expressed in Special Drawing Rights(SDR), the artificial currency of the International Monetary Fund(IMF), and set at SDR 666.67 per package or SDR 2 per kilogram, whichever was highest.

The advent of better navigational equipment and the annoyance of shippers at the continuous of the nautical fault defense triggered yet another round of international negotiations led by the United Nations Commission on International Trade Law(UNCITRAL), which abolished the seventeen defenses of the Hague and Hague-Visby Rules and replaced them with only three: (1) damage the carrier took all reasonable steps to avoid, (2) damage by fire, and (3) damage due to an attempt by the carrier to save life or property at sea. It also increased liability limits to SDR 835 per package and SDR 2.5 per kilogram. These rules are known as the Hamburg Rules and have only been ratified by a small number of countries, only a handful of which are significant international traders. A complete list of which countries have adopted which rules is available on the Internet.

Since the United States has not ratified either the Hague-Visby Rules or the Hamburg Rules, the COGSA is still in effect, even though it is grossly outdated with its limit of US $500. Several efforts have been made to attempt to revise COGSA, but none of them has been successful to date. However, with the advent of OSRA and of private contracts between shippers and shipping lines, it seems that the liability limit has been lifted in many contracts, and that all but a handful of defenses have been eliminated. Therefore, the revision of COGSA may become moot in the near future.

There is still a problem with liability in intermodal freight; that is, freight that is shipped through several means of transportation using only one bill of lading. The liability limits are different for domestic transport in the exporting country, international transport by ocean (and they depend further on the nationality of the carrier), and domestic transport in the importing country. When cargo is damaged in transit without the possibility of tracing where specifically in the voyage the peril occurred, which liability limit is applicable? This is a question that the United Nations Conference on Trade and Development (UNCTAD) answered in 1980, in a treaty that was proposed but never ratified. These rules, though, form the basis for the guidelines developed by the International Chamber of Commerce. In June 2000, the United Nations Commission on International Trade Law (UNCITRAL) started the process of creating a formal multi-modal liability framework.

Not only are these issues of interest to insurance companies, but they also are of interest to any shipper who decides to retain its shipping risks and decline insurance coverage. As the liability of the carrier is very difficult to engage, even in the case of navigational errors or negligence, it may make more sense to purchase insurance coverage (see Section 8-6).

9-7 Non-Vessel-Operating Common Carriers

Non-vessel-operating common carriers (NVOCC) make up another type of ship-ping company, but with the caveat that they do not own and operate ships. Nevertheless, NVOCCs are regulated by the Federal Maritime Commission (FMC). The way an NVOCC operates is by purchasing space on a ship on a given voyage and by selling this space to companies that need to ship cargo. The shipping line gets paid for the space-and weight-whether or not the NVOCC fills its allocation. The NVOCC only makes money by reselling the space at a higher rate than the one at which it purchased it. In most instances, an NVOCC also acts as a freight consolidator and aggregates less-than-container-load (LCL) freight from several customers into a full container. This allows small shippers to benefit from the protection of a container and allows them to ship without the extra packing protection that break-bulk demands.

The NVOCC system was the basis for the model followed by consolidators in the air passenger business. These consolidators purchase a block of seats on an airplane and resell them to individuals, generally through discount travel agencies.

End – of – Chapter Questions

1. What two different types of ocean cargo services are there?

2. Describe three different types ships used in international ocean transportation. What type of cargos are they used for?

3. Explain the concept of a “flag.” Why does a ship need a flag? Why would an owner choose to fly a “flag of convenience?”

4. What is a Conference? What is a Revenue Pool? Explain both terms

Endnotes

1. The Panama Canal, November 1987, a publication of the Panama Canal Commission Office of Public.

2. Marcus, Amy Dockser, “Egypt fights to pump up Suez revenue,” The Wall Street Journal, July 25,1996,p.A19.

3. “Glossary of shipping terms,” Frontline Limited, Bermuda, http://www.frontmgt.no/org/glossary.html , November 8,2000

4. “The various types of tankers,” Elf Corporation http://www.elf.fr/odyssee/us/trans/703.htm , November7,2000

5. “Standard tanker voyage chartering questionnaire,” 1988, http://www.frontmgt.no/pdf/Sea_Giant.pdf, November7,2000

6. “Great ships: Regina Maersk,” www.marinelink.com/dec96/gshis/regina.html , November7,2000

7. Tower, Courtney, “Mega-ships drive freight is future,” The Journal of Commerce, October 22,1998, p.1B.

8. Freudmann, Aviva, “Big ships, new problems,” JoCWeekly, June 5-11, 2000,p.22.

9. Machalabam, Daniel, “Maersk is ready to start on giant port,” The Wall Street Journal, June 5, 2000,p.A4

10. Richardson, Paul, “The 18000-TEU ship,” JoCWeekly, June 5-11 2000,p.19.

11. Richardson, Paul, “The 18000-TEU ship,” JoCWeekly, June 5-11 2000,p.19.

12. Lucentini, Jack, “FastShip makes progress, but who can afford it?” The Journal of Commerce, August7, 1998, p. 1A.

13. Rapoport, Carla, “Hyudai is car carrier unit aims for bigger cargo,” The Journal of Commerce, May6,1998,p.1B

14. Porter, Janet, “Can one size really fit all?” The Journal of Commerce,July 14,1997,p.1C

15. Richardson, Paul, “The 18000-TEU ship,” JoCWeekly, June 5-11 2000,p.19.

16. The Journal of Commerce Staff, “Specialty carriers thrive in midst of container age,” The Journal of Commerce September 22,1997,p 5C.

17. The Journal of Commerce Staff, “Specialty carriers thrive in midst of container age,” The Journal of Commerce September 22,1997,p 5C.

18. “LASH barges,” Forest Lines, International Ship holding Corporation, http”//www.forest-lines.com/FLI_LASHbarge.htm, November7,2000

19. Plume, Janet, “LASH vessels still providing snappy service,” The Journal of Commerce, September 22, 1997, p.7C.

20. Gottschalk, Arthur, “Summer to remember,” The Journal of Commerce, September 8,1997,p.1B

21. Sullivan, Allanna, “A 700-ft tanker just does not handle quite like a Hnoda,” The Wall Street Journal, April 14, 1989,p.1.

22. Wells, Ken, “Captain is course: Life on a Supertanker mixes tedium, stress for Kenneth Campbell,” The Wall Street Journal, September 11,1986,p.1.

23. Mcphee, John, “The ships of Port Revel,” The Atlantic Monthly, October 1998,pp.67-80

24. Knee, Richard, “Many owners of aging vessels would rather scrap than sell,” The Journal of Commerce, May 7, 1998,p.13A.

25.LangeWiesche, William, “The shipbreakers,” The Atlantic Monthly, October 1998,pp.67-80

25. “India bars dismantling of US ships that held hazardous materials,” The Journal of Commerce, Reuters News Release, August 7,1997,p.2B.

26. Mongelluzzo, Bill, “Boxships buck currents,” The Journal of Commerce, December 15, 1997,p..1B

27. Lesher,DAVE, “Sailing through the school of experience,” Los Angeles Times, July 30,1997.

28. Roberts, Michael G., “Do not touch the Jones Act,” The Journal of Commerce, August7, 1998, p. 1A.

29. Sansbury, Tim, “Exporters assail US cargo policy,” The Journal of Commerce,

30. October23,1998,p.1A.

31. Mongelluzzo, Bill, “Boxships buck currents,” The Journal of Commerce, December 15, 1997,p.1B.

32. Sneider, Daniel, “A cruise from Seattle to Alaska via Congress,” The Christian Science Monitor, May 21, 1997,p.4.

33. Prager, Joshua Harris, “For cruise workers, life is no ‘Love Boat’,” The Wall Street Journal, July 3, 1997, p.B1.

34. Bangsberg,P.T., “Shipowners tackle Asia flag question,” The Journal of Commerce, May 29,1997,p.8B.

35. Carrington, Tim, “US owners of foreign-registry ships want Navy to rally round the flag their vessels do not fly,” The Wall Street Journal, December 29,1987,p.44

36. O Rourke, Ronald, “Gulf ops,” Proceedings, U.S. Naval Institute, May 1989,pp.42-43

37. Baldwin, Tom, “Maersk reflags four more ships,” The Journal of Commerce, February 11,1997,p.1A.

38. Mongelluzzo, Bill, “Boxships buck currents,” The Journal of Commerce, December 15, 1997, p.1B.

39. Brennan. Terry. “TWRA signs contracts for chilled beef to head off non-conference diversion,” Traffic World, February 5,1996

40. Tirschwell, Peter, “Lines plan crackdown on cargo tricksters,” The Journal of Commerce,,December 24,1996,p.1A

41. Mathews, Anna Wilde, “Five members of shipping cartel are focus of space-sharing probe,” The Wall Street Journal, May 6,1997,p.B8

42. Beargie, Tony, “Re-regulation,” American Shipper, December 1998,p.12.

43. Beargie, Tony, “Re-regulation,” American Shipper, February 1999,p.8.

44. Damas, Philip, “Great expectation,” American Shipper, May 2000,p.23.

45. “One small step for OECD: Will nations leap at antitrust reform?” American Shipper, July 2000,pp.8-15

46. Mottley, Robert, “SORA and admiralty law,” American Shipper, May 2000,p.40.

47. Freudmann, Aviva, “Plumbing the depths of ‘nauticl fault’,” The Journal of Commerce, May 19,1998,p.7A.

48. Mandelbaum,Samuel Robert, “International ocean shipping and risk allocation for cargo loss, damage and delay: A U.S. approach to COGSA, Hague-Visby, Hamburg and the multimodal rules,” Journal of Transnational Law and Plicy 1996,Vol.5,Issue1.

49. Mandelbaum,Samuel Robert, “International ocean shipping and risk allocation for cargo loss, damage and delay: A U.S. approach to COGSA, Hague-Visby, Hamburg and the multimodal rules,” Journal of Transnational Law and Plicy 1996,Vol.5,Issue1.

50. “International Conventions Membership List,”

InforMARE, www.informare.it/dbase/convuk.htm,November 13,2000

51. Augello, William J., “Ocean cargo liability law to be revised,” Logistics Manangement, March 1998,p.37.

52. Mottley, Robert, “OSRA and admiralty law,” American Shipper, May 2000,p.40.

53. Freudmann, Aviva, “No easy answer,” JoC Weekly, June 12-18,2000,p.16

Chapter12

Packaging for export

Outline

12-1 introduction 12-4b Packaging Materials

12-2 packaging objectives 12-4c Markings

12-3 ocean cargo 12-5 Road and Rail transport

12-3a full-container-Load[FCL]Cargo 12-6 Security

12-3b Less-than-container-load 12-7 Hazardous cargo

(LCL)Cargo 12-8 Refrigerated Goods

12-3c Break-Bulk cargo 12-9 Domestic Packaging Issues

12-3d Markings End-of-Chapter Questions

12-4Air Transport Endnotes

12-4a Containers

Key terms

Container

Crate

Dunnage

Improper packaging

Pallet

12-1 introduction

One of the challenging practical areas of international logistics is the packaging of goods for international shipments. This is a responsibility that always falls on the exporter, regardless of the Terms of Trade, or Incoterms, chosen(see chapter 4).Unfortunately,it is a function that is oftentimes just left to the shipping department, with few guidelines other than to make sure it gets to the customers without problems, and quite often with pressure to control costs; there is rarely a strategy developed for packaging, even though it is an area that certainly has strategic implications.

The first function of correct packaging for export is obviously the protection of the goods from the hazards of international shipping by ocean or by air. Proper packaging has direct cost implication. On the one hand, it is certain that the costs of packaging generally increase as the protection of the good increases; however, on the other hand, the costs of losing part of cargo to improper packaging 1are generally higher, cannot be insured against (see Section 8-8 for further details),and no real trade-off exists. It is generally in the best interest of the exporter to ensure that goods are properly packaged so that they arrive undamaged to their destination. This chapter will expand greatly on this aspect of packaging, explaining the alternatives available and their advantages and disadvantages.

The second function of correct packaging is to facilitate the handling of goods while they are in transit; a well-designed packaging will allow the stevedores, the shipping line, and the trucking companies to handle it without difficulties, but mostly without having to improvise an inappropriate handling method . the capabilities of the equipment likely to be used in the handling of the goods must be respected(i.e.,the dimensional constraints and weight constraints they place on the package, as well as the different standards and regulation used in the countries through which the goods will travel). Finally, all the handling and care instruction must be clearly marked on the package. This chapter will cover as many of these requirements as practical possible.

