Incoterms-2010

If you just want to have a quick check about each Incoterm 2010, you can download this comprehensive Incoterms chart.

If you are new to importing from China and have any problem with Incoterms in 2019, please find answers from below questions, let me know if you cannot find your interested topic answer.

What is Incoterms 2010?

Incoterms stands for international commercial terms.

Incoterms 2010 is, in fact, a set of rules recognized by state entities, suppliers and lawyers worldwide as a comprehensive description of different terms in the international trade.

Incoterms 2010 definitions cover the duties and rights of the trading parties in the case of goods supply.

Incoterms represent a variety of trade rules, which are gathered in categories (named in the first three letters).

Each of these categories displays business practices in international sale contracts.

In general, Incoterms 2010 describe the costs, risks and main responsibilities which are connected with the delivery of goods from the supplier to buyer.

INCOTERMS 2010 chart

How many Incoterms 2010 are there?

There are 11 sets of rules in Incoterms 2010 in total.

Seven of these sets can be used for any type of transport of the main carriage.

All terms that are part of Incoterms are indicated in the form of a three-letter abbreviation, the first letter in which indicates the time and place of the transfer of obligations from the supplier to the buyer:

  • Group E: obligations pass to the buyer directly at the time of dispatch and, accordingly, at the place of dispatch of the goods;
  • Group F: the point of transfer of obligations is the terminal of departure, provided that the bulk of the transportation remains unpaid;
  • Group C: the payment for the main transportation is made in full, obligations are transferred at the time of receipt of the goods at the terminal of arrival;
  • Group D: full delivery, when the transfer of obligations is carried out at the time of acceptance of the goods by the buyer.

What are the most common Incoterms 2010?

The system of Incoterms was set to clarify international trading rules for both buyer and seller.

In daily practice, it is extremely easy to choose the wrong Incoterms set, which will eventually confuse the trading deal and relations between trading parties.

So if you don’t want to dig deeper inside the complicated rules of Incoterms 2010, you can use the most common sets listed below:

  1. DDP (Delivery Duty Paid).
  2. EXW (Ex-Works).
  3. DAP (Delivered At Place).
  4. DDP (Delivery Duty Paid).
  5. FOB (Free on Board).

These Incoterms are the most popular among the trading representatives because of the simplicity of inner terms both for buyer and seller.

However, we strictly recommend you to become familiar with all Incoterms so you can make your choice with a full understanding of all processes.

Please, follow our FAQ to become pro in this topic.

Are Incoterms 2010 mandatory?

The code of rules does not have the status of an international source of law.

However, its provisions are mandatorily taken into account by government agencies, including customs authorities and courts, if the contract contains references to the delivery basis or disputes of a foreign economic orientation.

In other words, it is a reflection of generally accepted universal concepts, rights, and obligations in the sphere of trade.

In some countries, the document is binding and received the status of law.

This item is important to consider when concluding supply agreements with residents.

In this case, the parties are obliged to indicate in the contract a clause on the reluctance to be guided by the provisions of the regulatory action, if there is no such need.

Why are Incoterms 2010 important?

If you want to become a professional in international trading, obviously, you have to learn a lot of things about this topic, which includes the Incoterms 2010.

These rules cover practically all known scenarios related to transportation, customs clearance, import and export procedures, etc.

Who created Incoterms 2010?

The development of Incoterms was first conceived by the International Chamber of Commerce (ICC) in 1921, and this idea was realized in 1936 when the first edition of Incoterms rules appeared.

In 1923, the ICC Trade Terms Committee, with the support of national committees, developed the first six rules: FOB, FAS, FOT, FOR, CIF, and C&F, which were the forerunners of future Incoterms rules.

This was the beginning of a long and eventful history of Incoterms rules, which continues in our time.

On January 1, 2011, a current version of the rules, Incoterms 2010, was introduced.

Container ship

What is Incoterms 2010 DAP?

DAP stands for Delivery At Point.

DAP set of rules tell us that the seller is obliged to provide the buyer with the products which are released in the export customs and are ready for unloading from the transport at the specified destination.

The rules of DAP impute the supplier the need to pay all the fees and costs connected with the transportation of products to the final destination.

What is Incoterms 2010 DDP?

DDP is an abbreviation for Delivered Duty Paid.

Speaking of DDP, the supplier has to process all the export and import customs which will make the products ready for unloading from the selected type of transport at a certain place.

