Expanding globalization implies that around the world imports and universal shipping is persistently increasing. In case you import or export products from or to overseas, then you're dealing with international commercial terms and conditions, also known as Incoterms.
The worldwide shipping industry is profoundly complex. Transporting cargo over long distances and across international borders implies shippers as often as possible encounter rules, regulations, licensing, and paperwork issues.
What is an Incoterm?
The International Chamber of Commerce (ICC) built up a set of global terms to help facilitate trade agreements and guarantee smooth international trade contracts. These terms help verify the obligations and responsibilities of buyers and venders during international trade.
Incoterms are renewed each decade and 2020 brings new upgrades and changes. So whether you’re totally new to using Incoterms, or have been using them for a long time, this article will tell you everything you need to know for 2020:
Incoterms are used to agree on the foremost important contractual terms and obligations for global trade. This incorporates the export, import and transit of goods. The transport contract, insurance, the determination of the place of delivery and transfer of risk, information obligations and more are decided by the Incoterms.
2020 incoterms rules are devided in two groups:
Rules for any transport mode | Rules for sea & inland waterway only |
• Ex Works EXW • Free Carrier FCA • Carriage Paid To CPT • Carriage & Insurance Paid to CIP • Delivered at Place Unloaded DPU • Delivered At Place DAP • Delivered Duty Paid DDP | • Free Alongside Ship FAS • Free On Board FOB • Cost and Freight CFR • Cost Insurance and Freight CIF |
EXW – Ex Works
The seller is only required to make the items available, properly packaged, at the designated location, which is often the seller's factory or depot, as per this rule.
The buyer is in charge of all export procedures, onward transportation, and any additional expenditures that may arise after the products have been collected, even though the seller may be better qualified to handle loading the goods onto a truck.
This rule may pose practical challenges in numerous cross-border transactions.
Particularly, it may still be necessary for the exporter to participate in the export reporting and clearance processes. In fact this is not something that can be realistically left to the buyer. Instead, think about Free Carrier (seller's premises).
Other things to keep an eye out for. Although it is not required, it is at the buyer's risk if the vendor loads the products.
FCA – Free Carrier
Can be used for any transport mode or in situations when there are several transport modes.
A extremely adaptable guideline that applies to all scenarios in which the buyer arranges the main carriage.
In an FCA transaction, the seller could take part in the cargo's actual transportation up to a particular point.
This point could be the carrier's warehouse, the buyer's agent's warehouse, the port or a terminal in the port, or any other place that the buyer and seller have agreed upon.
The seller in an FCA transaction is responsible for:
The shipment's entire pre-export documentation, including port, customs, and transportation papers, up until the time of delivery
If necessary, export customs clearance
if the delivery site is agreed to be the seller's facility, loading procedures
When FCA term is used, the seller's obligations, risks, and expenses extend only up to the agreed point of delivery, after which the buyer's obligations, risks, and expenses begin.
CPT – Carriage Paid To
As part of fulfilling this commitment, the vendor must:
Complete the export clearance procedures.
Pay for transportation from his door to the specified and agreed-upon destination, and engage into the appropriate carriage contract with the various carriers.
Organize any and all export permits, quotas, specific paperwork, etc. related to the cargo.
The "risk" in a CPT transaction moves from the seller to the buyer once the seller delivers the cargo to the first carrier, but the costs up to the stated destination will still be the seller's responsibility. This is an important distinction for the buyer and seller to realize.
When using the CPT term, this point becomes even more significant because risk and cost transfer at different moments, and if this is not understood, penalties and additional fees may be imposed on the buyer or seller.
Because the contract of carriage is arranged at the seller's expense in CPT, it is customary for the seller to employ his service contract and also prepay the cost of the freight up to the destination.
Things to be aware of:
Terminal Handling Charges (THC) are fees levied by terminal operators. The carrier may or may not include these fees in their freight rates; the customer should confirm whether THC is included in the CPT price to avoid unpleasant surprises.
CIP – Carriage and Insurance Paid To
In a CIP transaction, as the name implies, the seller is additionally required to make insurance arrangements to cover the buyer's risk of loss of or damage to the items during carriage in addition to delivering the products to the designated destination.
The word "agreed destination" in the CIP refers to any location that the buyer and seller have specifically agreed upon, which is typically abroad.
As part of fulfilling this commitment, the vendor must:
Complete the export clearance procedures.
Pay for transportation from his door to the designated and agreed-upon destination and engage into the applicable carriage contract with the various carriers.
Set up and fund the insurance to protect the buyer from risk. Under the Institute Cargo Clauses (A) of the Institute of London Underwriters or any similar set of clauses, the seller must insure the merchandise to 110% of the contract value.