The third function of correct packaging , and one that is often overlooked, is that it is part of the customer service strategy of the firm. While a customer expects to receive the goods in sellable or usable condition in all cases, it also expects to be able to quickly unpack the goods and not spend considerable time and money preparing them to be used or sold. This objective is often much more difficult to achieve than just protecting the goods for transport and facilitating their handling while in transit. The packaging has to be simple enough to be opened without using specialized tools, but most of all ,it has to be easy enough to be opened without damaging the goods. To a great extent, the packaging used by well-conceived and well-put together package is a positive reflection on the ability of a company to manufacture quality products. Similarly, more and more customers are sensitive to packaging alternative that is easily reused or placed in the waste stream.

Finally, this chapter makes a distinction between primary, secondary, and tertiary packaging ,as seen in figure 12-1. Primary packaging is consumer packaging, or what the consumer sees when S/HE purchases and handles the product. It is part of the marking function of the firm and is traditionally covered in marking management textbooks; primary packaging is only occasionally mentioned in this chapter. Secondary packaging is the packaging that usually groups several of the consumer goods into one unit, usually a thin cardboard box or shrinkwrap. This is what the retailers sees and handles before the goods are placed on the shelves。In discount retail stores, this packaging may be seen by the consumer. Tertiary packaging, or transportation packaging,includes all of the activities designed to ensure “safe and efficient delivery of the goods in sound condition”2 to their foreign purchaser. Tertiary packaging for consumer goods is therefore the packaging placed around the secondary retail packaging units. For industrial goods, since there is generally no primary or secondary packaging of the products, the tertiary packaging encompasses all the packaging activities aimed at protecting them during shipment.

12-2 packaging objective

Three of the objectives of proper packaging are to mark sure that goods are protected from the three major losses that can occur in an international transit:

1. protecting the goods in transit from breakage(these perils represent roughly 43 percent of all claims made by shippers to their insurance companies).

2. protecting the goods from water damage(15 percent of claims made).

3. protecting the goods from theft and pilferage(21 percent of claims made).

The remaining 21 percent of claims were linked to fire, strandings, sinkings, collision,overboard losses,and jettison.

Each of these perils can be prevented to a great extent by the proper use of packaging techniques and by correct design of the protective systems around the cargo.

However that’s not all: another objective of packaging is to provide good customer service to the recipient of the goods. This is a achieved by paying attention to the smaller details of the packaging process and designing a “smarter” package. While it is difficult to give specific guidance, a couple of example may illustrate the concept better:

Instead of gluing, and then nailing, the plywood panel onto a crate, a customer focused exporter would just nail them or, even better, screw them, so that they can be more easily taken apart by the receiving department of the importer. The boards can then be reused internally by the importer or by its employees rather than discarded. An exporter shipping to countries where packaging materials may end up as housing materials would be even more responsive if it considered using a slightly better grade of non toxic boards and plywood.

Another way of displaying customer focus would be to include a packaging list in the recipient’s language and to clearly mark all og the packages within a shipment; for example, by color coding or letter coding each pallet and its corresponding manifest.

Yet another way of showing customer concern is to utilize packages that match the size of the ones used by the customer,so that goods can be placed directly in its warehouse,without having to be reloaded onto the proper pallet size.

While it only takes a few extra minutes to pack a shipment”smarter”,the importer will appreciate the attention;it may actually become a strategic advantage over a competor,whose shipping department is inattentive to details.Inaddition,it helps prevent claims of shortages when the customer can not locate items within a shipment.

Finally,packiagng should refiect the increasing sensitivity to recycling and energy conservation present in many European countries.The focus in this case is to use recyclable and reusable materials rather than disposable materials;for example by using starch peanuts or recycled paper cubes rather than styrofoam,using inflatable dunnage rather than scrap pallets,or by loading the goods on pallets of the size used by the customer.

12-3 Ocean Cargo

Ocean cargo can be shipped through a large number of alternative packaging alternatives.Since an increasing percentage of cargo shipped by ocean is now containerized,this particularmode will be covered first,followed by break-bulk cargo and its packaging alternatives.

12-3a Full-Container-Load Cargo

While it is true that containers protect the cargo well against some damages,the choice of the proper container is important.

Choice of Container

After having determined the correct type of container in which the cargo will be shipped, the exporter should, as much as possible. inspect the container used for a particular shipment. itis particularly important if the cargo to be placed inside it will not be unitized on pallets or in crates,but will simply be placed in corrugated cardboard boxes or in their retail packaging.

The container should first be inspected from the outside for possible structural damage:a structurally unsound container could collapse under the weight of theseveral containers that will eventually be placed on top of it.Containers aer designed to withstand the weight of up to eight other containers;a slight structural problem could weaken it enough to collapse under this kind of weight and aheavy sea.Hundreds of them do every year.The frame should look straight,the fittings used for lifting it and securing it on the ship or on a truck should be in place and not damaged,the doors should close properly,the repairs—if any-should appear to have been done competently,and there should be no visible structural rust.Surface rust be a sign that the container is not very carefully maintained.

The container should also be inspected from the inside,with the doos closed,for possible light leakage,which would indicate a waterr infiltration risk during shipment.Sometimes,such leakage also indicates a structural promblem as well,The container should also have floor and ideally wooden sides as well,so as to prevent condensation damage inside the container and protect the cargo from direct contact with the metal sides

The container should also have all of its inside hardware in place, to allow for good securing of the cargo. The container should also be inspected for foul and persistent odors: several cargoes have been damaged by the content of a preceding shipment. Protruding nails or o the fasteners should be removed to prevent an accidental puncture to the cargo. Finally the container should be clean of grease, dirt, and other foreign material so as to keep the cargo clean.5

Packaging materials

Most of the time, it is better for shipment to be unitized(placed on pallets)within the container, rather than in corrugated cardboard boxes. That fact that the goods are placed on pallets and shrinkwarpped protects them better from water infiltration and from condensation in the container. It also facilitates handling and protects them once they have arrived at the customer’s warehouse; the lower the probability that the goods are manipulated by hand, the greater the probability that they will be unloaded in good condition. Another advantage of the a palletized units is that the secondary packaging may be sufficient to protect the goods, as long as the pallets are protected on the corners, as seen in figure 12-2, and that the pallets are not stacked. Should it be necessary to stack the goods, a more rigid support should be considered.

Although unitized cargo is preferable, it can also present challenges. For one, the standardized size of pallets in Europe has been 80 cm 120 cm(31.5 inches＊47.25 inches)since 1959. pallet sizes in the united states are, for all intents and purposes, not standardized, even though a great percentage of them are 36 inches by 48 inches(91.5cm*122cm). this present difficulties, as pallets of one standard do not fit neatly in containers designed for the other. Secondary, there are some restricted about the materials with which the pallets are made; it is prohibited to export some wood products from some countries into some other countries, for pest and disease control reason. For example in order to contain the “long-horned beetle ,”a threat to hardwood forests, wood pallets from china are not allowed into the united states,unless they have been fumigated, heat-treated, or pressure-treated with a pesticide.6

If the goods inside the container are not unitized, for whatever reason, it is preferable that they be somewhat protected from crushing and moisture by being packaged in a higher grade of corrugated cardboard, double-or triple-walled; regular secondary packaging is generally insufficient and its use should be avoided. If the goods are to be stacked, layers to strong cardboard or sheets of plywood should be used in-between the layer to protect the lower levels from collapsing. If the goods are to be shipped from(or to)a high-humidity area, cardboard should be avoided as much as possible, as it loses up to 60 percent to its strength under those conditions.7

If there are different types of goods to be placed in the same container, the heavier ones should always be placed on the bottom, to lower the center of gravity is somewhat in the center pf the container. This is achieved by making sure that the goods, are loaded in symmetrical fashion in the container, and that the blocking material be placed in between,as shown in figure 12-3. several software packaging have been designed to be help exporters load a mixed load in the most efficient manner in a container.8

Blocking materials

When loading a container, it would be idea if the goods could fill out the space as completely as possible, leaving no room for the cargo to shift. Unfortunately, that is generally unrealistic. Therefore, a number of blocking materials have been developed, collectively called dunnage

The first thing to do, though, is to secure the goods to the container itself, if that is possible. This is normally done through a system of hooks and straps that is particularly good at keeping the cargo from moving inside the container. The second is to insert some sort of “spacer” in-between the pallets or the packages. Some companies use old pallets, some use bracing contraption made with wooden beams(in American measurement,“4 by 4,” which measures 3.5inches by inches, or roughly 9cm by 9cm), and some use inflatable bags. Before closing the door of the container, similar bracing material must be inserted between the cargo and the door to prevent shifting. Insurance“claim handlers frequently ”come aross cargo poorly secured in a container, perhaps because void spaces are not filled, or because heavier items are not lashed down,”9 as a reminder, insurance policies do not cover claims for improperly packaged cargo(see section8-8).

The critical part is that the entire floor space in the container must be occupied, so that none of the cargo may move ,however heavy the cargo may be, it will move and eventually be damaged if it is not braced securely. The costs of replacing damaged cargo will undoubtedly exceed whatever savings were in not using proper dunnage.

12-3b less-than-container-load(LCL) cargo

Single shipments that are too small to be shipped as a full container are consolidated by a freight forwarder or the a non-vessel-operation. Common Carrier(NVOCC) with other freight and then shipped in the a full container. Because of the greater number of instance during which the freight is handled, it is mandatory that these goods be unitized on a pallet or placed in a crate or box, as well as extremely well protected from water damage. Since the nature of the freight with which the shipment is placed is never known, the greatest amount of the care should be exercise in packaging such goods. In addition to the risks of a shipment by ocean, there is also the possibility of the damage caused by other cargo in the con-subjected to leakage ,odors, and other hazards. The consolidator is almost always quite good at packaging a container properly, with proper dunnage and protection, but the owners of the other cargo on board the consolidated container may be not be as careful, and that represents a hazard.

12-3c break-bulk cargo

Break-bulk cargo is that cannot be containerized because it is too large and won’t fit a traditional container or because it exceeds the maximum weight of a containerload. Great efforts have been extends to containerized as much cargo as possible, with the creation of special container sizes(see section 11-3a). however, a substantial proportion of cargo is still shipped as break-bulk cargo.

Break-bulk cargo is placed directly in the holds of the ship and therefore has to be packaged differently than containerized cargo, which enjoys the “all-around” protection of the metal box. In addition, break-bulk cargo is handled more frequently than containerized cargo; for example,it is loaded onto the ship, unloaded from the ship, and so on. Therefore,break-bulk cargo should be packed in such a way as to be well protected to reflect both the rigors of the journey and the extra handling.

Finally, the company responsible for shipping break-bulk cargo should ensure that the weight and dimensions of the cargo can be handled by all the facilities through which the cargo will travel; if the break-bulk cargo weights more than the maximum capacity crane in a given port, an alternative route should be found, or arrangement should be made to rent specialized or large equipment. If the cargo’s weight exceeds the port cranes’ capacity, there is a great risk that the break-port’sequiment. There is also the risk that the port personnel will try to move the age the cargo with the existing equipment(using it beyong its rated capacity)and damage the cargo in the progress. Cigna Insurance Company pulishes a guide to the equipment in place in all the ports worldwide, called ports of the word,10 so that a firm may plan the size of its shipment accordingly. Very heavy and cumbersome cargo,called“Project cargo”is usually handled by specialized freight forwarders(seen section 11-5) who have an exllecnt knowledge of all of these limitations.

Crates and Boxes

Crates and boxes—as shown in Figures 12-4 and 12-5—are very appropriate containers for either break-bulk cargo or for LCL cargo to be handed to a freight consolidator. They should be made of dry wood., either softwood or hardwood; the first refers to wood obtained from coniferous trees, mainly pine and fir, the second to wood obtained from leafy trees, most often poplar or oak, at least for North America and Europe ( some different species are used in South America and Asia ) . There are some legal limitations to the importation of some types of wood in some countries (for insect and disease control purposes) so care should be taken in choosing the proper wood. The crate or box should be built in a size that accommodates the goods without shifting. The best alternative to make sure that the goods are handled upright is to mount the box or crate on a pallet or to equip it with hooks or straps which allow the goods to be handled in only one direction.

