Export Credit Insurance - Nationality Requirements

Usually no nationality requirements have to be satisfied by the exporters. In a few specific cases the exporters must have the nationality of the country where the credit agency or the insurance company is based: the Dutch NCM, for example, requires the exporter to be Dutch when cover of political risks with reinsurance by the Dutch government is needed.

Other exceptions refer to the enterprise itself: in Austria, for example, insurance cover may be provided to enterprises domiciled in the country or abroad which export Austrian products or invest abroad, or to credit institutions domiciled in Austria or abroad which finance Austrian export.

In Denmark, insurance cover may be provided to an exporter or to a Danish or foreign bank that is financing a transaction by means of buyer’s credit.

In Germany, cover is available to German exporters and normally for goods manufactured in, and services rendered from within Germany, while in Spain there are no nationality requirements as far as the goods exported are Spanish.

In the United Kingdom, specific guarantees are restricted to UK companies or foreign companies exporting UK goods and services.

In Switzerland, the rules are stricter: applicants must be domiciled in the country and entered in the Register of Commerce.

In the non-European countries, two are the most required elements: in some countries, such as Australia, New Zealand, Hong Kong, and Malaysia rules are more tolerant and to be eligible for cover, business entities must carry on business or other activities in those countries.

In Eastern-European countries (Hungary, Poland, Czech and Slovak republic and Romania), in the Asian countries (Japan, Taiwan, Indonesia, Singapore, China, and Thailand) and in South Africa it is necessary to be legally resident, or the company should be registered there.

Particular conditions are required in Saudi Arabia, where, in order to qualify for cover, exporters may be either of the following:
- client of the Islamic development bank;
- persons who are nationals of a member state;
- corporations or other juridical entities, the majority of whose shares are owned by nationals of one or more member states and whose principal office is located
in a non-member state, provided that not less than 50% of its shares are owned by nationals of member states.

Percentage of Risk Cover in Export Credit Insurance

The analysis of the cover’s percentage shows that coverage accorded by ECAs and insurance companies is generally less than 100%: exporters are asked to bear part of the risk, and this part differs depending on the characteristics of the insurance policy.

Some institutions grant cover to supplier credits extended by the exporter, but not to buyer credits where the exporter’s bank lends to the buyer or his/her bank, while others accept both but with different coverage.

General criteria according to which a defined percentage of cover is provided are the following:

• type of risk: in most of the OECD and non OECD countries higher cover is granted for political (90-95%) than for commercial risks (85-90%);

• type of debtor: cover is higher in case of a public debtor, or when the debtor or the guarantor is a bank as opposed to the case of a private debtor; this is
the trend required by the Belgium Office National di Ducroire (OND);

• type of country of destination: in some cases, cover is higher if the country of destination is a member of the OECD; this is the criteria employed by the
Portuguese Companhia de Seguro de Creditos (COSEC) and many others.

Particular attention has to be given to the Export Credit Insurance Corporation of Poland (KUKE), which distinguishes between short and medium/ long term credits: in the first case, the cover for political and catastrophic risks is up to 90%, and for commercial risks is up to 85%. In the latter case: under Buyer Credit facilities for both political catastrophic risks and commercial risk, up to 100% of the credit value while, under Supplier Credit facilities, up to 90% of the credit value for political/catastrophic risks; up to 85% of the value for commercial risks.

The actual percentage of cover granted is decided not only on the basis of the total transaction value, but also on the terms of payment requested and, especially, on the basis of an accurate assessment of the credit worthiness of both the country and the buyer. Such assessment is conducted using different sources of information, such as specific company’s information, International Monetary Fund and World Bank reports, and information from other diplomatic missions.

Even if the coverage does not differ greatly from one country to another, and the actual percentage granted depends on the characteristics of the buyer, rules of origin may allow the exporter to apply for an insurance policy in a country where conditions are more advantageous.

The concept of “conditions” relates not only to the amount reimbursed in case of loss but also to the premium charged, to the availability of policies covering particular types of risks or certain kinds of goods and to the length of the contract. The exporter can successfully apply for an insurance policy in a different country only if the terms of rules of origin, previously underlined, are respected.

The Link Between Rules of Origin and Export Credit insurance

The link between rules of origin and export credit insurance The notion of rules of origin has great relevance even outside the general context of the WTO Agreement.

Insurance Companies and Export Credit Agencies, for instance, require applicants for an insurance policy to comply with rules of origin set by them and adopted on a case by case basis. Even though general principle and classification methods are the same used and referred to in the Agreement, insurance companies, usually, apply rules of origin drawn up in an independent way according to their institutional purpose.

Rules of origin are adopted by ECAs and insurance companies to define the maximum percentage of foreign content (or the minimum percentage of domestic
content) on which they base the granting of their financial services. Therefore, the product’s origin is a remarkable decisive element for the exporter.

Entrepreneurs who apply for an insurance policy are requested to accept the rules of origin that are stated in a different and autonomous way by each Export Credit Agency and insurance company.

Rules of origin are, thus, an important factor in determining both the tariffs that are imposed on specific goods and whether quantitative and other trade restrictive measures may be applied to imported goods. Their application is also fundamental as criteria to apply for an insurance policy. Consequently the manner in which these rules are formulated and applied may have a relevant impact on the entrepreneur’s decisions.

Considering rules of origin may provide for either discriminatory trade measure or higher percentage of risk not insured, they have a significant impact on the strategic planning of firms. In the first case, exporters analyse the different rules, quantify their costs, treat them as a factor of production in determining where to source their investments, purchase their raw materials, produce or purchase intermediate materials and assemble the final products. In the second case, the entrepreneur decision on if and to whom apply (which agency and in which country) for a credit insurance is influenced by rules of origin and the percentage of cover granted.

