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You’ve decided to start selling your products globally. Now you have an opportunity to market and sell them to the 95 percent of the world’s population that lives outside the United States.
In this first part we will review how to prepare your business for Global e -commerce , complying with regulations, collecting additional information about your product, and managing new risks.
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Preparing your business for global e-commerce.
The first topic is product classification:
HS Codes: Every imported or exported item is assigned a classification code that corresponds to its product type. These numerical codes are used for statistic-gathering purposes by countries worldwide; they also determine which tariffs, if any, will be applied to the product. Exporters are legally required, under the Foreign Trade Regulations, to include the correct classification code on export documentation.
The Schedule B Book. All Schedule B codes are contained in the book The Schedule B: Statistical Classification of Domestic and Foreign Commodities Exported from the United States . The book is available on the Census Bureau website, www.census.gov/foreign-trade/schedules/b.
Schedule B codes are composed of 10 digits. The first 2 digits indicate the “chapter,” the first 4 digits taken together are the “heading,” the first s digits are the “subheading,” and the full 10 digits are the “product code.”
You Need to Know Your Product’s Schedule B and HS Codes , so you can:
• Determine applicable import tariff rates and determine whether a product qualifies for a preferential, or lower, tariff under a free-trade agreement;
• Complete the many required shipping documents, including commercial invoices, certificates of origin, and other documents; and• Comply with U.S. law, where applicable
Country of Origin: HS codes are one criterion used to determine the tariff on goods entering a country; country of origin is another. A certificate of origin is an official statement that indicates in which country the product was produced.
Why Do You Need to Specify Country of Origin? Trade agreements between countries are formed in order to lower tariffs on items produced in those countries. For example, country A and country B sign a trade agreement that lowers the tariffs on goods produced in those countries to zero percent. Manufacturers now need to certify that their products originated in country A or B in order to get the lower rate. If a product originated in country C, was shipped to country B, and re-shipped to country A, it would not be eligible for the lower tariff because the lower rate only applied to items originating in country A or B. The United States, Canada, and Mexico are members of the North American Free Trade Agreement (NAFTA), which offers preferential (i.e., lower) tariffs for items produced in those three countries.
Every country participates in multiple trade agreements, so each must determine a product’s country of origin in order to apply the appropriate tariff rate. In addition, many countries restrict or have quotas on imports from certain regions, so certificates of origin are also used to ensure compliance with these regulations.
Determining the country of origin of the products you manufacture requires you to identify, assign a value to, and determine the country of origin of every component of your product. You then calculate the value of the foreign parts used in your product as a percentage of the total costs of all components. The resulting percentage can be used to determine from which country your product originates. An alternative method is to indicate the country in which the components underwent the substantial transformation that turned them into the finished product.
Free-Trade Agreements. The United States has negotiated several free-trade agreements under which partner countries give preferential tariff rates to items that originate here; those rates can be as low as zero. A list of U.S. free-trade agreements is found on the website of the U.S. Trade Representative (ustr.gov).
The North American Free Trade Agreement (NAFTA) was created to facilitate tariff-free trade among Canada, Mexico, and the United States; as a result, the United States trades more with these partners than with any others. Under NAFTA, unique origin-determination rules apply; you can find them on export.gov.
Commercial Invoice. The country of origin is listed on two documents used during shipping: the commercial invoice and the certificate of origin. Every shipment must include a commercial invoice that lists the country of origin for each product it contains; the information on that invoice will be used to determine the tariff rates for exports. .
Certificate of Origin. A certificate of origin is an official document, signed by the exporter, certifying the country of origin for each product contained in the shipment. With lower-value shipments (e.g., those under $1,000) customs officials will accept the country-of-origin information on the commercial invoice. Shippers may want to include a certificate of origin with larger-value shipments to ensure that nothing is held up in customs because of insufficient documentation. You can find sample certificates of origin, including the NAFTA Certificate of Origin, on export.gov, in the “International Logistics” section. Occasionally, a country’s customs authority requests that the certificate of origin be certified by the exporter’s chamber of commerce.
NAFTA Certificate of Origin. NAFTA requires a specific certificate of origin; you should familiarize yourself with it because you’re likely to send goods to either Mexico or Canada. You can find details on how and when to use this document on export.gov.
To protect national security, foreign policy, and economic interests, the United States has established regulations that prohibit or limit certain exports. Known as export controls, these regulations also limit transactions with certain individuals, organizations, or countries. Because there are compelling reasons to prohibit certain transactions, the punishments and penalties for noncompliance are severe.
Incoterms. When the goods you export arrive at their destination, the importing country requires that all applicable tariffs (import taxes levied by the destination country) and local taxes, including Value Added Taxes (VAT), be paid; many companies make the buyer pay the tariffs and taxes. Buyers typically want to know the final price, with shipping and taxes included (known as the “landed cost”), before they agree to buy, but you might not be able to provide it—tariffs and taxes vary widely throughout the world, so determining those rates before you ship can be difficult. Be clear about your policy on tariffs—specifically, who pays and when payment will be due.
Shippers worldwide use standard trade definitions called Incoterms, which spell out who’s responsible for shipping, insurance, and tariffs on an item; they’re commonly used in international contracts and are protected by International Chamber of Commerce copyright. Familiarize yourself with Incoterms so you can choose the ones that enable you to provide excellent customer service and clearly define who is responsible for what charges. Look for the list of Incoterms on export.gov, in the “International Logistics” section.The most common Incoterms are EXW (Ex Works); FOB (Free On Board); CIF (Cost, Insurance and Freight); CPT (Carriage Paid To); DDU (Delivered Duty Unpaid); and DDP (Delivery Duty Paid). Most business-to-business e-commerce agreements will use EXW, CPT, or CIF; most business-to-consumer transactions will use CPT or CIF and, sometimes, DDP. With the exception of DDP, the Incoterms mentioned above require the buyer to pay all tariffs and taxes upon arrival. To make sense of all these terms, you should take the time to understand the use of Incoterms.