Boxes and crates are built somewhat differently. While boxes are containers made of wood where the sides are an integral part of the structure of the container( see Figure 12-4 ), crates are containers built on a wooden frame, and are either open or enclosed with plywood ( see Figure 12-5). In general terms, well-built crates are stronger than boxes, since the wood used for the frame of the crate is of a large size. Well-built crates are constructed with three-way corners ( see Figure 12-6), which is the strongest corner design. Unfortunately, this technique appears to be an “art” which is disappearing, although it makes a substantial difference in the ability of the crate to resist shocks and crushing. Both crates and boxes should always be reinforced with corner strapping and with metallic bands (see Figure 12-7).

Open crate are obviously not appropriate for cargo that is not impervious to water. Boxes an enclosed crates should be lined with a waterproof material such as polyethylene. Some packaging specialists prefer leaving the bottom of the boxes and crates free of waterproof material, while others prefer placing small holes in it to allow drainage should some water infiltration occur. To further protect crated machinery from water damage, it is common practice to simply spray it with oil.

crate A wooden box made especially for a product to be shipped break-bulk because it does not fit into a container, or because the exporter deems that an additional level of protection is necessary.

Bags

Bags can also be used to transport break-bulk merchandise: the multi-wall shipping bag (which can hold around 25 kg [50 lbs]) is designed to be used with chemicals, plastics, and other powdered materials that are somewhat unaffected by water and unlikely to be pilfered (see Figure 12-8).

The bag is made up of several layers of kraft paper and/or light polymers, and is not very good at withstanding numerous manipulations. It is recommended to add about 3 percent additional empty, slightly large bags to contain those bags that may be damaged during an international shipment. Shipping bags are quite sensitive to rough handling by dockhands, including damage by accidental contact with mechanical equipment or other cargo with sharp angles such as boxes, crates or pallets. The integrity of these bags is increased by palletizing and shrink wrapping them, since mechanical equipment must then be used to handle them.

The second type of bag is a very large size bag called a Flexible Intermediate Bulk Container (FIBC). FIBCs are constructed of woven polymer fibers, such as polyethylene or polypropylene (see Figure 12-9). They are usually of a capacity of about one cubic meter and can weigh up to one metric ton, but many different sizes and types exist. They are used for transporting granular cargo, such as plastics, grains and some chemicals.

Drums

Drums are used in two forms: metallic drums steel drums) and fiber drums. Steel drums, shown in Figure 12-10, can be used for wet or dry cargo, and are pretty resilient containers, which can withstand a good amount of abuse. They present great resistance to water damage and pilferage and have been used for a long time in ocean shipping. Their main disadvantage is their cost and their individual weight. Fiber drums, however, can only be used for dry cargo, such as plastic pellets or fertilizers, and they are usually lined with a polymer bag.

Fiber drums, as shown in Figure 12-11, are slightly more resistant to water damage than bags, and are more resistant to pilferage. However, they are often damaged when port personnel handle them in the same manner as they do steel drums, such as rolling them in their side, which they are not designed to do. Fiber drums are also somewhat sensitive to mechanical damage, such as that caused by careless forklift truck drivers or sharp corners.

12-3d Markings

There are two reasons to properly mark the cargo as it is shipped: it has to be protected from poor handling, and it has to be protected from theft and pilferage.

To protect the cargo from poor handling, it is necessary to use as many of the international pictorials for cargo markings as are relevant. A number of these pictorials, as standardized by the International Organization for Standards (ISO), are shown in Figure 12-12. If at all possible, they should be accompanied by their translations in the languages of the ports through which the cargo is expected to transit. Both the net weight (the weight of the cargo alone) and the gross weight (the cargo plus the weight of the packaging) should be clearly displayed in metric units and so-called English units on the outside of the package. The outside dimensions of the goods should also be clearly displayed both in English and metric units. This is to prevent, as much as possible, inappropriate equipment from handling the goods at any point.

To protect break-bulk or LCL cargo from being lost or shipped to the wrong consignee, it should be clearly marked with the consignee’s name—the name of the company which will pack it up at the port of the destination—as well as the shipment number. It is always a good idea to write that information on several of the sides of the load: that way, the information is never hidden from view. If at all possible, the name of the consignee should not include information that could indicate the brand or the type of the goods in the shipment, for security reasons.

All the units belonging to the same shipment should be marked as such, that is as “1 of 4,” “2 of 4,” and so on. Another useful “trick” is to mark all the units of that shipment with a particular color—for example, on the corners of the boxes—so that they are clearly designated as parts of one shipment and so that none of them is left behind. The temptation of using a color associated with a particular company should be avoided, however, to prevent jeopardizing the firm’s security efforts. For the same reasons, the color should be changed regularly.

There is a number of alternatives meant to determine whether a shipment has been the victim of theft: some shippers paint the outside of their shipment with a uniform color in order to determine whether a shipment has been tampered with. Some use shipping tape of a specific design—while avoiding using a tape marked with their company logo—and others use a shrinkwrap of a particular color. All of these attempts have the added benefit of keeping the shipment “uniform” and therefore clearly identifiable.

Finally, it should be reiterated that markings which reveal the identity of the shipper and/or the content of the package should be avoided at all costs. “Advertising” to potential thieves the content of the cargo is foolish and can only lead to problems. Many companies use code on a regular basis, without patterns, in an attempt to avoid security problems.

12-4 Air Transport

Since air transport is, by nature, less hazardous than ocean transport, packaging as a protection against damage is of lesser importance than for ocean shipping. Nevertheless, some perils still exist, such as water condensation and air pressure changes; still, the biggest problem for air cargo, by far, is theft and pilferage.

12-4a Containers

Containers used in air transport are much different than the ones used in ocean cargo and are not intermodal (i.e., they cannot be used conveniently in other modes of transportation, with the exception of one size—a twenty-foot container that can be used in cargo is usually placed (consolidated) in containers at the airport of departure, then manipulated again at the airport of arrival and placed into trucks. This additional handling should be taken into consideration when packaging goods for export by air. It is also likely for the goods to be unloaded from a container and reloaded into another at a connecting airport.

Containers used in air transport are lightweight, made of wood, plexiglass or aluminum, and are generally clean. As some containers are not fully enclosed , or are enclosed with netting rather than a solid wall, some damage may occur in the voyage. Nevertheless, most damage occurs in the handling before and after the flight; for example, while the container waits on the tarmac, the goods in the container could easily become wet from rain or snow.

12-4b Packaging Materials

While most air cargo tends to be shipped by air in its secondary packaging, it is generally not an appropriate method for two reasons.

Appropriate shipping packaging would therefore be tertiary in nature and include one additional layer of cardboard, preferably double-walked, and a shrinkwrap. The United Nations established rules in the 1980s regarding the resistance of air packages to drops and crushes; today, these minimum requirements are considered inadequate, but have not been replaced. Nevertheless, a number of shippers still do not follow these rules.

For cargo sensitive to humidity, a possible way of avoiding condensation damage is to add small packets of dessicant material in the box with the goods, as they are designed to absorb ambient humidity. An additional layer of shrinkwarp is always advisable, as well, to protect against other condensation, rain, or leakage caused by other cargo on the plane.

For shipments susceptible to leakage if its primary packaging breaks, such as glass or plastics bottles, the United States Federal Aviation Administration regulations (and the United Nations rules) require that the secondary or tertiary package must be capable of containing an accidental leakage. Most secondary packaging is not designed for such a contingency, so adequate additional absorbent material must be packed with the goods. The shipper of a three fluid ounce bant material must be packed with the goods . The shipper of a three fluid ounce(8.9 cl) bottle of perfume was fined US $132,500 when its package broke, leaked in the plane, and“contaminated”other cargoes.

12-4c Markings

Markings in international air shipments should be handled in much the same way as markings on ocean shipments. The use of the pictorials shown in Figure 12-12 is quite appropriate.

12-5 Road and Rail Transport

In the case of international road and rail transportation, a policy of protecting the cargo in much the same way as that used for shipment by ocean container is most appropriate. It is always best to unitize the loaded and unloaded, The cargo pallets should be shrinkwrapped for protection against rain and ambient humidity. As much as possible, in the railroad car to avoid all damage due to the cargo shifting and sudden accelerations and decelrations.

Domestic shipment in the United States are almost all made by truck or by rail;the cargo is loaded on a trailer which is then rather driven to its destination or loaded on a railroad car(piggy-backed) to an intermediaru destination and then driven to its final destination.From 1996 to 1999,the costs of goods destination and in transportation rose from US $3.3 billion to US $4 billion, or from 0.75 percent to 0.96 percent of Gross Domestic Sales, according to the Grocery Manufacturers of America;44 percent of these losses were due to crushed, dented, or collapsed packages.

Should the cargo be sensitive to theft, it should also be packed in unmarked boxes to prevent the possibility pf pilferage.

12-6 Security

The issue of theft and pilferage is becoming an increasing problem for cargo shippers.It is estimated that theft represent losses of at least US $10 billion per year in the United States and US $30 billion worldwide. Many methods have been developed to foil theft attempts against cargo, none of which has proven completely dffective, but a combination of several should cover most shippers and prevent theft and pilferage.

As much as possible, the cargo should not bear the name of the shipper, especially if it is a brand which has street appeal; this issue is crucial for goods which are shipped in their secondary packging and for which the primary packging and the secondary packging ate one and the same, as for electronics or appliances.Such a practice jeopardizes the safety of the cargo. A possible way to or Full Truck Loads (FTL), so as to hide the cargo from anyone other than the exporter or the importer. Another is to place the goods in an additional blank cardboard box, which would be recommended for goods shipped as Less than Container Load (LCL) or Less than Truck Load (LTL) goods anyhow, to protect them from handling damage.

A plethora of different methods exists to palce seals on containers, and all present advantages and disadvantages; however,all show whether the container has been opened.One critical aspect of seals is that the sea number should be written on the intermodal bill of lading so that the importer can check,upon arrival, that the seal on the container is the same as the seal with which the container left the exporter’s premises.

Upon realizing that container seals invite theft-after all, seas are only placed on valuable merchandise-some companies have created invisible locks that are placed inside the doors of the container or the trucktrailer, and operated with a coded transmitter frim the outside. Such positive innovations prevent thieves from opening the doors, but demand that all customers of the exporter be airmailed a transmitter prior to the fister shipment, which can be a substantial hassle and ecpense.

Altogether, though, the aspect that security experts insist is critical when shipping internationally or domestically is the personnel involved. Most thefts seem to have taken place with some insider involvement.All attempts should therefore be made to limit the number of people who know the content of the shipment, by making sure that the bill of lading and packaging lists are given to truster employees only, by keeping track of non-employees on the premises, by making sure that managers are present during loading and unloading operations, and so on. Some companies keep their docks under constant video surveillance to deter crime

Shipping Computers to China

The Chinese marker for personal computers has always appeared yery attractive to United States’corporations because of the vast potential for sales it represents. However,there have been many difficulties for the companies involved in manufacturing personal computers in China:Compaq found some of its distributors did not honor their debts and AST found that many of the PC units it exported to Hong Kong were smuggled back into the country.

IBM,meanwhile,faced charges that it was selling used machines when it was actually shipping brand new products.It turns out that the confusion arose over a packaging problem:the computers werewrapped boxes.However,this was not enough to protect them from the pervasive dust that floats around many Chinese cities-Beijing in particular-and the goods arrived dirty in the consumers’hands.An additional layer of shrinkwrap on the caidboard retail package solved the problem.

This problem was in addition to the many problem that packaging has to solve in China:a large percentage of personal computers are delivered to their final destination strapped on the luggage rack of a bicycle (see Figure 12-13) and most deliveries to retailers and whioleasalers are made in flatbed trucks,barely protected from the elements by a tarpaulin.As for units shipped to distant cities,they are shipped by railraods:extremly sturdy packaging should be used in that case,as an IBM manager observed“the (cargo handlers) virtually throw (ing computer) cartons into trains.”

12-7 Hazardous Cargo

Hazardous cargo can be shipped by ocean and by air,but,generally speaking,most dangerous goods that are flammable,explosive,or toxic are shipped by sea.

The shipment ot dangerous goods by sea is regulated by the International Maritime Organization(IMO),which publishes an International Maritime Dangerous Goods Code(IMDG Code) that has undergone many changes over the years,in order to keep up with the rapid expansion of the types of materials created. In May 2000,the IMO’s Maritime Safety Committee approved its thirtieth amendment, which is a complete revision and simplification of the existing Code, and which was pubished in October 2000. This amendment became effective January 1,2001, with an implementation period of one year. It is a two-volume document-the precreding was four volumes large-and is quite complex. It governs the packaging og hazardous cargo, as well as labeling, handling, and emergency responses.

