Key Takeaways
- The currency adjustment factor (CAF) is a surcharge on trade between the U.S. and Pacific Rim countries.
- CAF covers currency fluctuations impacting shipping rates, particularly when the U.S. dollar value declines.
- This factor is mainly applied to sea freight but can also affect other shipping methods.
- The CAF is calculated based on average exchange rates over the prior three months.
- All-inclusive shipping contracts can help protect against currency devaluation impacts.
The currency adjustment factor (CAF) is an additional cost on trades between the United States and Pacific Rim countries. The levy is imposed by shippers in that region to cover currency fluctuations while goods are in transit and to account for a declining value of the U.S. dollar over time. Many shippers in the region prefer all-inclusive contracts to mitigate exchange rate effects and the impact of currency devaluation.
How Currency Adjustment Factors Impact Trade Costs
The currency adjustment factor is applied in addition to the freight costs incurred during trades between these countries. It was enacted in response to the additional costs that shipping companies were incurring when they were dealing with exchange rates between the different currencies. The CAF is a percentage that is applied to fees, in addition to the base exchange rate. It is calculated based on the average of the exchange rate over the prior three months.
Important
The currency adjustment factor increases in direct response to the United States dollar dropping in value.
Due to this charge, many carriers seek to enter into all-inclusive contracts that will include all possible charges that can be incurred to offset the impact of the exchange rate on profits. These issues most commonly occur on sea freight traveling between the U.S. and the Pacific Rim countries, but they can also be seen in other forms of shipments and with other countries outside of the U.S. and the Pacific Rim.
Example of How CAF Affects Shipping Contracts
Consider an example of the currency adjustment factor being applied on a shipment between U.S.-based Onyx Technologies and Japan-based Nikita Corporation. Nikita has shipped Onyx a large shipment of silicon chips for Onyx to install into their digital cameras. Nikita is sending this delivery by steamer ship, and the name of the carrier service that runs these ships is Dermont Shipping.
Dermont Shipping specializes in these types of deliveries, and they are aware that the exchange rate between the U.S. dollar and the Japanese yen can be quite volatile. Not wanting to get caught in the middle of a devaluation of either currency, Dermont asks for the shipping contract to be all-inclusive, which means that there will be an adjustment built in to cover any drop in value. It works out in Dermont’s favor because, at the time of delivery, the adjusted fee would have included a 51% increase on top of what they were already paying, which means that half of their profits would have gone towards paying for the loss in currency value.
If Dermont had not requested an all-inclusive contract, either because they were not accustomed to shipping between these countries or because they wished to levy their own CAF against both parties, they would have needed to calculate their estimated fees in advance and written them into the contract. Otherwise, they would have had to pay those fees out of pocket.
The Bottom Line
The currency adjustment factor (CAF) is a surcharge levied in addition to freight and customs charges on imports from certain Asian countries to the U.S. The CAF is intended to compensate for currency fluctuations between those nations’ currencies and the U.S. dollar that may affect shipping rates.
The CAF was added by foreign shippers to adjust for a declining value of the U.S. dollar against Pacific Rim currencies over time. It is crucial for shippers to mitigate financial risks from volatile exchange rates. Shippers often prefer all-inclusive contracts to manage CAF and avoid unexpected costs.