Take care of all export permissions, quotas, specific documents, and so on related to the consignment.
The buyer and seller must realize that in a CIP transaction, the "risk" moves from seller to buyer after the cargo is delivered to the first carrier, but the costs up to the stated destination remain the seller's responsibility.
DAP – Delivered At Place
DAP requires the seller to transport the cargo to a mutually agreed-upon location. Any location can be a "terminal"—a dock, a container yard, a warehouse, or a transportation hub.
In order to meet this requirement, the vendor must:
Complete the export clearance procedures.
Cover the cost of transportation from his door to the specified location.
Engage in relevant carriage contracts with each carrier up to the named destination, including any necessary on-carriages
Organize all export licenses, quotas, specific paperwork, etc. related to the cargo.
To ensure that the items arrive at the intended location, all risk must exist up until the predetermined point of delivery.
Once the products are unloaded, the risk is transferred from the vendor to the buyer. Any applicable local taxes or import charges as well as import clearance are the buyer's responsibility.
Important note - because many ports and transportation hubs are very large, the delivery location should be indicated as precisely as feasible.
DPU – Delivered to Place Unloaded
*In Incoterms 2010, this rule was referred to as Delivered At Terminal
The seller is responsible for arranging carriage and delivering the items, unloaded from the arriving mode of transport, to the specified location ( it might be a hub for transportation, a warehouse, or the buyer's depot, for instance).
DPU could be seen as a logical extension of DAP terms since, under DAP, the seller is only required to deliver when the goods are ready for unloading, however, under DPU, the seller is also obliged to unload goods at the designated place of destination. After that risk transfers to buyer.
The buyer is responsible for import clearance and any applicable local taxes or import duties.
DDP – Delivered Duty Paid
When compared to EXW, DDP is at the opposite end of the trade spectrum in terms of obligations.
If you are the buyer buying on a DDP basis, you can take a seat and relax while the seller will:
Complete the export clearance procedures.
Pay for transportation from his door to the agreed-upon location.
Enter into carriage contracts with the various carriers up to the agreed-upon destination, including any on-carriages.
Take care of any export permits, quotas, special documentation, and so on that pertain to the cargo.
Cover all risks until the agreed-upon delivery date.
Ensure that the goods arrive at their destination.
Take care of customs clearance formalities at the destination port(s), and pay any applicable duty, VAT, and other local charges.
When the items are made available to the customer, ready for unloading from the arriving means of transport, the risk is transferred from the seller to the buyer.
This rule imposes the greatest obligation on the seller and is the sole rule that requires the seller to be responsible for import clearance and payment of taxes and/or import duty.
These last conditions can be quite difficult for the seller to meet. Import clearance procedures in certain countries are difficult and bureaucratic, and it is best left to the buyer with local experience.
FAS – Free Alongside Ship
According to the FAS, the seller is responsible for managing all operations up until the cargo is delivered next to the ship.
This indicates that the FAS term is more appropriate for non-containerized cargo because containers in a containerized shipment cannot be delivered alongside the ship but must be delivered at a container terminal. As a result, for containerized shipments, FCA (Free Carrier) may be preferable.
When sending a shipment under FAS, the shipper must:
Handle export clearance procedures for shipment
Pay for transportation from his residence to the agreed-upon port, terminal, quay, or ship.
Enter into carriage contracts with various carriers, including any pre-carriages applicable up to the agreed-upon port, terminal, quay, or ship.
Take care of any export permits, quotas, special documentation, and so on that pertain to the cargo.
Cover all risks until the agreed-upon delivery date.
At the buyer's risk and expense, the seller may also be asked to assist the buyer in obtaining a transport document indicating delivery.
The buyer is responsible for loading the goods and all subsequent costs.
Because the term is FAS, you, the buyer, must also ensure that you enter into the correct contract of carriage with the shipping line, taking into account where the seller's risk and cost ends and yours begins. There may be some gray areas in the transaction, which means you, as the buyer, may end up paying twice for the activity.
If you are the seller, you must ensure that the cargo is delivered alongside the ship in time for it to be loaded on board. Ships have different discharge/loading schedules based on the ship's stability calculations, and it is important for you to understand this as a shipper to ensure that the cargo is delivered on time.
FOB - Free On Board
The seller is required to deliver the goods on board the ship under FOB. It may not be suitable for goods that are handed over to the carrier before being loaded onboard, such as containerized shipments. For containerized shipments. FCA (Free Carrier) term may be preferable.
