The Use of Incoterms 2020 in International Trade
ABSTRACT
The topic of this research is the effective use of International Commercial Terms (Incoterms) in companies in Cameroon. The purpose of this research is to identify the most effective Incoterms for use by companies in Cameroon and to simplify the company’s use of Incoterms through the use of recommendation charts and a country-specific approach. The research was implemented at the end of the 2021.
Companies in Cameroon required a closer view of its Incoterms and an analysis of how they could be used more effectively. One area of focus was the development of the company’s understanding of the Incoterms’ advantages and disadvantages. Essentially, the company’s knowledge of its Incoterms needed to be updated.
This research used qualitative research to achieve its stated aims. The empirical part of the research was created using multiple sources, while the research part was conducted using five theme interviews. Each of these theme interviews included five main questions that formed the basis of the interview. Two of the interviews were conducted with logistics professionals, while the remaining three were conducted with sales professionals.
The results of this research proved useful for companies in Cameroon, as the results demonstrated that the company was already using Incoterms effectively but could further develop its use of Incoterms in a few key areas. The recommendation charts presented in this research, which prevent the misuse of Incoterms and lead to their effective use, were found to be helpful and easy to apply.
CHAPTER ONE
INTRODUCTION
International commercial terms also known as Incoterms, contains eleven delivery clauses. Trade term is one part of a commercial contract, between seller and buyer. Correctly used trade terms enhance logistic, decreases the risks and bring cost savings for company. Successful transporting gives firm base for continuing deals. The research focuses on eleven Incoterms and clarifies the effective Incoterms for companies in Cameroon.
The theoretical part focuses on Incoterms on generally level and focuses on risk and cost dividing between the seller and the buyer. Aspects that effect choosing Incoterm and Incoterms effect on sales of contract are main part of the theory. Effecting aspects by continent/country are also noticed in the theory part. The research part includes companies in Cameroon’s starting point and what should be developed. The fourth chapter includes the recommendation charts by country specific.
The result of the study will give useful information of the current situation and how the activities should be developed. The recommendation charts give the possibility to use the Incoterms correctly with simplified way. Correct use of Incoterms prevents the misuse and loss of effectiveness in the operations. The result convinces the product group managers to pay more attention to Incoterms. With the better understanding of the Incoterms companies in Cameroon gets an advantage in international sales.
International trade performance can be defined as the extent to which a country (or region) is able to benefit from trade with the rest of the world. It can be measured using some indicators such as: share of trade in world market, trade balance, percentage of different categories of exports to GDP, real growth in total trade; trade per capita (Goode, 2004; UNCTAD, 2006; 2008a; UNECA, 2010; World Bank, 2010). Commenting on one of the indicators, Ajakaiye and Oyejide (2005) observed that Africa’s share of world’s merchandise exports declined by more than half, from about 6% in 1980 to 2.6% in 2004.
In terms of international trade, SSA countries have performed relatively low. For example, SSA had negative trade balance from 1995 to 2008. The region’s trade balance as a percentage of GDP was -12.95% in 1995 and this deteriorated to -25.19% in 2008. The negative trade balance for SSA was worse than those of other regions as well as the global average (World Bank, 2010). The ratio of imported products to exported products (RMPXP) for SSA was far above those of other regions denoting merchandise trade deficit (World Bank, 2010). In 2007, the RMPXP for SSA was 1.90 compared to world average (1.36); Latin America and the Caribbean (1.45); Middle East and North Africa (1.28); and East Asia-Pacific (1.14).
1.2 Statement of Problem
One of the major indicators of international trade performance is the performance of a country’s export. In this study, emphasis is placed on export aspect of international trade. This is because export represents an injection to the exporting country and it is a source for foreign exchange earnings. Thus, an improvement in the exporting ability of a country can translate to a better international trade performance, ceteris paribus. The percentage share of exports in GDP of SSA was far lower than that of other developing regions such as Latin America and the Caribbean (LAC); and Middle East and North Africa (MENA). For instance, the percentage of manufacturing export in GDP in 2008 was 5.85% in SSA compared to the world average of 17.35%. In terms of service export, the percentage of service export in GDP was 7.72% in SSA, which was lower than 11.77% and 18.95% in 2008 for world average and MENA respectively (World Bank, 2008; 2010).
Another contextual issue is that while most developing countries in other regions especially Asia experienced trade diversification, exports from many African countries concentrated on primary products. For instance, the share of manufacturing products in total merchandise exports of developing countries increased from 35.1% in 1985 to 65.8% in 2004 and manufactured export in terms of world export increased from 14.5% in 1985 to 30.3% in 2005. The improvement in international trade outcomes of developing countries resulted from their diversified export markets. On the contrary, Africa’s share of manufactured export in terms of total export decreased from 4.3% to 2.9% of total export during the same period. One of the factors attributed to this development was Africa’s failure to integrate into the world trade with appropriate institutional framework (Bacchatta, 2007).
Institutional framework can be defined as the set of humanly formulated arrangement that is capable of structuring political, economic and social interactions among economic actors. Hence, it is seen to have been crafted by human beings for the reduction of uncertainties in any exchange of economic values (North, 1991; 2005; Williamson, 2000; Grief, 2006). Available evidences have shown that most countries in SSA have weak institutional framework. For example, using rule of law with values which ranged from -2.5 (worst) to 2.5 (best), SSA had average values between -0.76 and -0.70 from 1996 to 2008. The values for SSA were lower than the global average that ranged from -0.09 to -0.03 within the same period (Kaufmann, Kraay, and Mastruzzi, 2008; 2009).