In order to apply for an insurance policy, the nationality of the good is the guideline to determine the percentage of risk that will be covered. Since a high
percentage of foreign content leaves most part of the risks on him, the entrepreneur has to consider:
• the method used to determine the origin of products
• the percentage of domestic content necessary to be provided by the insurance cover
• the percentage of foreign content accepted in the insurance policy
• the exceptions to the rule related to particular originating countries
• the reduction of the risk coverage due to the presence of higher foreign content
• the amount of the reduction of risk coverage

In addition, it becomes important for him to know the percentage of cover granted by each Export Credit Agency for all types of risks (political or commercial) if local costs are covered and within which limits, and the nationality requirements to provide insurance cover. It is obvious that the adoption of rules of origin by ECAs and insurance companies has relevant influence on the producer’s and exporter’s decision-making; as more local industrial processes and materials are employed in the manufacture of a product, the percentage of risk covered increases.

Origin rules play also an important role with regards to the exporter’s need of financial resources: funds available at more convenient terms in another country can be obtained thanks to insurance cover or guarantee provided by that country’s export credit insurance company. Rules of origin encourage enterprises to diversify their economic efforts and to carry out more industrial processes within their territory and, whenever possible, to use local materials.

The decision to acquire inputs or to apply for an insurance policy in another country involves the evaluation of transaction costs. The final resolution will depend on an accurate analysis of costs and benefits related to each option. Hence, knowing which origin rules are in force in other countries becomes an important instrument for the entrepreneur to be more efficient and thus more competitive on the market place.

Institutions Providing Export Credit Insurance

Export credit insurance, guarantees and/or funding support are usually provided by specialised institutions, the Export Credit Agencies (ECAs), which can be governmental, semi-governamental or private agencies, established with the aim of facilitating exports and enhancing trade through the provision of their services.

Originally these services were provided by state-owned institutions but in the last ten years, risks insurance has been taken into consideration by private sector insurance companies, which usually guarantee short-term commercial risks.

Export credit agencies and insurance companies nowadays assume different forms: a section of a ministry, a government agency, a semi-public joint stock company or a private institution sometimes operating on behalf of the government. The actual distribution of the insurance and financing activities among institutions depends on the country’s laws and regulations. In some cases, official financial support is provided only when backed by an appropriate insurance; in other cases, the entry of private banks and insurance companies into the market is forbidden.

The growth of the private sector is connected to the gaps it fills in the programs of the official credit agencies, for example by insuring pre-shipment risks, pre-export financing, countertrade deals and existing investments. Its development benefits exporters, in terms of improved insurance programs, policies and conditions of coverage, as well as insurers, thanks to expanded activity.

Some state-owned ECAs have been privatised during the last years: the Export Credits Guarantee Department (ECGD), former British Government department, or the Compagnie Française d’Assurance pour le Commerce Extérieur (COFACE), which has also expanded itsoperations in many countries by creating Credit Alliance, an international network of specialised credit insurers.

In certain cases, namely when exports from different enterprises of different countries are to be financed, public and private agencies become partners: as for example in the case of COFACE and ECGD signed in 1995 an agreement that enables Anglo-French bids on major overseas projects. Private agencies also try to co-ordinate their policies on major issues and to exchange information on borrowers. This cooperation has induced the development of institutional arrangements, operating mainly through OECD, the Berne Union and ICIA.

Types of Export Credit Insurance Against Risks

The degree of protection offered by credit insurers, i.e. the amount of reimbursement, depends on the nature of the risks themselves. Credit risks may be
classified as follows:
Political and economic risks:

• War, hostilities, civil insurrections, rebellion, strikes or other disturbances outside the exporter’s country;

• Risks arising from economic events (including shortage of foreign exchange or other restrictions imposed by the buyer’s government) that prevent the transfer of payments or the importation of the goods into the country;

• Boycotts which effectively prevent or restrict the importation of goods into the buyer’s country;
• Natural disasters.

Commercial risks:
• Insolvency resulting in: sequestration, liquidation, judicial management;

• Protracted default: failure of the buyer to pay an undisputed debt within a fixed period (usually six months) from the due date;

• Repudiation: refusal of the buyer to take delivery of the goods without any apparent valid reason.

Various types of export credit insurance are available to meet the exporter’s needs for risk coverage. The main categories are:

- Short-term export credit insurance relating to credits not exceeding 180 days: it is mostly employed when exports are conducted on a cash or letter of credit basis.

Insurance of this type (turnover or global policy) generally covers the firm’s entire turnover and it is issued within an agreed upper limit when the exporter has a large number of export operations. Pre-shipment and post-shipment policies are available: pre-shipment insurance grants protection from the date of validity of the contract until shipment; post-shipment insurance grants protection from the date of shipment until the goods have reached the buyer and payment has been received.

- Medium- and long-term export credit insurance: it is issued for credits extending for periods up to five years (medium-term) or longer (long-term). It provides cover for financing exports of capital goods and services or construction costs in foreign countries.

- External trade insurance: it applies to goods not shipped from the originating country and it is not available in many developing countries. The external trade insurance covers the same risks covered by the short-term export credit insurance policy, with the exception of political risks.

- Foreign exchange risk insurance: it covers losses from fluctuations in the relative exchange rates of the importer’ and the exporter’s national currencies over a defined period running from the date the exporter quotes a definite price.

- Transfer risk insurance: it covers from the risk that the buyer will not be able to convert local currency into foreign exchange and therefore will be unable to effect the payment. Transfer risk, also known as conversion risk, can arise from exchange restrictions imposed by the government in the buyer’s country.

The Benefits of Export Credit Insurance

Export credit insurance is a trade financial facility that provides an important support to exporters needing financial resources to enlarge their economic potentialities
by insurance coverage from different risks they face in their activity.
Export credit insurance is thus an important instrument for exporters both in developed and indeveloping countries. It provides the following benefits:

1. Exporters can offer their buyers competitive payment terms.

2. They are insured from political and commercial risks.

3. They are protected against financial costs of non-payment.

4. They have freer access to working capital and they are covered against losses from variations in currency exchange rates after non-payment occurs.