Most people, however, still use FOB to refer to cargo for which freight is collected at the destination and where the buyer negotiates the contract of carriage.
In the case of a FOB shipment, the seller should:
Handle export clearance procedures for shipment
Pay for transportation from his door to the time the goods are loaded onto a ship.
Enter into relevant carriage contracts with the various carriers, including any applicable pre-carriages up to the agreed point.
Take care of any export permits, quotas, special documentation, and so on that pertain to the cargo.
Cover all risks until the agreed-upon delivery date.
In a FOB transaction, the buyer takes all obligations beginning at the point of delivery, including:
Choosing the appropriate ship type for cargo loading
Organize a suitable carriage contract with the most appropriate carrier.
Therefore, risk passes from seller to buyer once the goods are loaded onto the ship, i.e. before the main carriage begins.
Please keep in mind that the seller is not responsible for insuring the goods for main carriage.
CFR – Cost and Freight
The seller is required to arrange for the movement of the cargo to the named destination in a CFR transaction, and because CFR may only be used for waterway transport, this destination must be accessible via waterways.
In order to fulfill this obligation, the seller must:
Complete the export clearance procedures.
Pay for transportation from his door to the specified and agreed-upon destination and enter into a carriage contract with the various carriers.
Take care of any export permits, quotas, special documentation, and so on that pertain to the cargo.
Pay for the cargo's loading and unloading on and off the ship.
It is critical for both the buyer and seller to understand that in a CFR transaction, the "risk" passes from seller to buyer once the cargo is delivered onboard the performing vessel, while the costs up to the named destination remain the seller's responsibility.
CFR terms are typically closed at a seaport in the destination country or a feeder port in the same or another country.
According to CFR, the seller is required to provide the buyer with the necessary transport document, such as a bill of lading, as proof of delivery and termination of his risk. The bill of lading issued must cover the contracted goods and be dated within the agreed-upon shipment period.
It is critical for both the seller and the buyer to understand that when using CFR terms, the seller's risk obligation ends once the cargo is delivered onboard the ship, not when it arrives at the named destination.
For example, if the cargo is being transported from Shanghai to Gdansk and the term is CFR Gdansk, the seller's risk comes to an end when the container is loaded onto the ship in Shanghai. All risks from then until Gdansk are the buyer's, while the cost is the seller's. However, the cost and risk would fall on the buyer if, for instance, the container needs to be transhipped somewhere along the way due to weather or other circumstances.
CIF – Cost, Insurance, and Freight
In a CIF transaction, the seller is required to make arrangements for the transportation of the cargo to the named destination, which must be reachable by waterways since CIF may only be used for waterway transport.
In order to fulfill this obligation, the seller must:
Complete the export clearance procedures.
Pay for transportation from his door to the specified and agreed-upon destination and enter into the relevant carriage contract with the various carriers.
Purchase and pay for cargo insurance.
Take care of any export permits, quotas, special documentation, and so on that pertain to the cargo.
Pay for the cargo's loading and unloading on and off the ship.
The seller should secure insurance coverage equal to the commercial value of the product as agreed in the contract of sale plus 10% to cover the buyer's average profit (same as CIP).
It is critical for both the buyer and seller to understand that in a CIF transaction, the "risk" passes from seller to buyer once the cargo is delivered onboard the performing vessel, while the costs up to the named destination remain the seller's responsibility.
Common mistakes in applying the Incoterms rules
The following are some of the most common errors made by importers and exporters:
1) For containerised goods, use a traditional "sea and inland waterway only" rule, such as FOB or CIF, rather than the "all transport modes" rule, such as FCA or CIP.
The exporter is thus exposed to unnecessary risks. A recent dramatic example was the March 2011 Japanese tsunami, which destroyed the Sendai container terminal. Hundreds of packages awaiting delivery were damaged. Exporters who followed the incorrect rule were held liable for losses that could have been avoided!
2) Failure to be specific enough, e.g., "FCA Chicago," which could refer to many locations across a large area.
3) Using DDP without considering whether the seller can complete all necessary formalities in the buyer's country, such as paying GST or VAT
4) Using EXW without considering the implications of the buyer being required to complete export procedures; in many countries, the exporter will need to communicate with the authorities in a variety of ways.
5) Failure to consider the line of communication required between the carrier and the customs authorities when using DAT/DPU or DAP with a "post-clearance" delivery point can result in delays and extra costs.
With Sourceware, you can ensure smooth and efficient transportation
Understanding the definitions of these Incoterms can help to facilitate international trade. They make the transaction easier and faster for both buyers and sellers. If you need any assistance during shipping process from China, please contact us anytime and we will be happy to help!
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