Chakhawat Hossain |
January 15, 2022 9:48:43 PM
The country’s import trade is guided by the current Import Policy Ordinance issued by the government. The purchase of goods from external sources is called importing. Goods purchased under import constitute different components – price of goods, transportation cost, insurance premium, duties and taxes and many more. Payments for imports are channeled either to suppliers for all components, or to suppliers for the price of the goods, transporters for transport costs, insurance companies for risk premium coverage, authorities customs for duties and taxes, and many others involved in the process.
The destination of the costs depends on the terms used for the transactions. The terms are officially known as Incoterms. There are 11 terms available in the ICC (International Chamber of Commerce) publication named Incomterms-2020. The most common terms are FOB (free on board) and CFR (cost and freight). Under the FOB term, the importers pay the price of the goods to the exporters, which does not include the transport costs and the insurance premium. Transport costs and the insurance premium are paid separately by importers to carriers and insurance companies. In CFR terms, importers pay exporters the price of the goods and the cost of transport together, and the insurance premiums paid to the insurance companies.
Bangladesh is open to outside sectors in many ways for export, import, physical presence, finance and investment. As part of our export, overseas buyers appoint shipping companies for shipping arrangements. The incoterm they use is FOB. Under this arrangement, foreign buyers only pay the price of goods to exporters in Bangladesh. They pay freight charges to carriers for which they negotiate separately.
With regard to imports by Bangladesh, imports are made under the terms of the CFR in many cases. Under this arrangement, the importers jointly pay the price of the goods and the transport costs to the foreign suppliers. Importers are confused about the cost included in the price of goods for transportation. The central bank prepares the balance of payments taking into account external transactions. The FOB value is extracted from the CFR price to measure the trade balance – the difference between the value of exports and imports. The process is known as a globally practiced assumption, but such determination does not reflect the actual FOB value of the goods. The actual view is found if the import is run on FOB.
As mentioned earlier, the export from Bangladesh is executed FOB term, transportation against shipment is handled by the importers. Why importers take the hassle of transportation is a question. The simple answer is that importers can save on transportation costs by negotiating with carriers against importing under the FOB term. As such, it becomes profitable for importers compared to importing under the CFR term. It is certain that Bangladesh can get the same benefits if all imports are converted into FOB terms instead of CFR.
Maritime transport is an industrial sector in which different transport companies such as shipping companies and airlines work. Regarding payment procedures, freight charges may be charged to shipping companies operating in Bangladesh. Foreign carriers can return their surpluses, net of local expenses, including taxes, to their parent companies abroad.
Apart from large operators like shipping companies and airlines, freight forwarders and multimodal transport operators play a major role in cross-border transport. These operators may receive freight charges against FOB imports from importers and they may remit amounts payable to their counterparts abroad in accordance with exchange regulations. Freight against import via chartered vessels is also permitted for remittances to overseas shipowners.
Due to political support for outbound remittances, besides mainline operators, by freight forwarders and multimodal transport operators, FOB term imports are reported to be on the rise. Inside information shows that the upstream link industries supporting the export sector are executing FOB forward bulk imports, either by liners or charter vessels.
Our annual trade volume is about 100 billion US dollars. In case of importing under FOB term, other costs are involved due to the cost of transportation. If we were in possession of physical carriers like ships and planes, huge revenues would be earned in the form of transportation costs. Such a positive situation will surely come one day. Prior to this situation, dependence on foreign carriers is inevitable. Despite this, costs can be reduced if the import is executed FOB forward, as foreign buyers do in the case of their imports from Bangladesh.
As mentioned earlier, import trade is guided by the current Import Policy Ordinance. The Ordinance authorizes all terms except CIF, CIP and DDP. In the event of importation under CIF and CIP conditions, the authorization of the ministry concerned is necessary. There are valid reasons behind the regulatory restriction on the use of these terms. But whether it is possible to administratively implement FOB import is a question in the era of open market economy. This is one of the challenges.
There are many other challenges for the full introduction of FOB imports. Small importers will not be comfortable importing FOB term due to lack of shipping management capability at their ends. Exporters importing as part of back-to-back imports cannot opt for FOB imports due to nominated suppliers and risk factors associated with a delay in handling the shipment that will compromise the shipping time. However, effective shipping management can help FOB imports. In this case, credit support is needed to effect payment of transport costs from export earnings. Bank letter of credit facilities for transport costs are needed to encourage FOB imports.
In addition to commercial imports of finished products, bulk imports are needed to replace imports from domestic industries. These bulk imports can easily be executed FOB forward. On the other hand, the FOB term can easily be imposed administratively on commercial imports of finished products.
The positive impact, as previously indicated, is the reduction of costs, if the import is carried out FOB forward. But it is not possible to introduce the term overnight. Political support is needed in different aspects. The import duty rebate may encourage importers to use the FOB term. FOB imports are also possible provided that the buyer’s credit facilities in foreign currencies are authorized for the payment of transport costs.
To expand supportive policies, the Import Policy Ordinance needs to be reviewed with respect to the use of Incoterms for import trade. FOB, like other terms, must be made mandatory for importing commercial goods. In this case, a threshold can be set so that small importers are not affected. Bulk imports for industrial purposes can be discounted on FOB terms with support for settlement of freight charges under buyer’s credit in foreign currency. In addition to private imports, many government agencies or their designated agents execute imports such as fuel, foodstuffs, etc. Government imports should also be made mandatory FOB term. In case of importation under external loans, the agreements must be concluded in such a way that space is available for the importing entities for the negotiation of transport costs.
What is saved is treated as income that helps create employment. A simple provision to be incorporated into the policy framework can lead to further reduction in import costs, which will result in the development of maritime industries in the long term. Before that, the activities of shipping agencies for the management of FOB imports will generate jobs. The scope, as shown here, can be examined at the policy level to review trade policies and their supporting policies such as foreign exchange, customs and other relevant regulations.