5. Their insurance cover reduces their need for tangible security when negotiating credit with their banks.

Exporters are often exposed to credit risks: the buyer may not be able to pay on due date, payments may be suspended for political reasons or recovery of goods may be unfeasible.

Credit insurance provides protection in the form of reimbursement in the event of non-payment. The insurer compensates exporters and their creditors against loss deriving from causes outside their control and from events occurring outside their own country which are not normally insured under other types of policies, such as marine or fire insurance policies.

The insurance cover or the guarantee granted by the insurer enables the exporter to obtain funds from a bank, funds that are often difficult to be obtained without providing securities. Hence, the exporter has better access to working capital and can offer extension to the buyer. Credit insurance benefits the exporter’s financier as well: in case of loan default, a credit insurance policy reduces the dependence on tangible assets.

As an efficient export credit insurance market is essential for exporters, rules and regulations must be set up to avoid unfair competition and decreasing quality of the services offered. The first step towards harmonisation and transparency in official export credit systems was by the EU on 7 May 1998; the Council has then adopted a Directive concerning harmonisation of export credit insurance for transactions with medium and long-term cover. The directive attempts to reduce distortions of competition among enterprises in the Community caused by differences in official export credit systems in Member States.

Before this Directive came into force, the conditions of export credits that benefit from such insurance or guarantees were provided in the OECD Arrangement on Guidelines for Officially Supported Export Credits. It contains limits on the terms and conditions for export credits with a duration of two or more years that are officially supported, i.e. that are insured, guaranteed, refinanced or subsidised by or through ECAs, without covering the conditions of insurance or guarantees. European Union countries were required to bring into force the laws, regulations and administrative provisions necessary to comply with the Directive by 1st of April 1999.

Member States have therefore made some changes in their systems and, where necessary, they have made notifications in accordance with the requirements of the Directive. It is too early to draw any conclusions on the operation as it is too early to assess whether any changes will need to be made to the directive. The Commission is due to submit a report to the Council by 31 December 2001 on the experience gained and the convergence achieved in applying the provisions laid down in the Directive.

The advent of the Euro has had an impact in the field of export credits, particularly where official supported financing is concerned: previously there were Commercial Interest Reference Rates (CIRRs) for most Member States currencies and also for the ECU. CIRRs are the minimum interest rates that can be officially granted by national export credit agencies under the OECD Arrangement on Guidelines for Officially Supported Export Credits.

A single Euro CIRR now prevails for all Member States in the Euro zone instead of the national CIRRs. The Euro CIRR is also used by other participants in the OECD Arrangement whenever financing is named in Euros.

Rules of Origin and The Impact on the World Trading System

The lack of harmonisation in rules of origin regulation is still providing countries with the opportunity and incentive to use their rules of origin to implement protectionism in trade policy and to accord disparate treatment to similar goods.

In the increasingly globalised nature of production, there is no single correct definition of origin. Nowadays, the origin is determined according to the way rules of origin are formulated and applied. It means that countries, using Rules of Origin in a results-oriented manner as a trade policy tool, can control the degree of preferential treatment in international trade. Rules of origin may, for example, be utilised to restrict the import from particular sources.

As a consequence of the increasing number of free trade area agreements, it is also important to consider the link between rules of origin and regional free trade areas.

In a free trade area, tariffs and quotas are eliminated on goods originating from and traded between member countries. In a custom union the same principle applies with the added element of the determination of a common external tariff applied to goods originating from non-member countries.

Sometimes rules of origin generate distortions since they encourage countries to use local factors of production in order to facilitate the determination of origin and to benefit from preferential measures addressed to them. In this way, local inputs may be preferred even when it is economically more efficient to import them.

Rules of origin encourage countries to diversify their economic processes and produce within their national territory and to use whenever possible local materials in the manufacture of products. Sometimes, however, it would be more efficient for a country to import certain materials or to carry out specific industrial processes abroad because of cheaper or of higher quality. Nevertheless, the benefits deriving from the national origin of the goods make countries move into the opposite direction.

Criteria for Defining the Origin

The determination of origin does not present special difficulties when the product is “wholly obtained or produced” in one State. But it has become increasingly complex as a result of the globalisation of the world trade and the activity of pannational companies. Producers may source the components from different countries or may manufacture the product in subsequent stages in different countries. In this case problems arise in determining the spot of production.

A product originates in a particular country either if it is “wholly obtained and produced” in its customs territory or if it has undergone “substantial transformation”.

The substantial transformation method states that a good originates from the last country where it emerged from a given process with a distinctive name, character or use. It requires that the product has been transformed into a new and different article.

It means that exporter, importer or producer are requested to furnish a great deal of factual information to prove substantial processing. What is to be determined is whether the change, manufacturing or processing is of such a substantial nature to justify the conclusion that the article is a product of the country where this change took place. A change of use is usually considered as a determinant factor if the processing or manufacturing transforms the product from one that is suitable to one use to one applicable for another use or for multiple uses. A processing operation that merely completes an article normally does not constitute a change in use sufficient to substantially transform the article.

Substantial transformation can be basically defined according to three criteria: the “value-added “ criterion, the “ process” criterion and the “change in tariff classification” criterion.

- The value-added or ad valorem percentage test: it defines the degree of transformation required to confer origin to the good in terms of minimum percentage of value that must come from the originating country or of maximum amount of value that can come from the use of imported parts and materials. If the floor percentage is not reached or the ceiling percentage exceeded, the last production process will not confer origin.

