An international trader can choose to buy and sell goods worldwide. The trader may only be based in one location and will need to decide how they buy and sell goods. 

Imagine the trading business is based in the UK. They have received an enquiry from a customer in Australia wishing to purchase a product that the trader can procure from a supplier in Japan. The same product that is being purchased is the one that is to be supplied, no modifications are required. One option would be to ask the Japanese supplier to ship the goods to the UK and then re-export the product to Australia. Although the consignment could be held in a customs warehouse in the UK, there is still the consideration of the extra transport costs that would be incurred to move the goods this way. 

A potentially better option could be to ship the goods direct from the supplier to the buyer. This is called drop shipping and the requirements need to be considered carefully by the ‘middleman’ involved in the transaction. 

For every export, there is a subsequent import. The compliance requirements that must always be considered have added complexity for drop shipping. 

Every declaration must have a compliant value declared to Customs at Export and Import. At export, the value to be declared must be the selling price of the goods. For a drop shipment in our scenario, this is the Japanese selling price to the UK Trader. Why is the trader considering drop shipping? To supply the goods in the easiest way (in terms of transportation) and secondly to make a profit. Therefore, we must assume that the selling price to the Australian customer is higher than the purchase price from the Japanese supplier. 

This means that the invoice that must apply at import is the UK to Australia sale value. The higher value will be subject to Australian Import Duty and Tax, based on the Commodity Code from the Australian Import Tariff. 

This means the UK supplier will need to carefully consider his Incoterms to remain in control of the transaction. Avoiding EXW is wise because the Japanese supplier will then be responsible for export customs. By agreeing to buy from Japan on FCA, Free Carrier, the UK trader can choose who will transport the goods to Australia. Incoterms are designed for two parties to agree the costs and obligations, whilst also establishing where the risk is transferred for the purposes of insurance. Here we have two separate transactions: a sale and purchase between the UK and Japanese business, plus a sale and purchase between the UK and Australian end customer. Therefore, if they are used, two Incoterms must be agreed. 

The UK trader should avoid an FCA Sale to Australia because the end customer’s forwarder will potentially have sight of the end supplier’s details and the original purchase price of the goods. Selling on a ‘C’ or ‘D’ Term would be better for the UK Trader, allowing them to control the selection of the carrier. It depends how much risk the UK Trader wishes to undertake. 

The considerations of Incoterms and declaring the correct valuation is a glimpse into the world of trade compliance. As with any international trade, there are many other areas that need to be considered. In our example the UK business must manage both sides of the trade and understand their responsibilities, together with the supplier’s and customer’s requirements.     

Drop Shipping means that failure to prepare is likely to mean that…well, I’m sure you know the rest. It is easy for things to go wrong and the transaction to be incorrect, based on Customs regulations. Planning and preparation are the key to success. 



“Why don’t we just ship it direct?” is a common question, but make sure you have answered all the compliance questions.