The shipment of dangerous goods by air is regulated by the International Air Transport Association(IATA) and by the Inernational Civil Aviation Organization(ICAO), which both adopted new standards on January 1,1999. The shipment of hazardous cargo by air is no less complicated and cumbersome than by sea.

In addition to these international requirements, a shipper must abide by domestic regulatory agenvies as well, as there often are two domestic legs to any international shipment, one in the exporters’ country, the other in the importer’s country. The complexity of such requirements, and their contradictory statements on occasion, makes it an obligation to contract with a specialized freight forwarder or a specialized consultant before undertaking any international shipment shipment of hazardous goods. Shipments of products containing radioactive components are even more complicated.

12-8 Refrigerated Goods

Goods requiring refrigeration make up another category of cargo that demands particular care and specialized packaging services. It is difficult to generalize about refrigerated goods, as every commodity usually requires very specific handling; therefore, most refrigerated goods travel“alone”(i.e., different refrigerated goods and not mixed with one another, as they require different temperatures and different humidity settings). In addition, some fresh produce simply cannot be mixed together as they emit odors and other gasses that would spoil the resr of the cargo. For example, a load of cucumbers should not be mixed with apples, as cucumbers are sensitive to the ethylene that the apples produce, and for obvious reasons, onions and strawberries do not travel well together.

When goods needing refrigeration travel by oncean, they usually travel in a refrigerated container-also known as a“reefer.”Great care should be taken in ensuring that the temperature is kept at its correct setting throughout the voyage, which is achieved with temperature-sensitive indicators. Since containers are not very errective ar cooling goods-but are effective at keeping them cool-several shippers are making sure that the goods are well refrigerated before they are loaded to prevent possible damage. It should also be understood that reefers cannot possibly have a completely uniform temperature: temperatures within the box can vary by as much as 5 degrees Celsius(10 degrees Fahrenheit) Just because air circulation cannot be made uniform. Finally, another common problem with refrigerated cargo coming in or out of the United States is the confusion between Fahrenheit and Celsius temperature settings and the errors they cause.

With refrigerated cargo, the loading of the refrigerated container musr allow air circulation around the cargo; this requirement means that the goods must be loaded in the center of the container, with sufficient space in-between the walls of the cintainer and the cargo for circulation, and that the goods must be braced with a frame rather than with inflatable dunnage, which would prevent air circulation. In addition, some goods need to travel in contolled atmospheres-mixtures of oxygen and nitrogen in different percentages than ambiant air-to prevent spoilage. Some experiments are being conducted to determine whether a controlled atmosphere can also be effective against some peses as well.

Fresh produce must also be kept at humidity leves of 95 to 100 percent, to maintain its freshness as well as prevent weight loss due to evaporation. Most produce is made up of at least 80 percent water and is quite sensitive to water loss; for example,grapes will wrinkle and soften, and stems will turn brown, with a weight loss of only 4 percent, making them more difficult to sell, In addition, since produce is sold by weight, a small weight loss can translate into a substantial decrease in revenue for the importer.

For air shipments of refrigerated cargo ,the challenges are different, since the carigo is not placed in refrigerated containers but in cargo holds which have different temperature settings: for example, Lufthansa offers five different cargo holds, kept at different temperature settings, to keep perishables in their optimum environments. Hower\ver, because of the possibility that incompatible cargo might be mixed together-such as the onions and strawberries mentioned earlier-great care should be extended to protect sensitive goods from this eventuality by keeping them in solid wall cardboard boxes and possibly in shrinkwrap, if applicable.

Trade in precious goods and valuables is entire branch of logistics that, although not officially calculated separately from other data, is worth millions of U.S. dollars; in the United States alone, it is estimated at US $50 million. The crash of Swissair on September 2, 1998, exposed some of the extent of its international scale: the airplane was carrying 50 kg (110 lbs) of cash, 2 kg of diamonds, 2 kg of watches, 5 kg of jewelry, and an artwork by Picasso entitled “The Painter.”27

There is a substantial business in shipping precious stones internationally, such as diamonds and emeralds, since the stones are often produced, cut, set, and sold in different countries. Artwork travels from museum exhibits (and back). Antiques and collectibles travel to and from dealers and auction houses. Cash travels to where tourists flock..

Altogether, there are few firms specializing in the shipment of precious and valuable goods, and these firms emphasize discrection; they do not advertise, do not display their names on their vehicles, and operate out of anonymous office buildings and warehouses. The additional security measures they take are many: they do not ship more than a certain amount on a specific airplane or ship, they use ever-changing consignee names, and they have created a whole series of specialized packaging technologies.

Artex is such a firm. It is located in Washington, D.C., and specialized in the business of moving artwork, antiques, and jewelry collection. It employs a crew of seventy-five employees, most of whom are artists or experts with museum experience. Each piece of work is moved in a crate that is specifically designed for that work of art and fitted with foam to the exact dimensions and shape of the artwork. When Artex was selected to move an African-American burial site from New York City to Howard University, it took the firm’s employees three months to pack the 20000 objects this move represented.

In addition, Artex’s warehouse and trucks are equipped with air conditioning to keep humidity to a minimum. Each of its trucks is tracked with satellite transmitters and the Global Positioning System; this way, the firm knows at all times where the art is located. Finally, each of the trucks is driven by a team of at least two drivers equipped with cellular phones and sometimes accompanied by armed guards. Nevertheless, the best security is when no one knows that a move is occurring.

In 1996, Chiquita Brands was the largest American importer (by the number of containers brought into the United States), with about 79000 TEUs--twenty-foot equivalent units—surpassing even Wal-Mart, which “only” imported 76000 TEUs. 29 In 1999, Wal-Mart’s imports had grown to 241000 TEUs, and Chiquita imported 89000 containers of essentially a single product, bananas.30

Bananas are harvested green and hard, and immediately refrigerated. They are then loaded into one of Chiquita’s fifteen dedicated banana ships or on a number of other ships that the firm charters. About half of these ships are completely containerized, while the others transport bananas on pallets as break-bulk cargo in refrigerated holds and in containers on deck. During their trip, the bananas are then placed in a ripening environment where they acquire their yellow colour before being shipped to retail stores.

Wilmington, Delaware, is by far the largest port of entry for bananas, and about 1.2 million tons of its traffic is fresh produce.31 altogether, imported fresh produce accounts for 35 percent of produce sold in the United States. See the Box titled Cherries and Carnations(page 201) for more information about the United States’ reliance on Colombia in the business of cut flowers.

12-9 Domestics Packaging Issues

In dealing with consumer products specifically, several packaging, or the design of the packaging in which the final consumer purchases the goods, as well as by secondary packaging, or the design of the packaging designed to facilitate handling in the retail environment. Collectively, these constraints tend to be domestics in nature (i. e. , they are specific to a single country or possibly a group of countries).

Adapting a firm’s strategy to the different market requirements of a particular country add substantially to the costs of manufacturing, as well as to inventory and logistical expenses. A firm has to determine whether it makes economic sense to adapt its approach to these different markets and incur those additional costs or decide to ignore them at the risk of losing potential sales. This is the same strategic dilemma faced by a firm involved in international marketing: adapt or standardize?

Some of the factors that may affect primary and secondary packaging will now be explored.

Size

Consumer packages abroad may be of a different size then consumer packages in the domestic market because of consumer preferences: they are generally smaller in those countries in which retail shopping is done frequently and larger for those in which consumers shop at greater intervals. However, consumer packaging is complicated; consumers may demand smaller or larger packages based on preferences and customs, as well as packages of different shapes and materials. For example, sugar is sold in some countries in paper bags weighing 5 lbs (2.5 kg ), in others in cardboard boxes weighing 1 kg (2 lbs ), and yet in others, in tin cans of 1 lb (0.5 kg ). E ven products that are held as great examples of “international standardization ,” such as Coca-cola soft drinks, are sold in a myriad of sizes and therefore of primary and secondary packaging units.

Consumer packaging may also be seriously influenced by the layout of the shelves in the stores, such as their depth and the linear space allocated, constraining manufacturers to use different retail packaging.

Secondary packaging –the unit that holds several consumer packages –is influenced by the size of the retail stores and their configuration, as well as the size of the delivery trucks; the tertiary packaging unit, such as the pallet; or even the configuration of the storage area. In addition, it is also influenced by the frequency and the volume of sales of the retail units.

Legal Issues

Consumer packaging may also be influenced by legal requirements; some countries regulate size to a multiple of simple metric unit (1 kg or 1 liter ), while others do not, allowing packages of any size and weight. However, the greatest requirement are in the legal constraints on handing: many countries regulate the maximum weight an employee may carry, and that influences the weight of the secondary packaging unit, and, consequently, of both consumer packaging and tertiary packaging as well.

The legal constraints placed on the distribution channels can also influence consumer packaging. For example, the United States allows retail sales of some medicines “over-the-counter ,” which means that consumers buy them in drugstores, most often in a self-service environment. In France, in contrast, all drugs, including drugs not prescribed by a medical doctor, are sold exclusively through specialized stores called pharmacies. The primary package in a drugstore is often a blister pack or some variation of that type of package, as the goods are sold hanging form an aisle rack. The primary package from a pharmacy is usually a cardboard box, as the pharmacist keeps them on small shelves or in large –size drawers. In addition, the drugstore may purchase goods in larger quantities than the pharmacies, in any case, the primary packaging is different and therefore the secondary and tertiary packaging will also be different.

Storage and Transportation Environment

Finally, there are a number of environment influences on packaging, such as the dusty condition under which transportation take place, mentioned in the Learn More about IBM’s packaging of personal computer in China. There are similar constrains triggered by high humidity, heat, or cold.

There are also constraints placed by the lack of refrigeration resources. The best example is probably the existence of long-conservation milk, which is sold unrefrigerated with “expiration dates ” six or seven months after its production in a large number of European countries. Not only does this packaging alternative allow the use of non-refrigerated shelving in the store, but it also requires no refrigeration at all in the rest of the supply chain, from warehouses to transportation. It can also be transported safely quite far from its production location, including internationally.

All in all, several domestic issues in the importing country will also affect the packaging of goods. Companies should develop appropriate strategies to account for the possible diversity of consumer and retail packaging alternatively present in their export markets.

End-of-chapter questions

1. what are the consequences of improper packaging for the exporter? Does your response depend on the Incoterm used? Does it depend on the insurance policy in force?

2. What are the different alternative means of packaging products that are not containerized?

3. What are some of the issues and that risks that international packaging face and that are not present in a domestic shipment?

4. Use a product of your choice and ship it form one country to another on a multi-modal shipment. What packaging methods would you use? Why?

Endnotes

1. Hhensel, Bill. Jr, “A loaded problem ,” JoC Week, August 14-20,2000,p .13.

2. “General syllabus for postgraduate studies in packaging logistics, ” Lund University, Department of Design Science, Lund, Sweden, http://www. Pkglog.1th. se , October 20, 2000.

3. Ports of the World, Fifteenth Edition, Cigna Insurance Corporation, available form Publisher, Ports of the World, Cigna Companies, P. Q Box 7716, Philadelphia, Pennsylvania 19192, USA.

4. Harps, Leslie Hansen, “Popcorn! Peanuts! Bubble wrap! Thinking inside the box,” inbound Logistics, November 2000, PP.40-46.

5. “Container matters” and “Any fool can stuff a container,” videos published by the Thomas Miller P&I Ltd, International House, 26 Creechurch Lane, London, EC3A 5BA, United Kingdom.

6. Baldwin, Tom, “USDA offers four options for Chinese pallets,” The Journal of Commerce, September 24,1998, P.1A .

7. Mottley, Robert, “Chilling out,” American Shipper, June 2000, pp. 43-51.

8. Barrett, Colin, “Mixing and matching sizes in computerized loads,” Traffic World, July 3, 1989, p. 40.

9. Porter, Janet, “Insurer warns of the dangers of incorrectly packed containers,” the Journal of Commerce, August 4, 1997, p. 16A .

10. Ports of the World, Fifteenth Edition, Cigna Insurance Corporation, available form Publisher, Ports of the World, Cigna Companies, P. Q Box 7716, Philadelphia, Pennsylvania 19192, USA.

11. Ports of the World, Fifteenth Edition, Cigna Insurance Corporation, available form Publisher, Ports of the World, Cigna Companies, P. Q Box 7716, Philadelphia, Pennsylvania 19192, USA.