The value of the goods exported is normally calculated using the cost of manufacture and the price at exportation: the value of the constituent materials might be established from commercial records or documents. Two problems arise: firstly, border-line cases, determining a slight difference above or below the prescribed percentage, because a product failed to meet origin requirements; secondly, elements such as the cost of manufacturing or the total cost of the products are usually difficult to assess and may have different interpretations in the country of exportation and in that of importation. This criterion is applied by Australia, Canada, New Zealand and the United States and also by Bulgaria, the Czech Republic, Hungary, Poland, the Russian Federation and Slovakia. The latter group of countries has fully harmonised the criterion applied.

- The specified process tests of origin: it confers origin to the product based on the results of tests it must undergo. This criterion is applied by the European Community, Japan, Norway and Switzerland.

- The change in tariff classification method: it is the most widely applied criterion. It determines the origin of a good by specifying the change in tariff classification of the “ Harmonised System of Tariff Nomenclature” (HS) required to conferring origin on a good. As a general rule, imported materials, parts or components are considered to have undergone substantial transformation when the product obtained is classified in a heading of the HS at the four-digit level which is different from those in which the non-originating inputs used in the process are classified.

However, since sometimes the CTH rule is not able to determine the origin of a product, preference-giving countries have drafted a list, the Single List, of working or processing to be carried out in non-originating inputs in order that the final products may obtain originating status.

Global Harmonisation of Rules of Origin

In 1953 the International Chamber of Commerce made the first attempt to harmonise rules of origin: it submitted a resolution to the contracting parties recommending the adoption of a uniform definition for determining the nationality of manufactured goods. In the 1970’s another effort was made with the Kyoto Convention.

It came into force the 25 September 1974, with the aim of attaining a harmonised scheme of custom procedures. The text is divided in two parts: the body of the Convention and the Annexes. As each Annex considers a specific customs procedure, the most important for the purposes of this paper are the “D.1. Concerning rules of origin”, “D.2. Concerning documentary evidence of origin” and “D.3. Concerning the control of documentary evidence of origin”.

The Convention has particular relevance since it explains the most used criteria to determine the origin with their main advantages and drawbacks, and provides suggestions about their use.

The use of the rules of origin to implement trade restrictive and trade distortive policies finally lead to the inclusion of “rules of origin” as a topic of the Uruguay Round multilateral trade negotiations. The WTO Agreement on Rules of Origin was part of the outcomes of the Uruguay Round: it sought to harmonise the non-preferential rules of origin used by signatory countries into a single set of international rules. By drafting the rules in a multilateral context where all countries are represented and the adopted rules are used for all non-preferential purposes, the possibility for a single country to draw up rules in politically motivated ways has thus been limited.

A specific program was set up, and two new institutions were created to reach this purpose. The first one was the Geneva-based Committee on Rules of Origin (CRO) at the WTO, the second body was the Brussels-based Technical Committee on Rules of Origin (TCRO) of the World Custom Organisation. The Harmonisation Work Programme (HWP), which was launched on 20 July 1995, was scheduled for completion within three years of its initiation, i.e. by July 1998. However, due to the complexity of the issues, the work has still not been completed.

Negotiation difficulties can be attributed to problems such as:

1) the definition of goods which are wholly obtained in one country, in particular when they are related to products extracted from international territories, as in high seas or outer space;

2) the need for further refinement of the definitions of minimal operations and processes which do not by themselves confer origin: processes like assembly, disassembly, bleaching, drying, cutting and sewing, blending, packing and packaging, colouring must be classified and ordered in the definition of “substantial transformation”;

3) the need of product-specific rules for particular product sectors.

In order to achieve harmonisation, committees are working on a detailed uniform definition for determining when goods are wholly obtained in one country, on a list of minimal operations or processes that do not by themselves confer origin to a good and finally on the definition of last substantial transformation. The determination of the last transformation will depend on the change in the tariff classification method through the use of the harmonised system combined, when necessary, with tests of value-added and others specific methods.

As of May 2000, measurable progress had been made with respect to the general rules but the TCRO is still unable to complete the work owing to the divergence of views over the method of application for the primary and residual rules. The work is currently in progress.

Classification of “Rules of Origin”

There are two types of rules of origin: non-preferential and preferential.

Non-preferential rules of origin are used to distinguish foreign products from domestic products when a country does not want to provide the former with the same treatment granted to the latter. In some countries, for example, public procurement either excludes foreign products or reserves certain transactions to domestic products, or grants a margin of preference to them.

According to WTO Agreement, signed in Marrakech in 1994, “the general notion of rules of origin shall include all rules of origin used in non-preferential commercial policy instruments, such as in the application of most-favoured-nation treatment, anti-dumping and countervailing duties, safeguard measures, and any discriminatory quantitative restrictions or tariff quotas”.

Hence, non-preferential rules are important for several reasons including the application of tariffs, quotas, antidumping and agreements on textiles and clothing.

Preferential rules of origin are used to determine which goods may enter a country under a preferential treatment. They define if goods are eligible for special treatment under a trading arrangement between two or more countries, such as the Generalised System of Preferences (GSP)2, free trade areas, bilateral and regional integration agreements. According to the agreements, certain products benefit from duty-free or duty-reduced entry into the nations granting special treatment, provided that they originate from specific countries. If the product is judged as “not originated” from that country because, for example, it has not undergone substantial transformation or has had little value added there, the applicable tariff rate would usually be the mostfavoured- nation rate.

The WTO Agreement on Rules of Origin is applied only to non-preferential rules of origin. It is not applicable to the process of determination of the country of origin for preferential trade, for which the origin is determined on the basis of the provisions prescribed by a country for the particular system of preferences. Recognising that some Members applied preferential rules of origin, distinct from non-preferential ones, a “Common Declaration with Regard to Rules of Origin” has been added to the main document. In this Declaration, members agree to apply many of the same general principles for rules of origin to those rules, which they use to administer preferential arrangements (either in free trade areas or within GSP) and to notify these rules.

