06/07/2016
(International Commercial Terms), also known as shipping terms, freight terms, or trade terms, are the global standard terminology and definitions used in international trade to determine which parties are responsible for the shipment at varying times during transit.
Since the whole transportation can be divided into several parts, it’s necessary for the shipper and consignee to be aware of who pays for internal delivery, who prepares documents, who manages customs, or so. It’s all about freight cost and responsibility (or risk).
Here comes the question, how to choose the term or which one is better for me when importing from China? Let’s dive into.
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An Introduction to Incoterms
The Incoterms rules or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) that are widely used in International commercial transactions or procurement processes.
The latest version is Incoterms 2010.
A series of three-letter trade terms related to common contractual sales practices. The most common ones we’ve seen in an import & export process are FOB, CIF/CFR and DAP.
Here’s a video explanation of Incoterms 2010.
The rules are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of most commonly used terms in international trade.
They are aimed to reduce or remove altogether uncertainties arising from different interpretations of the rules in different countries. As such they are regularly incorporated into sales contracts worldwide.
New buyers often confuse incoterm and payment term.
• Incoterm means how many kinds of charges to pay, such as FOB Shanghai
• Payment term means how and when to pay, such as 30% prepaid + 70% against the copy of B/L
These rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods. Please check the chart above, which is the charges of buyer/seller according to Incoterms 2010, and it defines:
• The obligations of both parties
• Which party handles insurance, permits, and permissions
• Which party handles the transport until where
• At which point costs and risks are transferred from the seller to the buyer
The eleven terms in the chart can be divided into following 4 parts.
1. Departure
EXW = Ex Works + a named place
With this term, the seller has the least costs, risks and obligations. When the products are ready at the seller’s factory or warehouse, his job is all done. Not even the seller is responsible for loading the goods onto the first carrier (usually truck) that sends by the buyer to pick them up.
We’ve seen some importers choose EXW for maximum control. In our opinion, it’s not necessary at all. So it is not advisable to use EXW.
2. Main Carriage Not Paid By Seller
• FCA = Free Carrier + a named place
• FAS = Free Alongside Ship + a named port of loading
• FOB = Free On Board + a named port of loading
FAS is applied to bulk cargo.
FCA is a very flexible term, because it allows the delivery of the goods, both on the premises of the seller and at various points such as ports, airports, container terminals, etc., which are located in the country of the seller.
FCA can be used for any freight shipping via air/sea/rail/road, while FOB is the oldest Incoterm and together with CIF the most widely used with sea transport only.
Incoterms 2010 rules advised to use FCA instead of FOB, because the containers are delivered regularly in the port’s container terminal and not loaded onto the ship. But in practical work, almost all the Chinese supplier will use FOB instead of FCA.
3. Main Carriage Paid By Seller
• CFR = Cost and Freight + a named port of destination
• CIF = Cost, Insurance and Freight + a named port of destination
• CPT = Carried Paid To + a named place of destination
• CIP = Carriage And Insurance Paid To + a named place of destination
CIF acts the same as CFR, but the seller pays the insurance as well. CPT and CIP can be used for all modes of transport, while CFR and CIF for shipping by sea only.
Most Common Incoterms
FOB
Cost for the consignee includes, but not limited to:
• ocean freight costs including all surcharges
• on-carriage landside transportation by either road or rail
Cost for the supplier includes, but not limited to:
• packing of container
• customs clearance for export
• pre-carriage landside transportation by either road or rail
• port handling costs (example Terminal Handling Charges) at port of loading
CFR
Cost for the consignee includes, but not limited to:
• port handling costs (example Terminal Handling Charges) at port of discharge
• on-carriage landside transportation by either road or rail
Cost for the supplier includes, but not limited to:
• packing of container
• customs clearance for export
• pre-carriage landside transportation by either road or rail
• port handling costs (example Terminal Handling Charges) at port of loading
• ocean freight costs including all surcharges
DAP
Cost for the consignee includes, but not limited to:
• customs clearance, duties, taxes etc
Cost for the supplier includes, but not limited to:
• packing of container
• customs clearance for export
• pre-carriage and on-carriage landside transportation by either road or rail
• port handling costs (example Terminal Handling Charges) at port of loading and port of discharge
• ocean freight costs including all surcharges
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Incoterms Examples
Basically an incoterm consists of two components: a three letter code and a city name. Without an incoterm, you have no idea how far the supplier will ship your cargo.
When it comes to import from China, you can find a price quoted by a supplier in China is always based on an incoterm and a city. Let’s take two basic incoterms in practical use as examples.
FOB Shenzhen
• You book shipping space loading at Shenzhen Port
• Your supplier handles the inland delivery to Shenzhen Port
• Your supplier handles Customs export declaration
• Your supplier pays all cost at the Shenzhen Port until departure
• You pay the shipping cost to get the B/L
• You pay all cost after the cargo leaves
You pay sea freight charges, destination port charges, Customs, VAT, tariff and duties, inland transportation to your door or warehouse.
You can choose a shipping agent to handle your cargo transportation from the facility of your supplier to your destination.
CIF Blantyre
• Your supplier book shipping space from a nearer loading port
• Your supplier handles the inland delivery to the port
• Your supplier handles Customs export declaration
• Your supplier pays all cost until the cargo arrives
• You pay all cost after the cargo arrives
