Hello everyone. Today we are going to talk about Incoterms. What are Incoterms? I believe that many veterans already know that it is the “trade term” we often say, such as FOB, EXW, CIF, etc.
So what do we need to be aware of when it comes to terms of trade? What is the practical impact on our work? That’s what we’re going to discuss this time.
Definition:
First, let’s understand how Incoterms are defined. Incoterms are developed by the ICC (International Chamber of Commerce). The latest version is 2020. Its official website is as follows: https://2go.iccwbo.org/
Incoterms definition (Source from https://2go.iccwbo.org/)
The so-called commercial terms are terms that specify the distribution and transfer of the rights, obligations, costs and risks of buyers and sellers during the transportation of goods. Therefore, each trade term contains detailed provisions on the above aspects. Specifically, if there is a dispute during the transportation of goods, the incoterms will specify who is responsible for the cost, who is responsible for the risk, and where and when the responsibilities and risks of the buyer and the seller begin and end. With these trade terms, international trade can be carried out in a normal and orderly manner.
The practical impact of incoterms on air freight
It is worth noting that some of the incoterms refer to goods shipped by sea. And because the air waybill does not have the function of the document of title (and the different means of transportation), some trade terms are invalid for it. Therefore, in air transport, some trade terms only have reference value.
In actual work, many customers still tell us trade terms. Of course, we also need to understand a little bit. Understanding trade terms allows us to provide customers with the most intimate service possible. Why not do it? Moreover, there are some terms that allow us to get more information. For example, when a customer requests FOB, it may be a designated shipment (that is, what we usually call FOB Nomination Shipment). The owner of the cargo may not usually have contact with us, but through this FOB shipment, we have the contact information of the owner. So, after this shipment, can you consider visiting the owner to see if you can become one of its logistics suppliers?
A Brief Talk on Commercial Terms
Below we will explain in detail a few commonly used trade terms. When you hear similar trade terms in the future, you will not be confused. Of course, I don’t know much about shipping, I only know a thing or two. If there are any mistakes or omissions, you are welcome to guide me.
The ICC stipulates that incoterms are divided into two categories. The first category is applicable to all modes of transportation, including:
EXW: EX-WORKS
FCA: FREE CARRIER
CPT: CARRIAGE PAID TO
CIP: CARRIAGE AND INSURANCE PAID TO
DAT: DELIVERED AT TERMINAL
DAP: DELIVERED AT PLACE
DDP: DELIVERED DUTY PAID
The second category is only applicable to sea or inland waterway transportation, including:
FAS: FREE ALONGSIDE SHIP
FOB: FREE ON BOARD
CFR: COST AND FREIGHT
CIF: COST INSURANCE AND FREIGHT
Among them, the most common one is probably FOB, right, but it can be seen that this trade term is not applicable to air freight. The second most commonly used are EXW, FCA, DDP (DDU), and CIF. Then, let’s analyze it one by one.
FOB
FOB ((Source: https://www.investopedia.com/terms/e/exw.asp)
The most common understanding of Free on board is “over the side of the ship”. This means that when the goods are delivered to the terminal, the container is sent to the ship by crane. When the container has more sides, the cost, responsibility and risk of the goods will be transferred from the consignor to the consignee.
The specific operation is that the consignor is responsible for packing the goods in the container and sending them to the terminal, and at the same time bears the expenses incurred on the way and bears all the risks of damage to the goods that may occur on the way. When the container is hoisted over the ship’s rail, the above risks and expenses become borne by the consignee.
Assuming that the container is hit by the waves on the ship and seeps into the water, resulting in damage to the goods, then it is the problem that the consignee needs to deal with. And if there is a problem with the goods during the loading process, such as the container is damaged in the container yard, then the cost will be handled by the shipper. The handling criteria for both cases are based on whether the cargo has crossed the ship’s rail.
EXW
EXW ((Source: https://www.investopedia.com/terms/e/exw.asp)
Ex-work is what we often call “ex-factory price”. Usually followed by a location stating where the delivery will take place. This is easy to understand, that is, after the goods are ready for loading in the factory, all costs, responsibilities and risks are borne by the consignee (including container pick-up fees and inland transportation costs).
Therefore, under this trade term, if there is a problem with the goods on the way to the terminal, it is the responsibility of the consignee.
FCA
FCA (Source: https://www.investopedia.com/terms/e/exw.asp)
Free Carrier. First of all, to explain, carrier does not refer to airlines alone, it really means “carrier”. It means the side with the means of transport. Here, it refers to the ship owner/airline company. Under this clause, the consignor needs to deliver the goods to the designated carrier warehouse. After arriving at the warehouse, all costs, responsibilities and risks shall be borne by the consignee. Of course, it is also up to the consignee to choose which shipowner to use.
DDP(DDU)
DDU (Source: https://www.investopedia.com/terms/e/exw.asp)
DDP (Source: https://www.investopedia.com/terms/e/exw.asp)
Delivery Duty Paid (Delivery Duty Unpaid). DDP means that after the goods arrive at the destination, the buyer is responsible for customs clearance of the goods and clearing the relevant taxes and fees, and then delivers them on the means of transport. On the contrary, when the delivery is made, the taxable fee has not been settled. It is correct to say that DDP is Delivery Duty Paid while DDU is Delivery Duty Not Paid.
Under DDP terms, the consignee shall bear all costs, liabilities and risks after delivery.
Under DDU terms, the consignee needs to settle all taxes and fees after delivery and assume all costs, responsibilities and risks.
CIF
CIF (Source: https://www.investopedia.com/terms/e/exw.asp)
Cost, Insurance, and Freight. Commonly known as cost plus freight. What this clause says is that the shipper is responsible for the cost of shipping the goods, insurance, and shipping. But what is interesting is that the related costs, responsibilities and risks are not transferred to the consignee after the goods arrive at the port of destination, but, like FOB, when the goods pass the ship’s rail. The buyer is only responsible for the cost, shipping and insurance. Therefore, CIF is delivered at the time of shipment, not at the port of destination.
Well, after summarizing these commonly used trade terms, please remember them quickly. Maybe it will be useful in the future.
That’s it for this issue, see you next issue!