Also, the supplier has to think of all costs and fees related to products transportation, which includes all exporting and importing processes.

Note that these rules can’t be used if the supplier cannot ensure the import customs fulfillment.

So, if the parties still want to exclude such obligations from the supplier and use the rules of DDP, this should be clearly defined in the contract of goods’ sale.

The DDP rules are applicable in the case of goods transportation by any mode, even including the multimodal transport type.

You can see the word “carrier” in the DDP description of Incoterms.

In this matter, it means any entity who takes the obligation to arrange or provide transportation of products by some type of delivery route under the agreement of carriage.

What are Incoterms 2010 FAS?

FAS is short for Free Alongside Ship.

Under the FAS agreement, the supplier has to deliver certain products along the side of the ship at the berth in the specified port.

The term FAS can only be used when transporting goods by sea or inland waterway.

The risk of loss or damage to the goods passes to the buyer when the goods are located along the side of the vessel.

The seller’s main responsibility is to transport the goods not just to the port, but to the indicated berth where the ship chartered by the buyer moored, or to the barge (without loading onto the ship).

The buyer is obliged to load the goods onto the chartered vessel, pay for the vessel’s freight, unload it at the port of arrival, perform import customs clearance with payment of import customs duties and fees, and deliver the goods to the final destination.

What is Incoterms 2010 CIP?

CIP is short for Carriage and Insurance Paid to.

This set of Incoterms 2010 rules shows us the situation where the supplier has to transfer the insured goods, released in the customs export mode, to the carrier he chose before to transport the goods to the destination.

Considering the CIP rules, the buyer takes all risks of damage or loss of the products, as well as other costs after the goods are transferred to the carrier, and not when the goods reach the final destination.

All risks which arise after loading the goods into the vehicle and all the costs at the destination point are distributed to the buyer.

However, the supplier must pay all costs connected with the freight of products to the certain area, perform export customs clearance for the export of goods with payment of export duties and other fees in the country of departure.

Keep in mind that the supplier is not obliged to complete customs procedures for importing goods, pay import customs duties, and perform all the connected with import processes.

Finally, the CIP rules impute the supplier of some insurance fees.

This party has to pay for risks of loss and damage to the goods during transportation to the buyer.

But, please note that under the rules of the CIP, the supplier is obliged to provide insurance with minimal coverage.

So, if you want as a buyer to have insurance with a larger coverage, you have to either specifically agree on this with the supplier, or conclude additional insurance by yourself.

You can freely use the CIP rules for the transfer by any type of transport, including multimodal transport.

In the situation with shipment by several carriers, the supplier transfers its risks at the time of transference of products to the first carrier.

Air freight

What is Incoterms 2010 FOB?

Let’s try to figure out what the term FOB means.

So, FOB is short for Free on Board and it tells that the supplier completes the delivery when the cargo passes the ship’s rail at the specified port of shipment.

That is why all the connected risks of damage or loss to products and all the relevant costs are borne by the buyer from this moment.

The FOB rules state that the supplier must make all the clearance in the case of export.

Please remember that you can use this set of rules only if the carrier transports the goods by inland waterway or maritime transport.

In the case when the parties don’t want to deliver the products onboard, the term FCA should be used.

What does FCA Incoterms 2010 mean?

FCA (Free Carrier) Incoterms 2010 describe the deal in which the supplier has to transfer the products passed all customs procedures to the carrier, specified by the buyer, in the named place.

It should be noted that the choice of place of delivery will affect the obligations of loading and unloading goods.

If delivery takes place at the supplier’s premises or another agreed location, the supplier is responsible for loading the products.

It is recommended to identify the point of delivery because the risk passes to the buyer at this moment.

What is CIF Incoterms 2010?

CIF (Cost, Insurance and Freight) Incoterms 2010 show the situation when the supplier has to transfer the insured goods on board of the ship and deliver them to a destination port.

This is the moment when the supplier’s goods obligations pass to the buyer.

According to the CIF rules, the buyer takes all risks of losses, as well as other expenses after the goods are placed on board of the ship at the certain port (not when the goods reach the destination).

In the case of CIF contract, the supplier is obliged to pay the costs and freight required to deliver the goods to the specified port of destination, perform export customs clearance for goods with payment of all connected duties and other fees in the country of departure.

However, you have to know that such a supplier is not obliged to process customs formalities for importing goods or take part in other import customs procedures.

