In international trade, when you negotiate and communicate with your seller, you will definitely use trade terms, such as EXW, FOB, CIF, etc. You may be overwhelmed by these 3-letter incoterms. Because you don’t know what they mean in shipping, what you and the seller are responsible for, and which one you should choose from among so many incoterms.
Also, the use of Incoterms in international trade is flexible in practice. When you and your seller sign the contract, adding one more seller’s responsibility may change from one term to another.
If you are looking for a complete guide to Incoterms 2020, then you have come to the right place. You can clearly know trade terms from the following aspects:
What Is Incoterms In International Trade?
Published by the International Chamber of Commerce (ICC), Incoterms stands for International Commercial Terms. In global trade, there are several trade modes. Under each mode, buyers and sellers have different obligations, leading to different product quotations. Incoterms give an internationally unified explanation to these modes.
It defines the tasks, costs, and risks buyers and sellers should bear under each mode. Also, it explains the price composition, whether it includes shipping costs, insurance fees, etc. other than the original product price. Therefore, Incoterms are also called international trade terms, price terms, shipping terms, and delivery terms.
As general rules for trade between countries, you can directly use them when negotiating with your seller. It will help you simplify the negotiation process. When disputes arise, it is also easier to judge who is to blame. That’s why Incoterms are important for your businesses.
What Are The 11 Types Of Incoterms?
ICC updates Incoterms every a couple of years and Incoterms 2020 is the latest one. It explains 11 types of trade terms and divides them into rules for sea and inland waterways and rules for any transport modes, as the following Incoterms chart shows. Next, we will list and explain them one by one.
Incoterms For Sea And Inland Waterways
FOB
FOB (Free On Board) is currently the most common trade term for sea freight. It means that the seller must send the goods to the vessel at the designated port. After that, the buyer will be responsible for all tasks, costs, and risks.
Still suppose you buy and ship your cargo under FOB from Dongguan, China to New York, USA. Then, your seller should:
- Send your cargo to GuangZhou Port (the nearest China port to Dongguan) and load it on the vessel.
- Pay shipping costs from his factory to Port of GuangZhou.
- Deal with export customs declaration and pay declaration fees.
- Take the risks of damage and loss of goods until goods are loaded on the vessel.
Once the cargo is on the vessel, you will be responsible for the goods. So you have to:
- Book shipping space, buy cargo insurance, arrange all transportation from GuangZhou Port to your destination and pay the shipping costs.
- Go through customs clearance when goods arrive in New York and pay import duties and taxes.
- Bear all risks after the goods are loaded on the vessel.
Of course, you can let your freight forwarder help you arrange shipping and deal with customs clearance. This will save you lots of trouble, especially in the event of random customs checks.
As for FOB price, because sellers have to pay all expenses before sending the goods to the vessel, so they will include the costs in the product quotation:
FOB Price (GuangZhou)=product price+shipping cost to Port of Guang Zhou+customs declaration fees
FAS
Under FAS (Free Alongside Ship), the seller does not need to help you load the goods onto the ship as FOB, but only needs to put the goods alongside the ship, i.e. beside the ship at Port of GuangZhou in the above example. And you will be responsible for risks from then on. Others are the same as FOB. FAS is not commonly used.
CFR
On the basis of FOB, if your seller is also responsible to book shipping space, arrange shipping to the port in your country, and pay the freight, then it should be CFR (Cost and Freight) trade term. In the above example, your seller should also help you pay sea freight from Port of GuangZhou to Port of New York. Thus,
CFR price = FOB price + sea freight
CIF
On the basis of CFR, if you also want your seller to help you buy cargo insurance against damage and loss during transportation, then it should be CIF (Cost, Insurance, and Freight). That is to say,
CIF price = FOB price + sea freight + insurance
Many buyers wonder about CIF vs FOB. As shown in the price formula, the biggest difference is that the seller should be responsible for the sea freight and cargo insurance.
Note: Although these four terms are sea freight Incoterms according to the regulations, in practice, FOB and CIF sometimes will also be used for air freight.
Trade Terms For Any Transport Modes
EXW
EXW (Ex Works) means the seller needs to deliver your cargo to you at his location, such as his factory, warehouse, etc. And you will be responsible for all costs and risks of shipping the goods from the seller’s location to your destination. As a buyer, among all Incoterms, you should take the most tasks and risks under EXW.
For example, if your seller’s factory is in Dongguan, then you need to: deal with the export declaration, arrange all cargo transportation from Dongguan to your place in your country, handle import customs clearance, pay import duties, etc. And you should pay for all expenses incurred during the process. If your goods are damaged or lost, it is also your responsibility.
Since the seller does not need to pay any costs after the cargo leaves his location, the product quotation you get is the original product price. It doesn’t contain any other fees.
FCA
Under FCA (Free Carrier), the seller should give your cargo to your carrier (usually your freight forwarder) at any designated place, such as the seller’s factory and warehouse, road, rail or air cargo terminal, dock, container yard, etc. Also, the seller should help you with the export customs declaration.