In terms of the level of regulatory framework SSA region had low values compared to others. For instance, between 1996 and 2008, the average values for SSA lied between -0.70 and -0.54 compared to the global average values that were from -0.11 to -0.02 during the same period. The values for SSA were not only below the world average, it was equally below those of other regions (Kaufmann et al, 2009). As observed for international trade performance, institutional framework in SSA is equally not impressive. This is based on the low values of rule of law and regulatory quality indicators of institutional framework observed for SSA that were lower than the global average and that of other regions of the world.
1.3 Purpose and objectives of this research
This research aims to identify the most beneficial and cost-effective Incoterms for use by companies in Cameroon. Companies in Cameroon face a common problem of the quotation and contract stage: it is unclear what the most suitable Incoterms are for different cases. As such, this research summarises the correct Incoterms for use in every case, focusing specifically on Cameroon. The purpose is to find suitable, easy and cost-effective Incoterms for every objective. One challenge faced in fulfilling this aim was that the managers who quote the products do not have an understanding of Incoterms or why there are such an important part of contracts. To overcome this challenge, this research seeks an explanation for this lack of knowledge and defines when different Incoterms are recommended.
- Research Questions
The research questions explored in this research are as follows:
- What aspects affect Incoterm use?
- How do Incoterms affect trading?
- What Incoterms are effective and reasonable for use by companies in Cameroon?
1.5 Significance of the Study
In the period of 1990s there has been some measure of research interest with regard to the roles of institutions on the management of economies across the world. The significance of economic environments such as the effectiveness of monetary and fiscal policies, price stability, and secured property rights that are in tandem with efficient utilisation of resources have been found to exert some degrees of impacts on economic performance in some countries. In other words, the nature of institutional framework and policies in a country can determine such country’s economic performance (Temple, 1999). This implies that when the institutional framework in a country is weak, it can lead to the occurrence of sub-optimal economic outcomes. Thus, institutions matter.
There are emerging views in economic growth and development literature that institutional factors play considerable influence in determining economic performance of countries (e.g. Garba, 2003; Gallo, Stegmann and Steagall, 2006; Acemoglu and Robinson, 2008a; Hassan, Wachtel and Zhou,2009).
Some efforts have been made by examining the link between institutions within countries in relation to democracy and economic growth. However, majority of extant studies have focused on the relationship between institutions and economic growth. In addition, evidences abound from literature that not much has been done in relating institutions to international trade performance. This is particularly crucial for SSA countries that usually have lower values in major trade and institutional indicators than other regions of the world. In the work by Meon and Sekkat (2008), they related international trade to institutions using a panel data (1990-2000) that covered mainly countries in America and Asia. In the sample of 59 countries only eight of them were in Africa. In their study they classified total export into manufacturing and nonmanufacturing. Thus, there is the need to examine the impact of institutional framework on international trade performance using a sizable panel involving SSA countries. This is one of the areas this study makes its contribution to knowledge.
In another dimension, it has been noted that institutions may be endogenous; and as a result it will be needful to ‘unbundle’ them in order to appropriately capture their influence (Acemoglu and Johnson, 2005). Similarly, international trade performance may be too encompassing for general policy direction. This study observed that grouping total export simply into manufacturing and nonmanufacturing would be too general. This is essential especially in Cameroon where non-manufacturing export such as fuel and mining and agricultural export form bulk of their international trade basket.
This research implements qualitative research and, specifically, theme interviews. The key concept in qualitative research is finding an answer to a question, with the aim of identifying underlying perspectives and insights. The aim of qualitative research is not to find an existing answer or preconceived theory about the research object. Rather, the best outcome of such research is gaining a comprehensive view of the object and its causes. Qualitative research happens in a natural environment, and data is collected from professionals and specialists through an interactive relationship with the researcher. The research material is diverse and is collected from text, pictures, interviews and other media. Theme interviews are a common way of gathering information in qualitative research. Data from these interviews is analysed in inductive, recursive and interactive ways. Inductive analysis is used to develop a theory for practise, recursive is recuperating and interactive analysis involves communication between the researcher and interviewee.
Qualitative research is the basis of all research, including quantitative research. Quantitative research differs from qualitative research in that it starts from a position in which that question needing to be answered has already been defined. In qualitative research, theories are developed with the aim of defining the question; in quantitative research, the direction is from theory to practise, which is also known as deduction. (Kananen 2017, 32-34,44.)
In this study, the research material consists of theme interviews. Theme interviews include two components, according to their name: 1) interviews, in which face-to face, open conversation of the topic occurs, and 2) themes, which means that more than just a single question or topic is discussed but rather a more general theme is discussed. Through this discussion, the researcher tries to expand the knowledge of the topic and visualise the big picture. Discussion proceeds according to the interviewee’s terms; the interviewee shares details on the topic, while the interviewer provides specific questions that keep the conversation flowing. Usually, theme interviews require a second round so that more specific follow-up conversation can occur.
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