However, they do not accept to apply harmonised rules for preferential purposes.

For the aims of this Common Declaration, “preferential rules of origin shall be defined as those laws, regulations and administrative determinations of general application applied by any Member to determine whether goods qualify for preferential treatment under contractual or autonomous trade regimes leading to the granting of tariff preferences going beyond the application of paragraph 1 of Article I of GATT 1994”.

Within this context, the main purpose of rules of origin is to ensure that benefits arising from preferential tariff treatment under the Generalised System of Preferences (GSP) or any other preferential arrangement is limited to products that have been produced or manufactured in the preference-receiving country.

Therefore, rules of origin are crucial instruments both to identify the nationality of a given good and to determine whether and which commercial arrangements have to be applied. They are also a tool of trade policy to differentiate between priority partner states.

The differences between the two regimes are the mirror image of deliberate different trade policy objectives and the rationale for this differentiation has been underlined in the framework of the EU rules of origin by the European Court of Justice (ECJ) in the S.R. Industries v. Administration des douanes case.
For example, custom unions and free trade areas may have their own origin rules; the same is for a country that takes part in the Generalised System of Preferences (GSP).

Insurance for International Trade

Insuring goods in transit

Cargo insurance covers loss of or damage to goods while in transit by land, sea and air.

Many exporters arrange insurance and freight but pass on the cost to the buyer. Foreign buyers often insist on this service, because rates in the UK are relatively cheap.

The benefits:

• you have greater control over the risk as the UK insurance industry is highly regulated
• you could win business from competitors who do not offer insurance

Remember that if you leave your buyer to arrange insurance, they will do so before paying for the goods. You may not be paid in full if there's a problem and they're not adequately insured. In addition, if the goods are rejected when they get to the port of entry or to the customer's premises, they won't be covered by insurance, and the responsibility will be back with you.

Imports

You will minimise your risks if you arrange insurance of goods that you import. You'll know how much you are paying and what's included. Your supplier might not be able to give you full details of insurance cover they arrange, or if they do, the information may not be entirely reliable.

The following types of cover are available:

• open cover - for all journeys
• specific (voyage) policy - for one-off shipments
• seller's interest contingency - back-up for physical loss or damage where you've not arranged the cargo insurance

Cargo Insurance

A specialist cargo insurance broker will find you a good price, ensure the cover suits your needs and help you with claims.

Some banks offer cargo insurance as part of a finance package. You can also ask your freight forwarder for a quote, but research suggests that their costs and service don't match those offered by specialist brokers.

You need to be aware that carriers, freight forwarders or third-party service suppliers will not automatically insure goods that are under their care or control. They can only do so if instructed in writing.

Insurance intermediaries must be registered with the Financial Services Authority (FSA). This applies to freight forwarders and others who provide insurance of goods in transit.

Manage Your Euro Currency Risk

The main disadvantage of making and accepting euro payments is that it exposes you to currency risks. If the exchange rate between sterling and the euro moves between the times when prices are set and when payment is made, you may lose out.

For example, if the euro weakens after an exporting business sets its euro prices, it will still receive the agreed number of euros but these will be worth less when converted into sterling.

Similarly, if the euro strengthens after an importer agrees the price in euros for a delivery of goods, the importer will need to use more sterling than expected to buy the euros he needs to make the payment.

This can work the other way - you may gain from favourable movements in the exchange rate. But these exchange rate changes are very unpredictable and it is wise to take steps to minimise your risks.

There are a number of ways you can counter your exposure to exchange rate risk, sometimes referred to as "hedging" your currency risk:

• Ask your bank to open a euro bank account for you. This lets you make and accept euro payments without having to convert into sterling every time.
  
• Use a forward exchange contract, where you agree to buy or sell an agreed amount of foreign currency at a certain exchange rate by a specified date. These remove uncertainty by tying you in advance to an agreed exchange rate.
• Use currency options. These agreements are more expensive than forward exchange contracts but give you more flexibility by giving you the option, without the obligation, to buy or sell euros at an agreed exchange rate.

Top Ten Tips For Successful Exporting

1. Research your market - does your prospective foreign customer need what you are selling at the price that will yield you a profit? What is the competition and how will they react?

2. Implement an export strategy and review your capabilities - ask yourself: what would my business gain from exporting?

3. Construct an export plan - define how you will enter the foreign market. Finalise human resources and marketing strategy and allocate an adequate budget to cover export start-up costs.

4. Choose your sales presence - establish whether you need a direct sales operation. Or is an agent or distributor more effective? How will you manage your overseas sales presence?

5.Promote your product - how are you going to market and sell your product? Customise marketing to the target country.

6. Get the Customs side right - contact local customs office to clarify requirements. Make sure your reporting practices are watertight.

7. Get paid on time - ensure your cashflow will remain at a safe level. Guarantee sufficient credit for your future sales. Take out insurance cover if necessary.

8. Choose your distribution methods - consider the implications of selling over long distances and across national frontiers.

9. Transport goods effectively - assess and choose the most effective transport method and make sure the goods are insured by you or the importer.

10. After-sales policy - regularly liase with customers, export agents and banks. Monitor political unrest or other adverse conditions in the country of destination. Manage regular servicing and warranty claims.

Export and Import Terminology M - Z

M

Marking: letters, numbers and other symbols placed on cargo to enable it to be identified more easily.

Marine insurance: warehouse-to-warehouse insurance that covers exporters transporting goods overseas for losses they can't legally recover from the carrier. Despite its name, it covers all transport modes. (See also Credit-risk insurance.)

Movement certificate: required where goods are being exported from the EU to a country covered by EU trade agreements. These certificates ensure preferential rates of duty on an exporter's goods.

MTS (Multilateral Trading System): the processes through which large numbers of countries agree to trade with each other. The World Trade Organisation is part of this system.

