Economic coverages in international trade
In international trade, transport and logistics costs have an important weight in the final price of the product...
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What is an international trade insurance?
There are several factors that can negatively impact international trade, such as financial, trade, exchange, transportation risks and more. To guarantee the success of international operations, companies normally contract foreign trade insurance that covers expenses in the event of an accident. All exporting or importing companies in the international market must be aware of the existing risks and contract insurance.
What are the main risks?
The main risks that can jeopardize international export or import operations can be:
- Financial risks
- Extraordinary or catastrophic risks
- Commercial risks
- Country risk
- Exchange risk
- Transportation risk
Economic, sociopolitical or cultural factors can affect international trade operations and represent financial risks. The extraordinary or catastrophic can be natural catastrophes such as tsunamis, hurricanes, earthquakes or terrorist acts or wars.
The commercial risks derive from the contractual breach of one of the two parties to the contract and can be: unilateral resolution, non-compliance, insolvency or non-payment or fraud.
Country risk represents all the risks arising from the economic and political situation of the country with which the trade is made.
International transactions can be affected by currency price fluctuations, due to variations in GDP, supply and demand or speculative movements, which represent exchange risk.
Transport in international trade is very important and represents a very high cost. It can be by land, air or sea, although the majority (85%) of international freight transport is by sea.
International transport and logistics is a complex process, in which many risks can appear: deterioration of merchandise, bureaucratic errors, delays in the delivery of merchandise, etc.
What are Incoterms?
Incoterms are a set of globally accepted and standardized rules for international trade, expressed in groups of 3-letter abbreviations.
To talk about international trade, it is necessary to define the main Incoterms used and what they include.
For all types of transport, we can find the following Incoterms:
CPT (Carriage Paid To)
In this case, the seller is responsible for all expenses until delivery at the established place (expenses of origin, export, main transport and expenses at destination).
On the other hand, the buyer is responsible for import procedures and insurance.
CIP (Carriage and Insurance Paid)
Apart from all the previous expenses (origin, export and freight expenses), the seller in this case has to take care of hiring an All-Risk insurance, which is mandatory.
The buyer carries out the import formalities and the delivery at the destination, assuming the risk when the merchandise is loaded in the first means of transport.
DAP (Delivered At Place)
In this case, the seller is responsible for all expenses and risks to the destination, less import procedures and unloading at the destination, which are at the buyer’s expense.
DPU (Delivered at Place Unloaded)
In addition to the DAP charges, the seller also covers the unloading costs, the buyer only has the import clearance procedures.
EXW (Ex Works)
The seller delivers the merchandise in his warehouse, at the disposal of the buyer, but all expenses and responsibility are carried by the latter.
DDP (Delivered Duty Paid)
It is just the opposite of EXW, in this case the seller assumes all expenses and risks, from packaging to delivery at destination (including export and import procedures, freight and insurance). The buyer only receives and unloads the merchandise.
FCA (Free Carrier)
The seller is responsible for the export costs and the internal transport costs, up to an established collection point, while the buyer is responsible for the costs from the time the cargo is on board, until its unloading.
Only for maritime transport, there are the following Incoterms:
CFR (Cost and Freight)
This Incoterm, which exists only for maritime transport, means that the seller is responsible for all costs until the merchandise reaches the port of destination (export clearance, origin costs, freight and unloading costs). In exchange, the buyer takes care of the import formalities, assumes the risk at the time the merchandise is on board and deals with the transport to the final destination.
CIF (Cost, Insurance and Freight)
It includes the same charges as CFR, with the only difference that the seller has to take out insurance for the merchandise, until it reaches the port of destination.
FAS (Free Alongside Ship)
The seller is responsible for the expenses until delivery at the port of origin and the export customs procedures, while the buyer is responsible for the merchandise on board, freight and other expenses to its destination, including insurance and customs clearance. import.
FOB (Free On Board)
The seller bears the charges until the merchandise arrives on board and is in charge of contracting the carrier, although the expenses are borne by the importer. The responsibility for risks is borne by the buyer once the merchandise is on board. This Incoterm is not used for goods that are transported in containers.
Types of insurance in international trade
The buyer must agree the insurance with the seller. Ideally, it should be a prestigious company that covers the maximum risks and in the event of a loss it is payable in the country of the buyer and in the established currency. As usual practice, 110% of the cost of the operation is covered.
The type of insurance and the responsibilities of both parties depend on the chosen Incoterm. In CIF and CIP Incoterms, for example, the seller is not required to contract an insurance with the maximum coverage.
Depending on the means of transport, the route and the merchandise, we can contract more types of insurance, with full or only partial coverage.
The size of the company and the volume of merchandise influence the choice of term. A large company has more bargaining power and can get better prices.
The choice of an Incoterm means that the risks are transferred to the seller or the buyer, in relation to the ownership of the merchandise.
Some types of insurance that we find in international trade:
Transport insurance is a contract that covers the merchandise against the various risks that may appear during its transport, during its transfer from one place to another for a certain time or during loading and unloading.
In this situation, the insurer assumes the damages and material losses of all merchandise transported by land, air, river or sea. In this way, inventory losses, damages, delivery delays, etc. can be avoided.
Although it is not mandatory, insurance with maximum coverage is highly recommended, even more so in the case of merchandise that can be stolen, since it includes the risk of theft and looting.
It is the insurance that guarantees the losses or damages that the freight may suffer. The insured sum cannot exceed the amount of the charter contract.
Export credit insurance in international trade
This type of insurance offers protection against the possibility of not receiving agreed payments or receiving smaller amounts. It protects the parties from non-payment, even in the event that one party fails to meet contractual obligations.
Currency conversion insurance
This insurance covers the possible depreciations that may appear in the currency exchange. As we speak of international trade, we can find transactions even where there are more than 2 currencies involved and this insurance is responsible for covering exchange fluctuations.
Political risk insurance
In some countries, governments control international transport and can block or ban some products, delay deliveries or even confiscate them. This special insurance covers these risks.
International product liability insurance
It is possible that a product is imported into a country, but upon arrival it is not accepted by the authorities. This insurance covers the company that suffers this outcome.
In international trade, transport and logistics costs have an important weight in the final price of the product. Logistics costs include inventory management, packaging, order processing, export and import documentation, freight, insurance, storage, handling, loading and unloading.
A good logistics is very important, since it lies in the costs and in the service to the final customer.