The correct Incoterm can lower transportation costs for your China business
The use of Incoterms (International Commercial Terms) is meant to minimize or eliminate the confusion arising from the interpretation of the trade rules in different countries. Foreign companies importing goods from China must understand the proper use of these terms to avoid complications and lower their transportation costs.
Incoterms are published by the International Chamber of Commerce (ICC) and are used in the trade process. They are a series of three-letter trade terms related to the common contractual sales practices and are accepted by governments, legal authorities, and practitioners worldwide.
Also known as shipping terms, freight terms or trade terms, Incoterms are the global standard terminology used to specify which parties are responsible for the shipment at different moments while it is in transit. Their purpose is to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods.
First published in 1936, the Incoterms rules have been periodically updated. The eighth version "Incoterms 2010" was issued on January 1, 2011 and helps eliminate the uncertainties in the different interpretations of such trade terms in different languages and countries.
FOB – Free on Board (named port of shipment)
Under FOB terms the seller assumes all costs and risks up to the point when the goods are loaded on board the vessel. The seller must also arrange for export clearance. The buyer pays cost of marine freight transportation, bill of lading fees, insurance, unloading and transportation cost from the arrival port to destination. Since the FCA incoterm was introduced in 1980, FOB should only be used for non-containerized sea freight and inland waterway transport.
CFR – Cost and Freight (named port of destination)
In this case, the seller pays for the transportation of the goods up to the named port of destination. Risk transfers to buyer when the goods have been loaded on board the ship in the country of export. The shipper is responsible for origin costs including export clearance and freight costs for carriage to named port. The shipper is not responsible for delivery to the final destination from the port (generally the buyer's facilities), or for buying insurance. If the buyer does require the seller to obtain insurance, the Incoterm CIF should be considered. CFR should only be used for non-containerized sea freight and inland waterway transport; for all other modes of transportation, it should be replaced with CPT.
CIF – Cost, Insurance & Freight (named port of destination)
This term is broadly similar to the above CFR term, with the exception that the seller is required to obtain insurance for the goods while in transit to the named port of destination. CIF requires the seller to insure the goods for 110% of their value under at least the minimum cover of the Institute Cargo Clauses of the Institute of London Underwriters (which would be Institute Cargo Clauses) or any similar set of clauses. The policy should be in the same currency as the contract. CIF should only be used for non-containerized sea freight; for all other modes of transport, it should be replaced with CIP.
DAP - Delivered At Place (named place of delivery)
This term means that the seller pays all the costs of transportation (export fees, carriage, insurance, and destination port charges) up to and including the delivery of the goods to the final destination. The buyer is responsible to pay only the import duty/taxes/customs costs. The buyer also is responsible to unload the goods from the vehicle at the final destination.
The main difference between DAP and DAT is that with DAP the seller is responsible for the final leg of the journey and the buyer is responsible for the final unloading of the goods. This term applies to any mode of transport.
DAT – Delivered At Terminal (named terminal at port or place of destination)
This Incoterm requires that the seller delivers the goods, unloaded, at the named terminal. The seller covers all the costs of transport (export fees, carriage, unloading from main carrier at destination port and destination port charges) and assumes all risk until arrival at the destination port or terminal. The terminal can be a port, airport, or inland freight interchange, but must be a facility with the capability to receive the shipment. If the seller is not able to organize unloading, they should consider shipping under DAP terms instead. All charges after unloading (import duty, taxes, customs and on-carriage) are to be paid by the buyer.
EXW – Ex Works (named place of delivery)
The seller makes the goods available at their premises, or at another named place. This term establishes the maximum obligation on the buyer and minimum obligations on the seller. The Ex Works term is often used when making an initial quotation for the sale of goods without any costs included. EXW means that a buyer incurs the risks for bringing the goods to their final destination. Either the seller does not load the goods on collecting vehicles and does not clear them for export, or if the seller does load the goods, he does so at buyer's risk and cost.
If the parties agree that the seller should be responsible for the loading of the goods on departure and to bear the risk and all costs of such loading, this must be made clear by adding explicit wording to this effect in the contract of sale.