N

NCTS: HM Revenue & Customs' (HMRC) computerised transit system, introduced in 2003.

NES: HMRC's export system, introduced in 2002.

O

Open account: a trade arrangement under which goods are shipped by an exporter without guarantee of payment. This is similar to an UK exporter offering credit to a UK customer, with the exporter bearing all the risks of offering credit. Open account payment should only be used if you have an established relationship with the buyer and is typically for exports within the EU.

Open General Import Licence (OGIL): available from the Department of Trade and Industry in UK, this allows the import of most goods from outside the EU without licensing formalities. But some goods require a special licence and are listed in a schedule to OGIL.

Open insurance policy: marine insurance policy that applies to all shipments made by an exporter over a period of time rather than a single shipment. (See Marine insurance.)

P

Payment in advance: an exporter may be able to negotiate these terms for all or part of its shipment. The exporter bears no risks or financing costs. Payment or part-payment in advance is typically used for low-value sales to individuals or new customers.

Pre-shipment inspection (PSI): a few countries require goods and documents to be examined before export by an independent agency. In some countries it's optional but can be requested by the customer. Usually, countries where PSI applies have appointed one dedicated agency to perform the pre-shipment inspection. Normally, your freight forwarder or customer will be able to advise on the necessary arrangements.

Pro forma invoice: invoice provided by an exporter to an import customer before shipping. Typically used when the importer has to organise foreign exchange or get an import licence.

Q
Quota: quantity of a particular type of goods that a country allows to be imported before levying duty or restrictions.

Quotation: offer to sell goods at a stated price and under specified conditions.

R

Reduced rates of duty: some goods can be imported into your country at a nil or reduced rate of customs duty because they originated in a preference country or are from a non-EU country and qualify for a temporary suspension of customs duty.

Re-exports: goods temporarily imported into a country and then exported again. Because they are only imported temporarily, the importer or agent is usually permitted to reclaim some or all of the import duty and VAT paid on the goods.

Usually the importer must comply with special customs control procedures, such as specific warehousing regulations. (See also Inward processing relief).

S

Single Administrative Document (SAD): also known as the C88, this document must be completed for all exports, imports and goods transiting the EU.

SITPRO (formerly The Simpler Trade Procedures Board): public body which aims to help businesses trade more effectively across national borders and cut the red tape associated with international trade.

Standard industrial classification (SIC): standard numerical code used by the UK government to classify products and services.

Standard international trade classification (SITC): standard numerical code system developed by the United Nations to classify commodities used in international trade.

Standard shipping note: document completed by the exporter which tells destination ports and container depots how the goods should be handled. A dangerous goods note must also be sent with hazardous goods.

T

Tariff: customs duties on imports of goods. They give price advantages or parity to similar locally produced goods and raise revenues for the government that levies them.

Tariff quotas: European Union (EU) system to allow the importation of limited amounts of certain goods (sometimes from specified countries) at a rate of duty lower than would otherwise apply.

Terms of delivery: cover the division of responsibility for the costs of an export or import sale and for the risk of loss or damage in transit.

TIR: transports internationaux routiers. International system that allows goods to be packed in a container under customs inspection at point of origin. The container can then pass across all national frontiers without being opened by customs officers.

U

UNCTAD: United Nations Conference on Trade and Development. Main arm of the United Nations General Assembly dealing with trade, investment and development issues.

V

VAT: value added tax - in general terms VAT is payable on all imports at the same rate that would apply to the product or service if supplied in the UK. Many exports are zero-rated for VAT.

There are complex rules surrounding VAT on imports and exports, and UK businesses should seek advice from the HM Revenue & Customs National Advice Service Enquiry Line on Tel 0845 010 9000.

W

World Trade Organisation (WTO): intergovernmental organisation set up in 1995 to negotiate and administer trade agreements, handle trade disputes and monitor national trade policies.

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Export and Import Terminology - E - L

E

EFTA: European Free Trade Association. Members are Iceland, Norway, Liechtenstein and Switzerland.

Eurodollars: US dollars deposited in Europe.

Export Cargo Shipping Instruction (ECSI): issued by exporters to the freight forwarder or carrier, telling them what the goods are, the terms and conditions for movement of the goods and cost allocation.

Export Credits Guarantee Department (ECGD): the UK Government's official export credit agency. It helps UK manufacturers and investors trade overseas by providing them with insurance and backing for finance to protect against non-payment.

Export invoice: part of the documentation needed if you ship your goods abroad. It should contain a full description of your goods, their price, weight and country of origin.

Export house: intermediary organisation between an exporter and a buyer.

Export licence: government document legally required for the export of certain goods such as pharmaceuticals, chemicals and munitions. It's the exporter's responsibility to obtain a licence if necessary.

Export packing list: this is attached to the outside of the package to be shipped and specifies the weight, volume and type of cargo.

Export preferences: preferential rates of duty charged on certain goods exported from the your country, in effect allowing the buyer to benefit from a lower or zero rate of Customs duty.

EXW: ex work. This is an Incoterm (see Incoterms). The seller makes the goods available to the buyer at their own premises or another named place. The buyer assumes all the costs and risks of clearing the goods for export and loading and transporting the goods.

F

FAS: free alongside ship. This is an Incoterm (see Incoterms). The seller clears the goods for export. Delivery takes place when the goods are placed alongside the relevant ship at a named port. From this point the buyer bears all costs and risks.

FCA: free carrier. This is an Incoterm (see Incoterms). The seller is responsible for clearing the goods for export and delivering them to a specified place. This could be the seller's premises or those of a carrier or freight forwarder. The place of delivery determines who is responsible for loading or unloading the goods. Once the goods are delivered the buyer bears all costs and risks.