For example, if you buy and ship cargo from Dongguan, China, your freight forwarder will collect your goods at his warehouse in Dongguan. Your seller should:
- send the goods to the freight forwarder’s warehouse
- deal with export customs declaration
- bear the risks before delivering goods to your freight forwarder
Your seller will pay for all costs in the above process. But he will include these fees in the quotation in advance.
FCA price = product price + shipping cost to the delivery place + export declaration fees
Once the goods are delivered to your carrier, you should be liable for them, including all later tasks, costs, and risks.
CPT
Based on FCA, if your seller is also responsible for arranging shipments and paying freight costs to your destination, it should be CPT (Carriage Paid To). Thus,
CPT price = FCA price + freight costs
Under CPT, once the cargo is handed over to your forwarder, you should bear all risks and costs after that, except for the shipping cost to your destination, as your seller has paid for it.
CIP
Based on CPT, if you want your seller to buy cargo insurance for you, it is CIP (Carriage and Insurance Paid to）trade term. Therefore,
CIP price = FCA price + freight costs + Insurance
Note: In fact, the price compositions and responsibilities of buyers and sellers under FOB and FCA, CFR and CPT, CIF and CIP are similar. The main difference lies in different delivery places and when you begin to bear the risk of damage and loss. Therefore, if you ship cargo by sea under FOB, CFR, CIF, correspondingly, you can use FCA, CPT, CIP for air freight.
DAP And DPU
DAP (Delivered At Place) means that the seller is responsible for exporting customs declarations, shipping the goods to the destination, such as your place in New York, and handing over the cargo to you there.
Your seller should bear all shipping costs, other fees, and risks incurred during the transportation process, except for import customs clearance and customs duties & taxes. And you are required to obtain any licenses required for customs clearance in advance, and pay customs clearance fees and duties.
Pay attention, under DAP, the seller doesn’t need to help you unload the goods from the vehicle. If you need the seller to do that for you, DPU (Delivered At Place Unloaded) is the right trade term for you.
DAP and DPU only differ in whether the seller should unload the cargo at the destination. Others are the same.
DDP
If you want your seller to deal with import customs clearance and pay import duties and taxes, you should use DDP (Delivered Duty Paid). It is a door-to-door trade term. Your seller will be responsible for all tasks, costs, and risks during the whole transportation and directly send your cargo to your door. You just need to assist your seller when necessary.
When it comes to DDP, we need to talk about DDU (Delivered Duty Unpaid). Although Incoterms 2010 and 2020 remove DDU, it is still widely used in practice. The difference between DDU and DDP is that the seller will not help you go through customs clearance and pay customs duties. This sounds like DAP. In fact, DAP can be simply used to replace DDU in real business.
Note: If you have decided to use one trade term, but still hope that the seller can help you with some things out of his responsibility, you can negotiate with him and entrust him to handle it on your behalf.
For example, according to FOB rules, the seller is not responsible for booking and buying cargo insurance. However, in practice, some buyers will entrust the seller to help with these things, or even use the seller’s freight forwarder.
When To Use EXW, FOB, CIF, And DDP
Among so many trade terms, EXW, FOB, CIF, and DDP are the most commonly used. EXW is better for buyers who are familiar with the exporting country and export customs declaration.
FOB is preferred by buyers with some importing experience. They will have their cooperative forwarders deal with the shipping from the port in the seller’s country to their destination.
CIf is more suitable for new buyers. The seller will help ship the cargo to your country. And it is not very difficult for you to deal with the latter things.
DDP is quite popular for eCommerce sellers such as Amazon FBA sellers. They let their suppliers directly ship cargo to the Amazon warehouse, which is quite convenient.
What Are Freight Collect Or Prepaid Incoterms?
As you can see, for each incoterm, it clearly defines who pays for shipping costs. According to whether the seller or the buyer should pay international shipping costs, we can divide these trade terms into:
- Freight collect incoterms (i.e. the buyer pays international freight when receiving the goods at the destination): EXW, FCA, FOB, FAS.
- Freight prepaid incoterms (i.e. the seller pays international freight before shipping): CFR, CIP, CPT, CIF, DAP, DPU, DDU, DDP.
All those types of freight charges will be shown on the Bill of lading.
What Are Trade Terms On Alibaba?
As the largest international wholesale platform, many importers find suppliers and source products from Alibaba.
Generally, sellers on Alibaba display EXW price or FOB price on the product profile. But this is only a reference to price. If you want to know the specific product quotation or other quotations like CIF price or DDP price, you can contact and negotiate with the supplier.
In addition, you can use any type of trade terms above, as long as your supplier can do it. For example, if the supplier you find does not have the ability to help you obtain import licenses, handle import customs clearance, and pay customs duties, then he will not agree to use DDP.
The End
Hope this article can give you a clear understanding of Incoterms. If you have any questions, you can leave a comment below.
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