There is no obligation for the seller to make a contract of carriage, but there is also no obligation for the buyer to arrange one either - the buyer may sell the goods on to their own customer for collection from the original seller's warehouse.
In practice, the buyer arranges the collection of the freight from the designated location and is responsible for clearing the goods through customs. The buyer is also responsible for completing all the export documentation, although the seller does have an obligation to obtain information and documents at the buyer's request and cost.
FCA – Free Carrier (named place of delivery)
The seller delivers the goods, cleared for export, at a named place (possibly including the seller's own premises). The goods can be delivered to a carrier nominated by the buyer, or to another party nominated by the buyer.
In many respects this Incoterm has replaced FOB in modern usage. It should be noted that the chosen place of delivery affects the obligations of loading and unloading the goods at that place.
If delivery occurs at the seller's premises, or at any other location that is under the seller's control, the seller is responsible for loading the goods on to the buyer's carrier. However, if delivery occurs at any other place, the seller is deemed to have delivered the goods once their transport has arrived at the named place; the buyer is responsible for both unloading the goods and loading them onto their own carrier.
CPT – Carriage Paid To (named place of destination)
CPT replaces the C&F (cost and freight) and CFR terms for all shipping modes outside of non-containerized sea freight. The seller pays for the carriage of the goods up to the named place of destination.
However, the goods are considered to be delivered when they have been handed over to the first or main carrier, so that the risk transfers to buyer upon handing goods over to that carrier at the place of shipment in the country of export.
The seller is responsible for origin costs including export clearance and freight costs for carriage to the named place of destination (either the final destination such as the buyer's facilities or a port of destination. If the buyer requires the seller to obtain insurance, the Incoterm CIP should be considered instead.
CIP – Carriage and Insurance Paid to (named place of destination)
This term is broadly similar to the above CPT term, with the exception that the seller is required to obtain insurance for the goods while in transit. CIP requires the seller to insure the goods for 110% of the contract value under at least the minimum cover of the Institute Cargo Clauses of the Institute of London Underwriters or any similar set of clauses.
The policy should be in the same currency as the contract, and should allow the buyer, the seller, and anyone else with an insurable interest in the goods to be able to make a claim. CIP can be used for all modes of transport, whereas the Incoterm CIF should only be used for non-containerized sea freight.
DDP – Delivered Duty Paid (named place of destination)
Seller is responsible for delivering the goods to the named place in the country of the buyer and pays all costs in bringing the goods to the destination including import duties and taxes.
The seller is not responsible for unloading. This term is often used in place of the non-Incoterm "Free In Store (FIS)". This term places the maximum obligations on the seller and minimum obligations on the buyer. No risk or responsibility is transferred to the buyer until delivery of the goods at the named place of destination.
The most important consideration for DDP terms is that the seller is responsible for clearing the goods through customs in the buyer's country, including both paying the duties and taxes, and obtaining the necessary authorizations and registrations from the authorities in that country.
FAS – Free Alongside Ship (named port of shipment)
The seller delivers when the goods are placed alongside the buyer's vessel at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment.
The FAS term requires the seller to clear the goods for export, which is a reversal from previous Incoterms versions that required the buyer to arrange for export clearance. However, if the parties wish the buyer to clear the goods for export, this should be made clear by adding explicit wording to this effect in the contract. This term should be used only for non-containerized sea freight and inland waterway transport.
The eleven Incoterms can be separated into 2 groups.
Rules for Sea and Inland Waterway Transport:
Rules for Any Mode(s) of Transport:
Depending on the Incoterm you choose, you can let your Chinese supplier handle the shipping of products to a nearby port in China or all the way to your location. You should compare pricing between suppliers with the same Incoterm.
Preferably, if you are unfamiliar with shipping, choosing an Incoterm that delivers the shipment as far as possible is the best bet (DAP).
However, if you hire a reliable shipping company, you can use FOB and let the carrier handle the rest.
Using the correct Incoterm for your China business can lower your transportation costs and save your company money.
To learn more about what is the right incoterm for your business, complete our online inquiry form here below.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.