FOB: free on board. This is an Incoterm (see Incoterms). The seller clears the goods for export and delivers when the goods are passed over the ship's rail at the specified port. From this point on the buyer bears all costs and risks.

Foreign and Commonwealth Office (FCO): government department responsible for foreign affairs in UK.

Foreign-currency accounts: it may be more convenient for you to set up foreign-currency bank accounts if you frequently issue foreign-currency invoices. In particular, a euro bank account gives you flexibility in trading with businesses in eurozone countries.

Foreign-exchange risk: you're particularly at risk if you hold or receive a foreign currency which is volatile or very weak. Some currencies present extra difficulties - for example, there may be exchange controls requiring government approval before you can exchange a particular currency.

Forwarding agent: most smaller importers use a forwarding agent to handle customs clearance for goods.

Forward foreign exchange contract: exporters can hedge against the risk of adverse exchange rate movements by using a forward foreign exchange contract. You agree to sell the bank a particular foreign currency at a fixed future date for a price that is set now.

Free circulation: goods are in free circulation in the EU if they originate from an EU country or have already been imported, all customs charges paid, into an EU country.

Free trade zone: port designated by a country's government for duty-free entry of non-prohibited goods.

Freight forwarder: if you want to send goods overseas you'll normally need the services of a freight forwarder. The forwarder quotes for freight costs and other charges, prepares most of the freighting and customs documents, arranges marine insurance and attends to other freighting details.

G

Groupage: this allows exporters of small consignments to gain the benefits of containerisation. A freight forwarder undertakes to group together different exporters' consignments to fill a whole container for a particular destination.

H

HM Revenue & Customs (HMRC): UK government department with responsibility for collecting VAT and other taxes and customs duties. It's also charged with preventing illegal imports of drugs, alcohol and tobacco smuggling and VAT and duties fraud.

I

Import licence: some countries may require import licences for certain or all goods. As an exporter it's normally your customer's responsibility to comply with import procedures, but it's a good idea to check they're doing so.

Import paperwork: goods in free circulation within the EU generally require minimal documentation. But if your imports exceed £225,000 you must provide Intrastat (see Intrastat) declarations to HMRC for statistical purposes. And some goods need special documentation.

Goods imported from outside the EU require a range of import documentation and may also need an import licence.

Incoterms (International Commercial Terms): agreed rules which set out the delivery terms for goods which are traded internationally.

They allow the buyer and seller to agree responsibilities for the carriage of the goods, customs clearance and a division of costs and risks. The current version of Incoterms, agreed in 2000, contains 13 terms. They are grouped into categories covering various modes of transport.

Inspection certificate: sometimes required by the importer's country to confirm that the shipped goods meet its national specifications.

Insurance policy: should cover goods for at least their full value (110 per cent is common), and include details of quantity and route. Where necessary, it should also provide for time extensions and transhipments.

Intrastat: system for collecting statistics on the physical trade in goods (ie the actual movement of goods) between the member states of the European Union (EU). Businesses which import or export goods worth more than a fixed threshold must complete Intrastat supplementary declarations.

Inward processing relief (IPR): if you intend to re-export goods you've imported after processing them, you can apply for inward processing relief. This means VAT and duty only become payable if you decide to sell your goods in the UK or if you fail to meet the conditions of the scheme.

L

Letter of credit: banking mechanism that allows importers to offer secure terms to exporters. (See Documentary credits).

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Export and Import Terminology - A - D

A

Additional costs: the price you negotiate with overseas customers also needs to include some additional costs. For example, transportation costs may include the cost of special packaging and labelling, while the detailed documentation you generally need may involve extra costs.

Ad valorem: according to value (see Duty).

Advising bank: bank operating in an exporter's country that handles letters of credit (see Letter of credit) for a foreign bank by notifying the exporter that the credit has been opened in its favour. The advising bank lets the exporter know exactly what the conditions of the letter of credit are but isn't necessarily responsible for payment.

Air-Way Bill: a bill of lading (see Bill of lading) that covers both domestic and international flights carrying goods to a specified destination.

Anti-dumping: if a company exports a product at a price lower than the price it normally charges in its home market, it's said to be dumping the product. Member countries of the World Trade Organisation may be able to impose certain measures on other members that dump products on their markets.

Asian dollars: US dollars deposited in Asia and the Pacific Basin.

ATA: admission temporaire or temporary export, used in conjunction with the term carnet (see Carnet).

B

Bill of exchange: written document in which a supplier is guaranteed payment of a specified amount by a drawee by a fixed date. The drawee is generally the customer but is likely to be the customer's bank if the bill of exchange is used with a term letter of credit (see Letter of credit).

The bill can request immediate payment ("at sight" or "on demand"). It can specify payment at a later date ("the term"). Drawees become legally liable for payment once they accept (agree to pay) the bill.

Bill of lading: document generally issued by a shipper which acts as a receipt for goods received for carriage. In addition it provides evidence of the terms of contract between a shipper and a transport company under which goods are moved between specified places for a specified charge. And a bill of lading also acts as a transferable document of title to goods - meaning goods can be bought and sold simply by exchange of the bill. Bills of lading are used for all modes of transport - they're known as air waybills for airfreight. See also Air-Way Bill.

Bonded warehouse: warehouse authorised authorities concerned in the country for storing goods on which payment of duty is deferred until the goods leave the warehouse.

C

Carnet: Customs document which allows you to carry or send goods temporarily into certain countries for display or demonstration purposes without paying duty or posting a bond.

Cash in advance (CIA): full payment for exported goods before shipment is made.

Cash with order (CWO): the buyer pays for goods when ordering. The transaction is binding on both supplier and customer.

Certificate of inspection: document certifying that certain types of goods (such as perishable items) were in good condition before shipment.

Certificate of insurance: shows insurance cover has been arranged for goods being exported. It should detail the degree of cover and list the policy number and all other relevant details.