12．Zelade, Richard, “It’s in the bag ,” International Business, October 1996,p.44

13. Harrington, Lisa H., “The do’s and don’ts of packaging for air,” Transportation and Distribution, October 1998, pp. 59-63.

14. Harrington, Lisa H., “The do’s and don’ts of packaging for air,” Transportation and Distribution, October 1998, pp. 59-63.

15. Robinson, Alan, “Fixing the cracks in the system,” Food Logistics October 1998, pp. 29-25.

16. Barth, Steve and Michael D. White, “Hazardous cargo,” World Trade, November 1998, pp. 46-48.

17. Amerman, Don, “Shippers urged to wrap cargo in anonymity,” The Journal of Commerce, October 27, 1998, p. 1A.

18. “Container matters” and “Any fool can stuff a container,” videos published by the Thomas Miller P&I Ltd, International House, 26 Creechurch Lane, London, EC3A 5BA, United Kingdom.

19. Armbruster, William, “To ensure cargo security, don’t leave it to beeper,” The Journal of Commerce, May 4, 1998, p. 1A.

20. Mottley, Robert, “Container theft: Does anyone care?” American Shipper, June 1998, pp. 24-30.

21．Hamilton, David, “Untamed frontier: PC makers find China is a chaotic market despite its potential,” The Wall Street Journal, April 8, 1996, p.A1.

22. Mottley, Robert, “Chilling out,” American Shipper, June 2000, pp. 43-51.

23. Mottley, Robert, “Chilling out,” American Shipper, June 2000, pp. 43-51.

24. Nall, Stephanie, “As federal rules outlaw fumigants,farmers look to high-tech solutions,” The Journal of Commerce, January 7, 1998, p. 1C

25. Mongelluzzo, Bill, “A cool idea,” The Journal of Commerce, May 23, 1997, p. 1B.

26.Banham, Russ, “Foiling spoiling,” The Journal of Commerce, June 23, 1997, p. 4C

27.Estrin, Robin, “Swissair 111 went down with millions in valuables, including Picasso painting, ” Associated Press News Release, September 4, 1998.

28. Hull, Dana, “How a moving company capitalizes on valuable secrets” The Washington Post, May 5, 1997, p.F12.

29. Amerman, Don, “Keeping Chiquita sweeter requires atmosphere control as well as reefers,” The Journal of Commerce, June 23, 1997, p. 2C.

30. “Top 100 importers and exporters,” The Journal of Commerce, Special Report, March 29,2000

31. Robinson, Alan, “Ports of call,” Food Logistics, March 1999, pp. 21-24.

Chapter13

Customs Clearance

Outline

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13-1Introduction

13-2 Duty

13-2a Classification

13-2b Valuation

13-2c Rules of Origin

13-2d Tariffs

13-2e Dumping

13-2f Other Taxes

13-2g Value Added Tax

13-3 Non-Tariff Barriers

13-3a Quotas

13-3b Adherence to National Standards

13-3c Other Non-Tariff Barriers

13-3d Pre-Shipment Inspections

13-4 Customs Clearing Process

13-4a General Process

13-4b Customs Brokers

13-4c Customs Bonds

13-4d Reasonable Care

13-4e Required Documentation

13-4f Required Markings

13-4g Merchandise Visas

13-4h Duty Drawbacks

13-5 Foreign Trade Zones

End-of-Chapter Questions

Endnotes

Key Terms

assist

binding ruling

classification

cleared

dumping

duty

entry

export quotas

informed compliance

liquidated entry

protest

quota

reasonable care

rules of origin

tariff

tariff schedule

valuation

value added tax(VAT)

visa

13-1 Introduction

Another aspect of international trade is the process that an importer must follow when it brings goods into a country. This process is dictated by Customs, the government office in charge of collecting taxes on imports and of enforcing a number of rules and regulations regarding what can and cannot be admitted into the country. It is generally a complex process, fraught with pitfalls and loaded with paperwork: most countries, with very few exceptions, do not like to import goods and act accordingly. This chapter explains how the Customs system works in general but draws most of its examples on the process followed to import goods into the United States.

13-2 Duty

Duty( is the tax that an importer must pay in order to bring goods into a country. Such duty is calculated in a number of different ways, generally based upon three criteria:

1. The type of goods imported, which is determined according to a number of rules of classification( that essentially have been standardized worldwide.

2. The value of the goods imported, which is not only determined upon the invoice value, but also is calculated according to a number of rules that differ from country to country, collectively called valuation( rules.

3. The country from which the goods are imported; this determination is made according to the rules of origin, a process recently simplified, but still quite cumbersome for manufactured products with components made in multiple countries.

From these three elements, Customs calculates what tariff will be charged on the import, or the

tax that the importer will have to pay on the imported goods: it is generally a percentage of their value, but it can also be calculated with some other method, based on the number of units shipped or their weight, for example.

13-2a Classification

The classification of goods follows a coding scheme that is essentially the same worldwide, as most countries have adopted the Harmonized Commodity Description and Coding System------also called the Harmonized System (HS) of Classification------developed by the Customs Cooperation Council. The Harmonized System is used to classify both exports and imports. The fact that a trader can use the same code when it is exporting a product from one country and importing it in another is a great simplification. At one time, almost every country had its own classification and coding systems.

According to the HS, each product can have a code that uses up to ten digits. An example, taken from the tariff schedule of the United States, would be:

6402.19.05 golf shoes

.30___________for men

.60___________for women

.90___________for other persons

where the first six digits represent the “root” of the international coding(i.e., the code that will be identical in all the countries which have adopted the Harmonized System for the product “golf shoes”). The last four digits are “country-specific” (i.e. , every country can use these to differentiate between different subcategories of the main product, as the United States does between golf shoes for men, for women, and for “other persons,” presumably children rather than aliens).

The Harmonized System is divided into twenty-one sections, logically determined by the type of product and material, each divided into one or more chapters, with a total of ninety-seven chapters for the entire HS nomenclature. The chapter in which the golf shoes are classified is Chapter 64, entitled “Footwear, gaiters and the like; parts of such articles.” Each chapter is then divided into headings, which make up the first four digits of the HS number. The heading under which the golf shoes can be found is “6402.19 Other footwear with outersoles and uppers of rubber or plastics.” Each heading is then divided into subheadings, or the six-digit code common to all HS countries (“6402.19 golf shoes” in our example).

The HS is accompanied by a series of six General Rules of Interpretation, which detail how an importer should arrive at the correct HS code for an entry :

1. The section, chapter, and heading only serve as guides, and the correct classification may be in a different section, chapter, and heading altogether.

2. The classification of an incomplete or unfinished product is that of the finished product. For example, shipments that contain all of the subassemblies for a final product should be classified as the final product rather than as individual parts. This is true of chemical compounds as well.

3. When in doubt between two classifications, the one with the most specific description is the correct one. However, if the product is made up of several parts, each of which would lead to a different classification, then the classification that lends it its “essential character” is the correct one.

4. When there is no category under which a specific product can be classified, then the classification that should be used is that of a product that would be most like it.

5. Containers and packaging materials are classified with the products with which they enter: such would be the case for camera case, for example. However, if the container has usage beyond the product itself, then it must be entered and classified separately.

6. When comparing classifications, only descriptions at the same level should be compared;

it is not appropriate to compare a heading to a subheading, for example.

Nevertheless, the correct classification is always subject to some interpretation on the part of the importer and of Customs officers. Since the classification of a specific article determines at which tariff rate it will be taxed and whether it will be subjected to numerical quotas (as are some textile articles in developed countries, such as the United States, see Section 13-3a), it can be a nontrivial issue. In those cases where a U.S. importer is in doubt about a correct classification, the Bureau of Customs and Border Protection (formerly the U.S. Customs Office) will issue, prior to the entry of the goods, a binding ruling( where it will determine the correct classification of a specific product, a decision that will be binding to both parties.

In early 2000, there were efforts undertaken to simplify the ten-digit classification used by the United States and to model it after Canada’s system, which uses only the six-digit subheadings of the HS. However, as of 2002, the U.S. Customs’ tariff schedule was still using a ten-digit based classification system.

Classification Quirks

G

iven the multitude of products imported into the United States------and given the eclectic tastes of the U.S. population------a large number of unusual following the Harmonized System, with some decisions that can be amusing:

A novelty item called a “necktie in a bottle” was classified by Customs as a necktie------no surprise here------and therefore was made subject to numerical quotas. However, since its bottle package was unusual, it also had to be classified separately, according to General Rule of Interpretation Number 5.

Some Halloween costumes have been classified as “articles of clothing” by Customs, and were therefore made subject to high tariffs and some numerical quotas. This decision obviously brought jeers on the part of importers who argue that children are unlikely to wear Dracula disguises to school, with the possible exception of a single holiday: Halloween.

A novelty item, consisting of a cloth pocket that can be wrapped on a couch’s armrest to hold a TV remote control or a couple of magazines, and sold under the trade name “TV Duck,” was classified by Customs as a bedspread------Rule of Interpretation Number 4------which subjected it to high tariffs and numerical quotas. The importer disagreed, and this protracted fight went all the way to the U.S. Court of Appeals: “You had to be in the Courtroom to appreciate the looks of disbelief that the judges directed toward (the Customs’ lawyer).”

Canadian exporters have drilled holes in boards to allow their construction lumber to be classified as “finished products”------since homebuilders can fit wires through them------and therefore avoid the high tariffs placed by the United States on lumber, which it considers subsidized by the provincial governments of Canada. U.S. Customs and Canada are still fighting this issue: the U.S. has even suggested to Canada that it impose an export tariff on all lumber rather than face U.S. anti-dumping duties.

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The correct classification of an imported good is generally made by the importer and then verified by the Bureau of Customs and Border Protection; however, each country has different standards and a few put the entire classification responsibility on Customs. In any case, it is critical to have a complete description of the goods on the commercial invoice, and not just a part number or an item number. When in doubt, Customs can ask to see the merchandise before it is released, and this inspection can substantial delays.

13-2b Valuation

Since most duty is collected ad valorem (on the value of the goods imported in a country) a correct valuation amount must be determined by the importer, following a number of valuation rules governed by the Customs Office of the country in which the goods are imported.

For most member countries of the World Trade Organization------and officially for all WTO countries as of December 31, 2000------the valuation of the goods is based on the transaction value of the sale. Therefore, the valuation of the goods must start with the value presented on the invoice sent by the exporter to the importer. For most countries, the value used is the “landed” value, or the CIF/CIP value of the goods (see Sections 4-9 and 4-11 for explanations of these Incoterms), that is, the invoice value including packaging costs, transportation costs in the exporting country, international transportation costs to the country of destination, and international insurance costs. For other countries, including the United States, the value used is the FCA or FAS value (see Sections 4-5 and 4-6 for explanations of these Incoterms), that is, the invoice value of the goods as well as packaging costs, transportation costs in the exporting country, but excluding the costs of international shipping and insurance.

There are obvious difficulties in reaching the correct valuation unless the commercial invoice sent is detailed enough to include all of these different costs in a clear, itemized fashion, regardless of the Terms of Trade (Incoterms) used in the transaction. For example, a CIF sale to an American importer should spell out the costs of international freight and international insurance, so that they can be deducted from the invoice value for Customs purposes.

The valuation process can be much more complicated than what has been outlined so far. Some countries used to determine value based upon the “Brussels Definition of Value (BDV),” or the “usual” price of a commodity, based on the price at which a product would sell in a free market between an unrelated buyer and seller. Such BDV has slowly been replaced by the transaction value since 1994. In those cases where Customs suspect that valuation based on the invoice would result in undervaluation------or, possibly, overvaluation------Customs can still legitimately decide that valuation can be determined with other methods:

Comparative method: Customs determine the value of the goods based upon the value of identical or similar quantity to the same country. Note that the determination of the value of the goods is made based upon importing data and that differences in exporting countries’ costs are not taken into consideration.

Deductive method: Customs determine at what price identical or similar goods are sold within ninety days of importation in the importing country, and determines an entry value based upon “normal” mark-ups in the distribution channel.

Computed or reconstructed value method: Customs determine the value of the goods by computing the manufacturing costs of the goods and adding “an amount for profit and general expenses equal to that usually reflected in the sales of goods of the same class or kind.”

Method of last resort: Customs use “well-trained” and “well-informed” Customs officials to determine the value of the goods imported; no specific guidelines are given, other than that the valuation cannot be “arbitrary.” It is unlikely to be anything else, though.

