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What is International Trade?
International Commercial Terms, abbreviated as "Incoterms," include 11 trade terms. The latest version, Incoterms 2020, is published by the International Chamber of Commerce (ICC) and provides a comprehensive and standardized explanation of commonly used terms in international trade. As a global trade language, it helps facilitate global trade activities.
The 2020 version of Incoterms includes 11 trade terms, which can be classified into four categories based on cost phases:
· Category "E" (Departure)
· Category "F" (Main Carriage Unpaid)
· Category "C" (Main Carriage Paid)
· Category "D" (Arrival)
Based on modes of transportation, they can be divided into two types: suitable for any mode of transport and suitable for waterway transportation (such as sea and inland waterway transport).
Why Are Incoterms So Important?
In international trade contracts, using terms from the Incoterms can clearly define the obligations of each party and reduce the risk of legal disputes. Since the ICC first introduced the Incoterms in 1936, this globally accepted set of contract standards has been regularly updated to keep pace with the development of international trade.
Detailed Explanation of Incoterms
1、EXW (Ex Works)
The seller delivers the goods at their premises (factory or warehouse) to the buyer. Unless otherwise specified, the seller is not responsible for loading the goods onto the buyer’s vehicle or vessel, nor for clearing the goods for export. The buyer bears all costs and risks from the point of delivery at the seller’s premises to the final destination.
Features: This term is most favorable for exporters as it represents the least responsibility for the seller. Once the buyer takes possession of the goods, all handling responsibilities, including loading, are theirs. The seller only needs to provide a commercial invoice or electronic data. If required by the contract, proof that the goods conform to the contract specifications must also be provided.
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2、FCA (Free Carrier)
The seller delivers the goods, cleared for export, to the carrier selected by the buyer at the named place.
Features: The seller must deliver the goods at the agreed place to the carrier chosen by the buyer. Note that the transfer of risk is not at the ship's rail but at the point of delivery to the carrier. Therefore, typically, the risk transfers to the buyer once the carrier has control of the goods. The seller must also complete the export customs clearance procedures.
3、CPT (Carriage Paid To)
The seller delivers the goods to the carrier at the agreed location, and the risk transfers to the buyer at that point, but the seller must pay the transportation costs to the named destination.
Features: The seller's responsibility is similar to that in FCA, as they must handle export customs clearance. The only difference is that the seller is responsible for paying the transportation costs to the destination.
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4、CIP (Carriage and Insurance Paid To)
The seller delivers the goods to the carrier at the agreed location, transferring the risk to the buyer. However, the seller must pay for transportation and insurance to the named destination.
Features: The seller’s responsibility is similar to CPT, but they must pay for insurance as well. The seller is only required to purchase minimal insurance coverage. If the buyer needs higher coverage, they must arrange it themselves.
5、FAS (Free Alongside Ship)
The seller delivers the goods alongside the vessel at the named port of shipment, and, where applicable, completes export customs formalities. The buyer bears all costs and risks from this point.
Features: Under FAS, "alongside the ship" usually refers to the area within reach of the ship’s loading gear or port loading equipment. This term is often used in bulk cargo trades, especially for primary commodities like wheat, cotton, soybeans, and ores.
6、FOB (Free On Board)
One of the most commonly used trade terms, FOB means the seller must load the goods onto the vessel nominated by the buyer at the named port of shipment on the date or within the period agreed. The risk transfers to the buyer once the goods are on board.
Features: The seller bears all costs and risks up to the point when the goods are loaded onto the vessel, including export customs clearance, port fees, and domestic transportation. Once the goods are on board, the buyer assumes responsibility for all costs. If the buyer’s nominated vessel is delayed, causing storage costs or losses, the risk is transferred to the buyer.
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7、CFR (Cost and Freight)
The seller delivers the goods on board the vessel and transfers the risk to the buyer. The seller also arranges and pays for transportation to the named port of destination.
Features: The seller’s responsibilities are similar to FOB, but they must also pay for the transport to the destination port. The risk transfers to the buyer once the goods are on board.
8、CIF (Cost, Insurance and Freight)
Another commonly used trade term. Under CIF, the seller delivers the goods on board the vessel and transfers the risk to the buyer. The seller arranges and pays for transportation and insurance to the named port of destination.
Features: Similar to CFR, the seller must pay for insurance. The seller is only required to purchase minimal insurance coverage. If the buyer needs higher coverage, they must arrange it themselves.
9、DPU (Delivered at Place Unloaded)
The seller delivers the goods, unloaded from the arriving means of transport, at the named place, ready for the buyer to take charge. The seller bears all risks involved in bringing the goods to and unloading them at the named place of destination or terminal, excluding import customs formalities.
Features: The place of delivery is still the destination, but it can be anywhere, not necessarily the final transport point.
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10、DAP (Delivered at Place)
The seller bears all costs and risks involved in delivering the goods to the named place. The seller is responsible for export clearance but not for import clearance or any applicable duties.
Features: The delivery point can be at the border between two countries, on the vessel at the port of destination, or at an inland location within the importing country. Although the seller is not obliged to provide insurance, they often do so to mitigate risks.
11、DDP (Delivered Duty Paid)
The seller fulfills their delivery obligation when the goods are placed at the disposal of the buyer, cleared for import, on the arriving means of transport, ready for unloading at the named place of destination. The seller bears all costs and risks, including import duties and taxes.
Features: In contrast to EXW, the seller bears almost all costs, risks, and responsibilities during the entire delivery process. If the seller cannot obtain an import license, this term should not be used. If the parties wish to exclude certain costs (such as VAT) from the seller's obligations, this must be clearly stated in the sales contract.
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