Certificate of manufacture: statement (often legalised by a notary) in which a producer of goods certifies that manufacture has been completed and the goods can be bought.

Certificate of origin (C/O): statement on the origin of goods. You may need one if you're exporting to a number of countries. They're available from your Chamber of Commerce for goods of EU origin.

CFR: cost and freight. This is an Incoterm (see Incoterms). The seller clears the goods for export and meets the cost of carriage to the port in the destination country. But the buyer bears all risks after delivery, which occurs when goods pass over the ship's rail in the port of shipment. The buyer also bears any extra costs caused by events that happen after delivery.

CIF: cost, insurance and freight. This is an Incoterm (see Incoterms). The seller clears goods for export and meets the cost of carriage to the port in the destination country, including insurance. But the importing buyer bears all risks, except marine insurance, after delivery.

Delivery occurs when goods pass over the ship's rail in the port of shipment. The buyer also bears any extra costs caused by events that happen after delivery.

CIP: carriage and insurance paid to (named place of destination). This is an Incoterm (see Incoterms). The seller clears the goods for export and pays for delivery to the named destination. The goods are delivered when the seller passes the goods to its carrier. From this point the buyer takes responsibility for all costs and risks. But the seller must also take out insurance to cover the buyer's risk during transport.

Commercial agent or sales agent: person or organisation appointed by exporter to sell and distribute goods in a foreign country. (See Distributor).

Commercial invoice: bill listing the goods and prices shipped by an exporter.

Confirmed letter of credit: letter of credit issued by an overseas bank but also confirmed by another bank. Under these circumstances you'll be paid by the confirming bank even if your buyer or the other bank defaults, providing the terms of the letter are met fully. (See Letter of credit).

Consignment: when goods are exported subject to consignment, the exporter only receives payment on completed sales. Any unsold items may be returned to the exporter, usually at their expense. This is a high-risk method of payment for an exporter.

Consolidator: company issuing bills of lading (see Bill of lading) for the carriage of cargo on vessels or aircraft.

Containerised/containerisation: the packing of goods for transport in sealed containers.

Convertible currency: a currency that can be bought and sold for other currencies at will.

Correspondent bank: bank that handles in its own country the business of a foreign bank.

CPT: carriage paid to (named place of destination). This is an Incoterm (see Incoterms). The seller clears the goods for export and pays for delivery to the named destination. The goods are delivered when the seller passes the goods to its carrier. From this point the buyer takes responsibility for all costs and risks.

Credit-risk insurance: insurance for exporters designed to cover risks of non-payment for delivered goods.

Customs commodity code: eight-digit commodity code required for exports outside the EU. It needs to be entered on your customs export declaration. Sometimes known as the "first eight digits of the Customs Tariff number" or "CN (Customs nomenclature) code", it's also used as the basis for the import declaration in the country of destination.

Customs Freight Simplified Procedures (CFSP): electronic declaration methods that simplify customs procedures for clearing non-EU imported goods either at a frontier or upon removal from a free zone or customs warehouse.

D

DAF: delivered at frontier (named place). This is an Incoterm (see Incoterms). The seller clears the goods for export and pays for delivery. The goods are delivered - not unloaded or cleared for import - when they arrive at the named place at the frontier of the importing country but outside the customs border. The buyer clears the goods for import and is responsible for all costs and risks from this point.

Dangerous goods note: document required when shipping hazardous or potentially hazardous goods.

DDP: delivered duty paid (named place of destination). This is an Incoterm (see Incoterms). The seller clears the goods for export and pays for delivery to the named destination. The seller meets all the costs and risks of clearing the goods for import, though the buyer may agree to bear some of the costs. The goods are delivered when they arrive, cleared for import but not unloaded, at the named destination.

DDU: delivered duty unpaid (named place of destination). This is an Incoterm (see Incoterms). The seller clears the goods for export and pays for delivery. The goods are delivered when they arrive at the named destination place, not cleared for import or unloaded. The buyer is responsible for clearing the goods for import and the associated costs and risks, though the seller can agree to bear some of these costs.

DEQ: delivered ex quay (named port of destination). This is an Incoterm (see Incoterms). The seller clears the goods for export and pays for delivery. The goods are delivered when they're placed on the quay at the named port of destination. The buyer is responsible for clearing the goods for import and the associated costs, unless agreed otherwise.

DES: delivered ex ship (named port of destination). This is an Incoterm (see Incoterms). The seller clears the goods for export and pays for delivery. Delivery occurs when the goods are placed at the disposal of the buyer on board the ship at the named port of destination. From this point the buyer bears the costs and risks of clearing the goods for import and unloading.

Distributor: overseas agent which sells for a supplier directly and maintains an inventory of the supplier's products. (See Commercial agent or sales agent).

Documentary collection: where you draw up a bill of exchange (see Bill of exchange), which allows you to keep control of your goods and raise additional finance.

An overseas bank, acting on your bank's behalf, will only release the documents necessary for your customer to take possession of goods once it formally accepts the terms of the bill. Documentary collections are typically used for exports outside the EU to customers you have an established relationship with.

Documentary credits: letters of credit are the most secure method of payment (other than payment in advance). Your customer arranges a letter of credit with its bank which pays a corresponding bank in your country - the advising bank - once you submit all the necessary documentation.

An accurate and authentic "irrevocable" letter of credit, verified by your bank, carries little credit risk. Documentary credits are typically used for exports to customers you have not sold to before, and for customers and countries that present particular credit risks.

Duty: you may be required to pay import duty if you are bringing goods into your country. There is no duty on goods that are in free circulation (see Free circulation) within the EU.

For goods that are imported from outside the EU, the rate of duty depends on the product and the country of origin. Duty is based on the cost, insurance and freight value (ad valorem duties) of the goods. Rates of duty can vary suddenly and without warning and can have a significant effect on the value of the goods.

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