Customs Clearance

When importing into a country, there are various terms, regulations and procedures an importer should be familiar with. The following is a guide of various issues to be aware of when importing.

For first time importers, it is highly advisable to use a customs broker to enter and clear goods through customs. Customs brokers are licensed by the countries in which they operate, and they act on behalf of the importer to file the necessary documents for goods to enter a country at the port-of-entry. Depending on their relationship with their client, they may also pay customs duties and other importing expenses on their client’s behalf. Finally, they advise importers about issues of which they may need to be aware such as country or origin markings.

When choosing a customs broker, the importer should first make sure they can enter goods at their desired arrival port. In the U.S., customs brokers are licensed by the U.S. Customs and Border Protection Service.
Prior to placing an order with a manufacturer, the respective nation’s customs agency and the importer’s customs broker should be consulted to avoid possible problems such as the following:

  • Any legal issues that might exist with the product in the country of import.
  • Finding out after the product arrives at port that the product is subject to import quotas (such as those put on textiles)
  • Possible health, safety or other regulations which apply to the product to be imported.

One easy to avoid, but all too common problem encountered when importing is the failure to mark the product in compliance with country of origin regulations. To avoid this, contact the respective customs agency of the nation where the merchandise will be imported to ensure the goods are in compliance. For example, custom laws in the U.S. require each imported good be marked with the English name of the country of origin (e.g. China) as legibly, indelibly, and permanently as the nature of the article permits. Furthermore, this marking must be visible to the ultimate purchaser of the product.

The tariff rate levied by customs must be paid before the importer can take possession of the goods. While tariff rates in countries like the U.S. average around 5%, they can be significantly higher for some goods, particularly those with higher labor content. Therefore, it is important to know the rate before product arrives at port. See the following link for more information tariff & customs information.

Before the goods are shipped, ensure the packing regulations for the destination country have been adhered to by the factory. For example, every box, bale or case may need to be numbered with the exact quantity in each.

Other regulations include the type of pallets that can be used.

The majority of customs clearance is about paperwork. Different goods can require different types of documentation, but the three major types of documentation the shipper must prepare include the following:

1. A bill of lading: This document, issued by the carrier or shipper, is basically a receipt of the goods acknowledging they have been received on the vessel for shipment. This document indicates the particular vessel on which the goods have been placed, their destination, and the terms for transporting the goods to their final destination. Customs Clearance

2. A commercial invoice: This is used as a customs declaration by the entity that is exporting an item across international borders. This document is required by customs to determine the value of the goods to assess duties and taxes, and goods must be invoiced in a systematic manner.

3. Packing list: This document is an itemized detail of the merchandise in a particular shipment. A copy is usually attached to the outside of the shipping container or inside the container itself so the merchandise may be counted by the person opening it.

It is crucial to make sure these documents, and any others that may be needed for a particular shipment, are carefully completed and reviewed before the goods arrive.

To avoid excess storage fees, arrange for a freight forwarder or some other type of transporter to ship the goods to their final destination as soon as they have cleared customs.

Being aware of these points, as well working closely with customs and a customs broker, will make the importing process run more smoothly and will reduce the possibility of unnecessary difficulty or expense.

Commercial Letter of Credit

Payment is almost always made with a commercial letter of credit, except for various small orders. Letters of credit allow a bank to act as an uninterested party between the buyer and seller. They have been used for centuries and are becoming a vital, ever-increasing instrument of international trade. They aid both parties by enabling the buyer to prove they can make payment and by reassuring the seller that payment will be received. Before placing an order, it is important to understand how letters of credit operate.

There are four major parties involved when issuing a commercial letter of credit in international trade:

  1. Applicant: Purchaser of the goods
  2. Beneficiary: Producer of the goods
  3. Issuing bank: Bank where the purchaser (applicant) draws the letter of credit
  4. Advising bank: Bank where the manufacturer (beneficiary) maintains an account

A typical transaction involving a letter of credit works as follows:

  1. An applicant (purchaser) in the US agrees to purchase a product from a beneficiary (e.g. a factory in China). Both parties agree a balance of $75,000 will be paid upon shipment.
  2. The applicant goes to the bank where they normally do business and draws up a $75,000 letter of credit for the beneficiary.
  3. The issuing bank goes through an underwriting process to ensure the applicant has the credit or collateral for the letter of credit.
  4. Once the process is complete, the issuing bank sends a copy of the letter of credit to the advising bank in China. The advising bank notifies the beneficiary the payment is ready.
  5. When the issuing bank is satisfied all the conditions in the letter of credit have been met, the money will be released to the advising bank, and the beneficiary will be paid. For example, if the payment is to be made upon shipment, the beneficiary will be paid when they receive the proper documentation (such as an official bill of lading) proving the goods have been shipped.

Issuing fees usually range from 1.5% to 8% of the value of the letter of credit.Commercial Letter of Credit

When using letters of credit, be aware of the following:

  • A letter of credit is about documents and not goods. It is not an insurance policy for the quality of goods.
  • It is important to understand all required documents before signing and it is also important to be sure all stipulated conditions can be met.
  • The inability to meet time schedules is the number one reason letters of credit fail, so ensure time frames can be met.
  • The failure to produce the required documentation on time can nullify the letter of credit.
  • Even minor errors in documentation can render a letter of credit invalid, so it is critical to be careful with the documentation.

A letter of credit is not an absolute guarantee the beneficiary will receive payment. The issuing bank is obligated to pay under the letter of credit only when the stipulated documents are presented, and the bank is satisfied all the terms and conditions of the letter of credit have been met.

Common types of letters of credit include the following:

  • Revocable letter of credit: A letter of credit that can be revoked by the bank without agreement from the beneficiary.
  • Irrevocable letter of credit: A letter of credit that cannot be revoked unless all parties agree. Most letters of credit are this type.
  • Revolving letter of credit: This is used when there are many repeat shipments between the two parties. It eliminates the need for a new letter of credit for each shipment.
  • Standby letter of credit: The bank pays the beneficiary only when the applicant is unable to pay. While neither side intends to use it, this type of letter of credit serves as a secondary payment mechanism to ensure the beneficiary will receive payment in the event the applicant is unable to make payment.