The valuation of the goods imported can be increased by some items not included on the invoice; for example, a royalty to be paid by the importer to the exporter, a commission to be paid by the importer sells the goods to their final purchaser. The valuation can also be affected by the presence of what Customs call an assist(, or an item that the importer provided to the exporter in order to produce the goods: for example, a mold or a die that the exporter used in manufacturing the product. The value of such an assist must be added, on a per-item bases, to the value of the goods imported.

Finally, the issue of exchange rates is relevant. Customs must arrive at the value of the goods imported in the importing country’s currency, even though the invoice can be written in a different currency. Each national Customs Office therefore has rules to determine what exchange rate will be used to convert an invoice issued in a foreign currency. United States Customs use the date of export of the merchandise.

13-2c Rules of Origin

The third element necessary to determine the duty that will be applied to a specific import is the country of origin of the goods. Goods are given a country of origin based upon a set of rules that are known as “rules of origin,” which follow one or the other of two methods, neither of which has yet been adopted universally by the World Trade Organization (WTO), despite the fact that there has been a committee working on this project since 1995.

Substantial transformation: The country of origin of a product is the country in which it acquired its most substantial transformation. The determination of the “substantial transformation” is fraught with pitfalls and can lead to widely different interpretations. FOR example consider a computer assembled in Mexico from parts originating in Taiwan (memory chips),the Unites States(CPU),China (board and hard drive), Brazil (monitor), and so on: where did the “substantial transformation” take place, and what is the country of origin of the product? Although vague, this is still the method followed by the Unite States-with the exception of textiles’ country of origin determination-and it can lead to fairy interesting decisions (see Box titled Made Where? on the following page).

Change in HS classification: The country of origin is the country in which the last change in Harmonized System classification occurred. The method is the one currently followed by the United States for textile products, and it has proven to be much easier to implement. Nevertheless, the decision can sometimes lead to product’s country of origin being a country in which a fairly inconsequential transformation took place, and where little value was added. Already several exceptions have been made to this rule.

Unfortunately, there seems to be no easy way to determine what the country of origin of a complex product is. THE determination of a country of origin-and the marking that are associated with it-probably one of the most difficult issues facing firms engaged in international trade today, as different duty rates are used for different countries and as numerical quotas exist for some countries but not others. An importer can be charged very different duty rates, and, in some cases, fined substantially for having hidden the actual country of origin:

A Hong-Kong clothing manufacture was fined US$388,000 for fraudulently seeking to export Chinese-made garments to the Unites States.(…) The firm pleased guilty to 10 counts of lying about the origin of 14,000 dresses. They carried Hong-Kong labels but were actually made in china. The maximum penalty for such cases is US$500,000 and two years in jail.

U.S. Customs keeps and publishes a list of all the firms that it has found guilty of transshipping, the practice of attempting to hide the country. Because of the very different conditions under which textile products from China and from Hong-Kong are imported into the United States, many of these firms have been Hong Kong-based firm.

In addition, the country of origin of a good can have substantial marketing consequences, as most countries require that the goods be marked with their country of origin; for obvious reasons, importers of luxury clothing items prefer a good marked “made in Italy” to one made in a country not known for its designers. However, the issue is of consequence for all sorts of products, as consumers everywhere are sensitive to what international marketers call“country-of-origin effects,”17 the perceptions that country of origin imparts on the product.

13-2d Tariffs

An importing country usually manages its imports under a tariff system that is dubbed ”N-column tariff system,” with N, the number of columns, corresponding to the number of different classes of countries that the importing country considers. The tariff rates would then be the same for all of the countries in a given class. As the number and complexity of multilateral trade agreements increase, this

Made Where?

U

nder the “substantial transformation” rule of origin, the United States’ Customs determined that transformation steel rods into steel wire was not substantial enough to warrant changing the country of origin, but that the assembly of photo album pages into a binder was. Similarly, ostrich chicks hatched in Great Britain from eggs laid in South Africa had not been subjected to “a process so substantial as to transform them into new and different articles of commerce” and therefore were coming form South Africa and subject to the then-existing embargo on imports from this country; however, ostrich feathers coming form South Africa and placed on hats made in China were considered transformed enough that their entry was permitted: they “originated” in China.

Under the “change in HS number,” though, there were similarly difficult situations: A pair of underwear made for Victoria Secret, assembled into final products in a Jordanian plant from panels cut in Israel, and shipped back across the border to Israel is officially “made in Israel” as General Rule of Interpretation 2 dictates, and benefits from the free-trade agreement between Israel and the United States. Silk scarves that to be considered “made in Italy” under the substantial transformation rule, are now considered to be originating in China, since the HS classification for a raw silk scarf and a painted one is the same. Under pressure from the European Union, the United States relented, and those scarves are once again allowed to be “made in Italy” and fetch US $200 prices, a price difficult to obtain for a scarf made in China.

terminology can sometimes be confusing, as there can be many more than “N” classes. Nevertheless, the terminology has remained, and most tariff schedules( are known as two-three-, or four-column schedules, with the Most-Favored Nations(MFN) subject to column1 tariffs and others to column 2 tariffs. In 2000,the MFN designation was officially changed to Normal Trade Relations(NTR), but this terminology has not yet been universally adopted.

However, the number of columns is often quite an oversimplification if the actual tariff system. For the Unites States, there are only five trading partners that do not have NTR status, all of which are minor trading partners(consider the countries of Afghanistan, Cuba,* Laos, north Korea, and Vietnam). However, among the relations (Canada, Mexico, and Israel, as well as a number of Caribbean countries), and several that have a special status on specific products, such as most developing countries under the Generalized System of P reference. Add to these several bilateral agreements on specific products, and the system is much more than a two-column system. Therefore the first column is actually spit into two subcolumns, one labeled ”general” for all NTR countries, and the other “ special ” for all countries for which, for a given HS number, there has been a special negotiation. Table 13-1 shows this layout.

Tariffs are generally calculated ad valorem or a percentage tax on the value of the goods imported. Nevertheless, Other methods exist, such as a fixed amount per the goods imported. Some others are calculated with a mixed system, such as a fixed amount per unit in addition to a percentage of the value of the goods imported; such a tariff is called a compound duty rate. Table 13-1 illustrates all these alternatives:

· A company importing springs for watches(9114.10.4000) would have to pay 7.3 percent duty on FCA value of the goods if they came from an NTR country , for example ,Japan. If the spring came from India (Generalized System of preference), Canada (North-American Free Trade)

TABLE 13-1 United States Tariff Schedule

Harmonized Tariff Schedule of the United States (2002) (Rev.4)

Annotated for Statistical Reporting Purposes

XVIII

Heading/ Subheading	Stat. Suffix	Article Description	Unit Of Quantity	Rates of Duty
				1	2
				General	Special
9114 9114.10 9114.10.40 9114.10.80 9114.20.00 9114.30 9114.30.40 9114.30.80 9114.40 9114.40 9114.40.40 9114.40.60 9114.40.80 9114.90 9114.90.15 9114.90.30 9114.90.40 9114.90.50	00 00 00 00 00 00 00 00 00 00 00 00 00 00	Other clock or watch parts: Springs, including hairsprings For watches…………… Other………. Jewels………… Dials: Not exceeding 50 mm in width… Exceeding 50 mm in width….. Plates and bridges: Watch movement bottom or pillar or their equivalent…… Any plate, or set of plates, suitable for assembling thereon a clock movement……… Other: For watches……….. Other………. Other: Assemblies and subassemblies for watch or clock movements consisting of two or more pieces or parts fastened or joined inseparably together: For watch movements…….. For clock movements…… Other: For watches…… Other…………..	No… No… No… No… No… No… No… X… X… X… X…. X… X…	7.3% 4.2% Free o.4c each+ 7.2% 4.4% 12c each 10c each 7.3% 4.2% 7.2% 6%+ 2.3c jewel +0.2c for each other piece or part ,but if consisting in part of a plate of a set of plates the total duty shall not exceed the duty for the complete movement 8.8% 4.2%	Free(A+,CA,D,E,IL,J,MX) Free(A+,B,CA,E,IL,J.JO.MX) Free(A+,B,CA,E,IL,J,MX) Free(A+,B,CA,E,IL,J,MX) Free(A+,CA,E,IL,J,MX) Free(A+,B,CA,E,IL,J,MX) Free(A+,CA,E,IL,J,MX) Free(A+,B,CA,E,IL,J,MX) Free(A+,CA,E,IL,J,MX) Free(A+,B,CA,E,IL,J,MX) Free(A+,CA,E,IL,J,MX) Free(A+,B,CA,E,IL,J,MX)	65% 65% 10% 5c each+ 45% 50% 75c each 38c each 65% 65% 45% 65%+ 25c jewel+ 3c for each other piece or part of a plate or a set of plates the total duty shall not exceed the duty for the complete movement 65% 65%

Legend:

A+: Generalized System of Preference B: Automotive Product Trade Act CA: Canada

E: Caribbean Basin Economic Recovery Act IL: United Stated-Israel Free Trade Area J: Andean Trade

MX: Mexico Preference Act

Agreement), Haiti (Caribbean Basin Initiative), Israel (United States-Israel Free Trade Agreement), Peru (Andean Trade Preference Act), or Mexico (NAFTA), the importer would have no duty to pay. If the spring came from Laos, the duty rate would be 65 percent.

·A company importing small watch dials (9114.30.4000) from an NTR country, such as Germany, would have to pay US$0.004 per dial, in addition to 7.2 percent of the FCA value of the dials. The same product coming from some other countries could be imported duty-free, while others would be saddled with a US$0.05 duty in addition to 45 percent of the FCA value.

·A company importing watch plates suitable for assembling watch movements (9114.40.4000) from South Korea would pay US$0.12 for each unit imported. The same product from North Korea would be charged US

Some countries can have very unique ways of determining tariffs. Switzerland’s tariff schedule stands out in that most of its tariffs are based on the gross weight of the goods imported (per 100 kg) rather than their value, even for products such as computers or texiles. Most countries’ tariff schedules are now published electronically and can be accessed through the World Customs Organization’s website at www.wcoomd.org.

13-2e Dumping

In some cases, Customs can determine that the invoice value is lower (in some rare cases,higher) than the actual value of the goods. This is generally uncovered by comparing the value of a giving invoice with a database of import entries with the same Harmonized System Number made in preceding year(s).For example, in the United States, the invoice value is systematically compared to existing valuations: this is one of the purposes of the column labeled “unit of quantity” in Table 13-1 which represents the units under which the Customs’ computer keeps the values of other entries under a specific HS number to determine whether a given entry is within the bounds of “normal.” Should the invoice give a value outside of these bounds, a Customs’ Import Specialist will scrutinize the entry before liquidating it.

When the invoice’s value is much below what Customs has historically accepted and when a much higher valuation is reached with one of the alternative valuation methods (see Section 13-2b),Customs can determine that the exporter is dumping( the goods in the importing country (i.e., selling the goods at a price which is below their commercial value ).The exact definition of “dumping” varies from country to country, but the most prevalent definition is a price that is below the wholesale price of the goods in the exporting country and that causes injury to competitors (or some other group, such as a labor union) located in the importing country. For some countries, such as the United States, there must be a complaint from an injured party before Customs considers that the undervaluation is a case of dumping. In addition, an organization independent from Customs－in the United States, the International Trade Commission－is asked to determine whether there is actual injury to competitors and ascertain whether the goods are sold at below their commercial value before an exporter is found guilty of dumping.

In those cases, Customs can add an additional duty to the regular duty rate of the commodity, and this duty rate is called an “anti-dumping” duty, which can range from 1 percent to several times the value of the goods imported. Unfortunately, dumping accusations have been one of the most commonly used tools of certain countries to restrict imports, and it was still one of the most commonly used methods of protectionism in 2000.In addition, Customs can also use a “countervailing” duty to tax products that the exporting government is found to have subsidized. In the United States, there are roughly twenty cases a year of industries requesting relief from dumping practices; there were highs of 105 requests in 1992 and 39 orders in 1993. Historically, most of the requests have come from the steel industry and products manufactured with steel, such as ball bearings, but there is a 283 percent anti-dumping duty on raw pistachios and a 318 percent duty on roasted pistachios from Iran, due to a complaint initiated by pistachio growers in California, most of whom are, ironically, Iranian expatriates.

13-2f Other Taxes

In addition to duty, several countries will perceive additional taxes based on the value of the goods; these additional taxes are a disguised way of creating additional

Revenues from imports while remaining within the boundaries of the General Agreement on Tariffs and Trade (GATT) and the rules of the World Trade Organization (WTO), which mandate systematic reductions in tariffs.

