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INCOTERMS (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, its necessary for the shipper and consignee to be aware of who pays for internal delivery, who prepares documents, who manages customs, or so. Its 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? Lets dive into.
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 weve seen in an import & export process are FOB, CIF/CFR and DAP.
Heres 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
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 sellers 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.
Weve seen some importers choose EXW for maximum control. In our opinion, its not necessary at all. So it is not advisable to use EXW.
Main Carriage Not Paid By Seller
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 ports container terminal and not loaded onto the ship. But in practical work, almost all the Chinese supplier will use FOB instead of FCA.
Main Carriage Paid By Seller
The place of delivery may be the buyers premises or a place nearby, other than a transport terminal in the country of destination.
DDP is somewhat the reverse of Incoterms EXW; it represents the greatest obligation for the seller because he assumes all costs and risks of the operation, including import procedures, to deliver the goods at the agreed place in buyers country.
The only difference between Incoterms DDP and DAP is that in DDP all costs and taxes of import clearance are paid by the seller while in DAP are paid by the buyer.
The eleven can also be divided into 2 parts based on different modes.
Rules for Sea and Inland Waterway Transport:
Rules for Any Mode(s) of Transport:
packing of container
packing of container
packing of container
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. Lets take two basic incoterms in practical use as examples.
FOB Shenzhen Port
CIF Mumbai Port
How to Choose Incoterm When Importing from China?
These are four common terms of trade (incoterms) when buying from China. A product price is always quoted according to an Incoterm.
Basically how much of the shipping you pay the supplier to handle. Based on the incoterm you select, you can let the supplier handle the goods transportation to
no further place but the factory/manufacturer, which is EXW
a nearby port in China, which is FOB
a nearby port in your country, which is CIF (including maritime insurance)
all the way to your facility, which is DAP/DDU (not including tariff and taxes)
In brief, it can be divided into 2 categories.
EXW and FOB means you the buyer can use your own freight agent and pay for their services directly.
Other term means the seller use their freight agent and you still pay for that.
Commonly, you can find the term states clearly in the Proforma Invoice or Quote Sheet provided by the seller. If not, advise the seller to add into the papers to avoid any further confusion even dispute.
When you compare prices from several suppliers, make sure they are based on the same term. For example, A-seller quoted EXW $5/unit while B-seller quoted FOB 5.5/unit, it doesnt mean the price from B-seller is not more competitive than A-seller.
Most suppliers will quote EXW or FOB price at the beginning, and are flexible in providing different price based on different term upon your request.
Be certain you understand INCOTERMS, and properly using INCOTERMS is essential to freight savings.
In todays marketplace, its not just enough to save money on your freight management costs. Companies also want to know that they are getting the most for their money by finding a logistics provider that can offer a wide array of value-added services, and lower their transportation costs.
CFC here wants to be your one stop shop for your supply chain needs. We do this by working in virtually every aspect of the supply chain and offering our customers splendid services. Partnering with us, and shipping is no longer a problem at all.
Please feel free to let us know if you need any assistance