Such additional taxes can be labeled very creatively:

Punitive duty: The United States, unhappy about decision a decision by the European Union to give preferential treatment to bananas imported from former European colonies in the Caribbean and African , retaliated by placing a 100 percent duty on certain items coming from any of the fifteen EU countries: cashmere, blue cheese, “handbags covered in plastic sheeting,” and so on..

Border traffic tax: Russia, in order to “make a more accurate tally of border flows of people, cargo and means of transportation,” imposed a 1 percent tax on all goods crossing its borders. Russian travelers are taxed at 0.8 percent of their monthly income.

Safeguard tax: Argentina, after being chastised by the WTO for having increased its duty rate on footwear, reduced them, and immediately reimposed them through an emergency “safeguard tax” designed to protect its footwear industry against foreign competition.

Temporary protection tax: The United States imposed a 33 percent additional tariff on brooms from Mexico, to allow U.S. manufacturers to increase their efficiency so that they could compete against imports. It repealed such tax two years later, nothing that the industry had not taken advantage of this protection period to improve its efficiency.

These taxes are designed to increase revenues for the importing country, protect less efficient domestic industries, and punish importers, while respecting the letter--- but certainly not the intent--- of WTO agreements.

13-2g value Added Tax

In some countries, an additional tax is collected in addition to the duty, but is generally considered to have no bearing on importers ---even if it adds up to a significant amount--- since it is perceived from domestic producers as well as from importers, and is eventually only paid by consumers: the value Added Tax(VAT)(.The idea of VAT is somewhat simple in its concept: the tax is perceived on the value added by each firm involved in adding value to a good, from the first one in the production chain to the last one. The implementation of a VAT is somewhat complex, though.

It is provably best to explain the VAT concept and its implementation--- as it is practiced in the European Union countries, at least--- with a simplified example:

1. A farmer purchased seeds, fertilizer, pesticides, and fuel to produced corn. On each of her production-related purchases, she pays the VAT. She keeps track of the VAT she has paid in a special bookkeeping account, as a “debit.” She then sells the corn she has produced and collects VAT from her customer, which she also records in that account as a “credit.” At the end of the quarter, she deducts the VAT she has paid from the VAT she has collected, and sends the difference to her government.

2. The corn is purchased by a mill that promptly transforms it into several products, including corn syrup. On all the products it sells to wholesalers and retailers, the mill collects VAT, an amount it records in s special bookkeeping account. At the end of the quarter, the mill deducts all the VAT it has paid to farmers for corn and all the VAT it has paid for its other purchases from the VAT it has collected from its customers and sends the difference to its government.

3. The corn syrup is purchased by s consumer who uses it for cooking. The consumer pays the VAT, but has no way to collect any, so it is the consumer who bears the tax’s entire burden.

The VAT

For imports, the concept is the same: the VAT is collected from the importer, but the importer can deduct the VAT it had paid from the VAT it eventually collects from its customers; therefore, the tax is not an actual cost to the importer. However, this is somewhat incorrect: in reality, there are substantial accountings and cash-flow costs associated with this method of garnering taxes. Nevertheless, since both domestic and imported products are taxed the same way, there are mo advantages garnered by either in their final costs to the consumer. The cost is quite a substantial one for the ultimate consumer, though, as the tax rate in the European Union is approximately 20 percent.

In the European Union, the Value Added Tax is computed on the sum of the sum of the value of the imported goods and the duty perceived at importation.

13-3 Non-Tariff Barriers

Some countries use high tariffs to attempt to limit the import of certain goods. However, steady pressure from the General Agreement on Tariffs and Trade, and now the World Trade Organization, has reduced considerably the duty paid by most goods the most countries. while there are still some exceptions, the trends is still toward ever-lower duty rates, with many countries having adopted tariffs that are rarely above 10 percent for most goods.

At the same time, the WTO has also been very active in attempting to decrease the number of those alternatives are still in place, which effectively limit exporters’ access to certain markets. Non-tariff trade barriers are those policies and actions that have the effect of reducing the number of items imported in a specific country.

13-3a Quotas(

The primary method used by countries to limit imports is a system of quotas, which limit the quantity of goods that can enter a particular country. A quota can take either of two forms:

1. An absolute quota, which places a yearly limit on the number of items entering s country under a specific HS number. On occasion, the quota ceiling on the total value of goods imported under a specific HS number. Once the quota is reached, goods in that category can no longer be imported. Some countries whose products are subject to quotas have established a system of visas to monitor how much of a given quota has been filled by its exporters (see Section 13-4g).

2. A tariff-rate quota , which places a two-tiered tariff rate on a specific category of products. Until a specific number of goods are entered, the tariff is low, but once the quota is reached, the tariff changes to a much higher percentage. Nevertheless, the goods can still be legally imported.

TABLE 13-2 Countries Subjected to Textile Quotas in the United States

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United Arab Emirates Indonesia Nepal

Bahrain India Oman

Bangladesh Jamaica Panama

Bulgaria Japan Peru

Brazil Kenya The Philippines

Canada Republic of Korea Pakistan

People’s Republic of china Kuwait Poland

Colombia Laos Qatar

Costa Rica Lebanon Romania

Czech Republic Sri Lanka Russia

Egypt Macedonia Slovakia

Fiji Burma El Salvador

Guatemala Macau Thailand

Guam Northern Mariana Islands Turkey

Hong Kong Mauritius Trinidad and Tobago

Hungary Malaysia Uruguay

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Quotas are usually placed on very specific items coming from a specific country of origin: for example , in 2000, no more than 147,358 dozens of articles under quota number 651-B-----HS numbers 6107.22.0015 and 6108.32.0015, corresponding to boys’ and girls’ blanket sleepers (a type of pajamas) made of man-made fibers------could have been imported into the United Stated from China. This complex system of quotas for textiles and apparel is followed by the United States and other developed countries for products originating from some developing countries, and if outlined in an international treaty called the Multi-Fiber Agreement. Those quotas restrict the number of textile items imported from the countries listed in Table 13-2. The WTO negotiated an Agreement on Textiles and Clothing, and all developed countries; textile quotas are supposed to have been lifted by 2005.

Quotas can also be aggregate quotas, applying to all imports under an HS heading, regardless of the country of origin; for example, the United States has a tariff-rate quota on milk, cream, dried milk, cheddar cheese, ice cream, peanuts, cocoa powder, sugar, and a substantial number of other food products.

Quotas can also be called “voluntary quotas”. Under pressure from the importing government, exporters agree to limit their exports “voluntarily” to a certain quantity. Such was the case during the early 1980s in the United States, when Japanese automobile manufactures agreed to absolute quotas for automobiles and light trucks.

Quotas can also come in the form of export quotas(, when an exporting country limits the quantity of a certain type of goods that firms can export from its territory (see Section 7-3f).

13-3b Adherence to National Standards

Unfortunately, quotas are hardly the only non-tariff trade barriers placed by countries to restrict imports. In many instances, countries enact “safety measures” designed to ostensibly protect their populations from effective, dangerous, or

The European Union’s Banana Wars

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I

n 1993, the European Union, in an effort to support the economies of some of its members’ former colonies in the Caribbean and Africa, devised a complex system of quotas, preferential tariffs, and import licenses to favor bananas imported from these countries. Even though it is not an exporter of bananas, the United States got tangled in this dispute since two of the companies that were affected by these restrictions were Dole Foods and Chiquita Brands, two American firms exporting bananas grown in Central America to Europe.

Even after three rulings against this practice by the World Trade Organization, the European Union still maintained this convoluted system of preferential treatment and the United States eventually retaliated with higher tariffs on products from Europe such as pens, candles, and cheese, to no avail. The “banana wars” escalated to a point where it involved the highest levels of government, and it took years to be resolved, despite WTO panels’ efforts to ease the tension and resolve the issue.

In early 2001, Chiquita Brands took the unusual step of suing the European Union for US $525 million, which the company claims was the lost profits the company had incurred because of the restrictions, and which caused it to default on its bond payments. The spat is now over, and Europeans end up paying slightly less for bananas today than they did when the trade barrier was in place.

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Unhealthy products from abroad. While most of these restrictions are justified and necessary, some of then are based on dubious data and are simply a form of undisguised protectionism for less efficient domestic producers.

Countries certainly can demand that products sold within their borders meet the standards that their governments have enacted; for example, there are many requirements of quality for consumer products in developed countries. The most prominent ones are the Deutsche Industrie Norm (DIN) in Germany, the Japanese Industry Standards (JIS) in Japan, the Norms Francaises (NF) in France, and the American National Standard Institute (ANSI) in the United States. A few international standards exist as well, such as the ones defined by the International Organization for standards, which laid out the ISO set of requirements. Most of these requirements are legitimate in that they reflect national preferences and sentiments toward consumer protection, health standards, and safety. For example, the European Union requires that vehicles be equipped with rear turn signals that are distinct from the brake lights, and the United States requires that automobiles be equipped with airbags. Both are worthy requirements.

The point at which these requirements become non-tariff barriers is unclear. An exporter is often unwilling to incorporate in its products an additional feature which is costly, or which it deems unnecessary, and claims that the requirement is a non-tariff barrier, when it may just be an unwillingness to deal with one of the differences and difficulties of selling a product in a foreign country. In a parallel fashion, such a requirement may not be a non-tariff barrier, even if it is required only of imported products and not of domestic manufacturers, if it is to protect a country from “importing” a disease that has not yet been observed domestically. A recent example would be the so-called “mad-cow disease,” against which non-European countries are trying to protect themselves.

Nevertheless, countries’ efforts to make imports adhere to national standards are often considered to be trade barriers: there have been lengthy spats over the safety of Mexican avocadoes in the United States, of United States’ cherries in Mexico, of New Zealand apples in Japan, and of United States’ hormone-treated beef in the European Union. The dispute with Japan over the safety of U.S. tomatoes lasted forty-six years.

13-3c Other Non-Tariff Barriers

Countries have enacted some very creative means to slow or restrict imports without having recourse to high tariffs, to quotas, or to standardization requirements. Here are several examples, which certainly do not constitute an exhaustive list:

·In the very early 1980s, France decided that it needed to protect its nascent VCR industry. It achieved this goal by requiring that every VCR entering the country be inspected, that a sticker be placed on every machine, and that the inspection take place in Poitiers, a land-licked small town about 250 miles from the port of LeHavre through which most VCRs were shipped, moreover, the inspection station was also a one-man operation.

Countless countries have enacted similar “slow” Customs clearance processes, in order to deter imports and increase importers’ costs, who need to shoulder additional storage cots and potential market delays.

·Another tactic is to require a mind-numbing number of documents and approvals. For example, in India, “an exporter has to complete and process fifty-four documents(…): twenty-seven pre-shipments documents, fourteen for Customs clearance, and thirteen for post-shipment realization of bills. As many as sixteen approvals are needed from departments of the central government.”

·Another way to slow Customs entries is to request additional papers that are not readily available or that are close to impossible to gather. The United States requests the “sewing tickets” for some garments, an internal work document of the garment factory, as well as the time cards of the employees working there, in an attempt to determine the country of origin of tactile products.

·South Korea has been tremendously effective at keeping foreign cars out of its domestic market. As of 1998, foreign automobiles constituted less than 1 percent of all sales. This was achieved, despite relatively low tariffs of 8 percent, with a systematic campaign designed to portray the purchase of a foreign car as unpatriotic. To bolster this perception, the South Korean government has all but threatened all purchasers of foreign cars with an income tax audit.

·Russia asked the United States’ exporters of chicken parts(legs and wings) to individually inspect every bird-for specific diseases-before they can enter the country, effectively preventing all U.S. imports of such parts.

13-3d Pre –Shipment Inspections

Pre-Shipment Inspections (PSIs) inspections performed by independent companies at the point of

departure of goods destined to be exported. The firm determines that the goods shipped are the ones ordered by the importer, in the correct quantity, and sufficiently well packed for an international shipment. When the independent firm has ascertained that all of these aspects conform to the invoice, it issues a Certificate of Inspection (see Section 7-4c) to the importer. Inspection companies have representatives in most ports and generally can handle just about any sort of shipment; on many occasions, though, the exporter experiences delays with PSIs as the workload of inspectors can be substantial, and as the expertise needed for a specific shipment may not be available.

Pre-Shipment Inspections are sometimes requested by importers to ensure that the exporter is

shipping the correct product and the correct quantity; they are used when the importer is purchasing on a “Cash-in-Advance” or on a Letter of Credit basis. However, most PSIs are requested by countries that require Pre- Shipment inspections as part of their import process. There are several reasons for that requirement:

· The country wants an expert opinion on the classification and the value of the products that are about to enter its territory.

· The country wants to fight corruption in its own ports of entry: by having a foreign, independent firm determine the classification and value of imported goods, its own Customs authorities have lost the ability to “be flexible” and change their classifications and valuations for a bribe. Such was the motivation when Indonesia demanded that any good shipped into Indonesia had to be pre-inspected by the Societe Generale de Surveillance.

· The country wants an estimate of the currency requirements it will face in the short term, and uses the value of the shipments subject to PSI to forecast its foreign currency needs.

· The country wants to generate some revenues in addition to the tariff it charges. Most of the countries requiring PSIs have long-term contracts giving an exclusive right to a single inspection company to inspect all of the goods about to enter its territory. Although it is pure speculation, it is likely that inspection companies compensate the country for this exclusive right by transferring a portion of the revenues generated by inspections to its Tresury.

13-4 Customs Clearing Process

The Customs clearing process differs from country to country, and tends to be arcance and cumbersome. In most countries, because of the complexity of the task, only certified Customs brokers or Customs agents are allowed to file the paperwork necessary to clear Customs. This section will only give a brief overview of the processes generally followed by Customs authorities worldwide and give examples based upon the United States system.

13-4a general process

In some countries, the process starts with an application for an import license, a request for the express authorization to import a certain product. Import licenses are usually granted according to a number of criteria, most of which are based on the availability of foreign currency to pay for the import, and on the availability of domestic substitutes. Generally speaking, countries with scarce foreign currency resources will attempt to limit the granting of import licenses to those companies that have generated export revenues, and to those companies purchasing goods for which no close domestic substitute is available.

For most countries, however, the process starts when an importer files an entry (i.e., notifies the Customs authorities that it will import – or has imported – a particular product ).There is usually a paper form (see Table 13-3) that has to be field and which must accompany all the documentation necessary for the import: invoice, Certificate of Origin, Certificate of Inspection (when required ), Certificate of Insurance, and other forms as required by the Customs rules of the importing country. In most developed countries, the importer is usually responsible for classifying the goods according to the tariff schedule of the importing country, and for determining the amount of duty. In many developing countries, this task is still left to the Customs authorities, which often delays the process of clearance. In most instances, the goods are not released to the importer (cleared) until after the duty is paid or after there is evidence from the importer that it will pay, a requirement often met with a Customs bond. Generally, Customs authorities will review a percentage of the entries made by importers after the goods have been cleared and will have a few months to a couple of years to challenge them. If an entry is reviewed satisfactorily, the entry is deemed liquidated . In some countries, such as the United States, an importer dissatisfied with the final decision of Customs authorities has a brief period of time to protest a liquidated entry and request a review before it id finally settled.

13-3 The Canadian Entry Form for Food Products
Canadian Food Inspection Agency	Agence canadianne d'inspection des aliments
IMPORT DECLARATION		DECLARATION D'IMPORTATION
1□ Dairy Products Products Laitiers	□ Orocessed Fruits and Vegetables Fruits et legumes transfrmes	□ Honey Mile	□ Maple Products Produits de I'erable
□ Pesticides Semences	□ Seeds Semences	· Feed Aliments du betail	□ Fertilizer Engrais
Registrable/Subjects a I'enregistrement
2 Name and Address of Manufactuer Nom et adresse du febricant	3 Name and Address of Exporter Nom et adresse de I'exportateur
4 Name and Canadian Address of Importer Nom et adresse canadience de I'importateur	5 Name and Address of Destination (consignee) Nom at adresse du destinataire
Telephone Number Numero de telephone		Telephone Number Numero de telephone
6 Transaction No./N' de transaction	7 Carrier/Transporteur
		9 Container No./N' de conteneur
8 Fright No./N' de vol	10 Trailer No./N' de remorque
PRODUCT DESCRIPTION AND PACKING (ATTACH LIST IF NECESSARY) DESCRIPTION DU PRODUIT ET DE L'EMBALLAGE (ANNEXER UNE AU BESSOIN)
11 Common Name Nom usuel	12 Brand Name Marque	13 Grade Categorie	14 No.of Shipping Containers Nbre de contenants
15 No.,Type and Net Contents of Individual Containers per Shipping Container/Nbre,type et contenu net des contenants individuets par contenant d'expedition	16.Total Net Quantity Quantite totale netle	17.Label Approval No.N'd'approbation de I'etiquette	18.Registration No. N' d'enregistrement	19.purpose of Importation Motil de I'importation	20.Addition documentation and other references Documents additionnents et autres references
I,＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿ the importer of the products described on this form do hereby certify that the information provided on this form is complete,correct and accurately describes the products contained in the shipment.	Je,＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿,I'importateur des Produkts decrits sur ce formulaire,certifie que I'information foumie surce formulaire est complete et qu'elle decrit avec precision less produits contenues dans cechargement.
By sugning this declaration in the case of the food products used for human consumption,I affirm that I have read the "Regulatory Requirements for Food Products Imported into Canada" set forth in the instructions to fill out this form and the products described on this form meet those reqirements.	En signant cette declaration,dans le cas de produits alimentaires utilises pour consummation humaine,j'affirme que j'al lu les "Exigences regiementaires pour les produits alimentaires au Canada" inscrites dans les instructions pour remplir ce formulaire et que les produits decrits sur ce formulaire satisfont ces exigences.
	＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿	＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿
	Signature			Date
GOVERNMENT USE ONLY /RESERVE A L'ADMINISTRATION
22.Stamp/Estampe	23.Instrctions to Customs and Importers/Directives aux douaniers et importateurs
	□ Au moment de I'importation,main levee et remise sous le controle d'AAC(pour I'inspection a I'arrivee a destination)
	Further action to be conducted on the shipment at the following place:
	□＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿
	Autres mesures a prendre a I'egaard du changement a I'endroit suivant
	□＿＿＿＿＿＿＿＿＿＿＿＿＿＿＿	＿＿＿＿＿＿＿＿＿
	Other instruction/Instruction particuliere
	＿＿＿＿＿＿＿＿＿＿＿	＿＿＿＿＿＿＿＿＿
	＿＿＿＿＿＿＿＿＿＿＿
	＿＿＿＿＿＿＿＿＿＿	＿＿＿＿＿＿＿＿＿

This information is collected by the Canadian Food Inspection Agency for the purpose of administering all Agriculture Acts. Information may be accessible of protected as required under the provisions of the Access to Information Act.

13-4b Customs Brokers

Because of the complexity and time-consuming nature of filling out Custom entries, many countries demand that importers delegate the task of interacting with Customs to a Customs broker, a representative of the importer that has acquired the knowledge and experience required to deal effectively and efficiently with Customs. In many countries, Customs brokers are the only entities qualified to enter goods (i.e., fill out the paperwork necessary to import goods). It is not the case in the United States, though, where importers can complete their own entries, as long as they have posted a Customs bond (see Section 13-4c). Customs brokers are usually compensated on a fee basis, for each entry they handle. In the United States, Customs brokers are highly qualified individuals who have to take a grueling test on issues of classification, duty computation, and quotas before being allowed to manage importers’ entries.

13-4c Customs Bonds

In most countries the importer has to pay the duty to Customs before the shipment can be legally released. However, this can be extremely unwieldy, especially in those cases where the shipment is an express package or a shipment of time sensitive produce, for example, Therefore, Customs authorities allow importers(or Customs brokers entering goods on their behalf) to post a surety bong, which is a guarantee that the importer or the Customs broker will pay the duty due. A bond is generally a sum of money deposited with Customs, from which any unpaid duty can be withdrawn, or an insurance policy with a surety company which acts as a guarantor of the importer or the Customs broker, and which it would be required to pay if the duty were not paid on time. This process allows goods to be entered before the duty is paid. In some cases, actually, the goods are sold much before the entry is liquidated.

In the United States, the bond is not just a guarantee that the duty will be paid on time; it is also a contract that obligates the importer or the Customs broker to perform all Customs-related functions in a timely manner, such as filing entries that are complete and accurate, as well as present Customs with the goods after they have physically entered the country, generally for inspection purposes.

13-4d Reasonable Care

Out of the United States Customs Modification Act of 1993 came the concepts of informed compliance and reasonable care , neither of which can be easily defined, but which have become pivotal to the efforts of the Customs Service in the United States

The idea behind informed compliance is that if an importer has been found compliant, the likelihood that one of its shipments is going to be inspected is minimal, therefore minimizing delays at entry and allowing the importer to organize its supply chain more predictably. It also lowers costs, as merchandise is cleared quickly and does not languish in some bonded warehouse while the importer and Customs argue about its correct classification valuation, or country of origin.

In order for an importer to be found compliant, it must show that it exercised reasonable care in the filing of its Customs entries. In order to demonstrate reasonable care, the importer must follow along list of obligations that the U.S. Customs service provides. The obligations center on making sure that the importer employs a Customs specialist, who will make sure that all---including the most recent---Customs regulations are followed, and that it has put into place a process by which it correctly determines the valuation, classification, and country of an import. Reasonable care is monitored through a system of compliance audits organized by the U.S. Customs.

Informed compliance

A standard of behavior set and enforced by the United States Customs, that is expected of importers if they want their Customs entries to be cleared quickly and if they want to keep Customs inspections to a minimum.

Reasonable care

A standard of behavior, set and enforced by the United States Customs, that is expected of importers if they want their Customs entries to be cleared quickly and if they want to keep Customs inspections to a minimum.

13-4e Required Documentation

The documentation required by any Customs authority can be extensive. Ideally speaking, there should be only three documents required in every country to make an entry;

· A form designated for entry ( specific to the record-keeping requirements of the importing country )

· A Certificate of Origin to ascertain the country of origin

· A Commercial Invoice with enough information to determine value and classification

However, many more can be included, from an import license to a series of certificates, most of which were introduced in Chapter7. One of the worst offenders is the country of India, with about fifty-four documents, as already mentioned in Section 13-3c. Many countries’ requirements are published electronically; a good number of them can be accessed through www.tradelinks.com .

The critical element of import documentation is that it is established on a per-transaction basis. Every import, however small, needs to have its own specific entry, which can lead to an inordinate amount of paperwork generated, under which both the importer and the Customs authorities are drowning. For example, in order to allow a shipment which landed in any of Europe’s many ports to travel to another country in the EU, a form has to be filed in quintuplicate---five copies---and there were 18 million shipments of this nature in 1999, netting a “paper blizzard” of 90 million copies which the European Customs authorities must store in warehouses.

There are several efforts made to simplify the process of importing merchandise and clearing Customs;

1. The most significant one is the automated (electronic) processing of entries, which was implemented by the U.S. Customs Service under the name of Automated Commercial System (ACS) in 1984, and is in the process of being progressively replaced with an Automated Commercial Environment (ACE) , to be completed by 2005. Several countries have adopted similar programs, but ,to this date, they are all incompatible. The World Customs Organization , with its Kyoto Protocol, and more recently the World Trade Organization, are working on harmonizing Customs requirements worldwide, but so far these efforts have only been marginally successful.

2. Great Britain’s Customs Agency has developed an International Trade Prototype with the help of U.S. Customs. The idea is that the same merchandise, exported from the United States and imported into Great Britain ,generates two sets of paperwork, as if it were two separate, stand alone processes. The international Trade Prototype allows the electronic documentation used for exporting the product from the United States to be used to import the product in the United Kingdom, which reduces the amount of paper generated significantly. The World Customs Organization is now considering a similar set-up.

3. The U.S. Bureau of Customs and Border Protection is also evaluating an Entry Revision Project , which would allow an importer to file entries periodically---say , at the end of the month --- rather than for ever

Transaction. Similarly, duty could be paid for several entries at the same time. Such a system would revolutionize the business of filing entries, bringing much simplification and expediency to the process.

13-4f Required Markings

Production imported in a country often require a marking—“made in (country)” or “product of (country)”---printed or affixed on the product itself or its packaging. Rules differ from country to country on the location of the marking, its size, and whether it needs to be permanently attached to the product. The determination of the country placed on the marking is also left to the country of importation. However, there are no known instances of a country on the marking being different from the country of origin for Customs duty purposes (see section 13-2c).

In the United States, markings are required for most products, although there is a list, maintained by the U.S. Bureau of Customs and Border Protection,