Finally, the CIF contract rules also place on the supplier the obligation to purchase marine insurance against the risk of loss and damage to the goods during the transportation process.

Like in the case of the CIP set of rules, the supplier is required to provide minimal coverage insurance, so if the buyer wants to have insurance with large coverage, he must either specifically agree on this with the seller, or apply for additional insurance agreement.

Note: the CIF set of rules can be used only when transporting goods by sea or inland waterway transport. If the parties do not want to deliver the products in such a way, they should use the CIP contract, which was already mentioned previously in this article.

What is CFR Incoterms 2010?

CFR stands for Cost and Freight.

What does it mean?

These terms state that the supplier finishes the delivery when the products pass on board of the vessel at the port of shipment and are delivered to the port of destination.

According to the CFR delivery basis, the buyer assumes all risks of loss or damage to the goods, as well as other expenses after placing the goods on board of the ship at the certain port.

The CFR delivery terms impute on the supplier the obligation to pay the costs and freight required to bring the products to the certain port of destination and to perform export customs clearance.

The buyer, on the other hand, has to perform customs formalities for import goods, pay import customs duties and perform all other import customs procedures.

The term CFR Incoterms 2010 can be used only when transporting goods by inland or sea waterway transport.

If the parties are not going to deliver the goods across the ship’s rail, the CPT rules are better to be used.

Product warehouse

What is CPT Incoterms 2010?

CPT is short for Carriage Paid To.

According to the CPT rules, the buyer assumes all risks of loss or damage to the goods, as well as other expenses after the goods are transferred by the seller to the carrier (not when the goods reach the destination).

The seller must pay the costs and freight required to deliver the goods to the specified destination, perform export customs clearance for the goods with payment of all duties and other fees in the country of departure.

But, please note that the supplier is not obliged to perform customs formalities for importing goods, pay corresponding customs duties or deal with other import procedures.

These terms can be applied for delivery by any mode of transport, including multimodal transport.

In the case of transportation to an agreed destination by several carriers, the transfer of risk from the supplier will occur at the time of transfer of the goods to the first of carriers.

What is EXW Incoterms 2010?

EXW (Ex Work) terms describe the situation when the seller is considered to have fulfilled the delivery obligations when he transfers products to the buyer’s business or in another specified place (e.g. warehouse, factory, shop, etc.).

Under the EXW rules, the supplier is not responsible for loading the goods onto the vehicle provided by the buyer, neither for making customs payments nor for customs clearance of the exported goods, unless otherwise specified.

According to the EXW rules, the buyer bears all the risks and costs of moving goods from the seller’s territory to the specified destination.

If the parties wish the seller to take over the responsibility of loading the goods at the place of dispatch and bear all the risks and expenses for such a shipment, this should be clearly stated in the relevant addendum to the contract of sale.

The term EXW cannot be used when the buyer is not able to perform export formalities.

What is DAT Incoterms 2010?

DAT is an abbreviation for Delivered At Terminal.

This set of terms states that the seller is considered to have fulfilled his obligations when the goods released in the customs regime of export are unloaded from the transport and placed at the disposal of the buyer at the agreed terminal.

The term “terminal” in the basis of delivery DAT means any place, including air/ auto/railway cargo terminal, berth, warehouse, and so on.

The DAT terms of delivery impose upon the seller all the risks associated with transporting the goods and unloading them at the specified terminal.

Also, the seller is obliged to pay the costs and freight necessary for the delivery and unloading of goods to the specified terminal, perform export customs clearance in full.

On the other hand, the buyer is obliged to perform customs formalities for import and pay all the connected fees or duties.

The DAT terms may be used in the carriage of goods by any mode of transport, including multimodal transport.

What is a multimodal transport in the case of some Incoterms rules?

Multimodal transportation definition is used for the transportation of products under an agreement with one carrier using various modes of transport.

The carrier has the right to use the transport of other contractors, but all responsibility lies with the general contractor, from whom the transportation was ordered.

The organization of multimodal transportation of products should begin with comprehensive route planning.

Carefully consider a timetable with overload points and stops along the way.

Multimodal transportation can be used in the next cases:

  • when there is no direct communication by a single mode of transport between the supplier and the consignee;
  • direct communication by a single mode of transport is not suitable for the consignee due to the high price or long delivery time.

The consignee can also order transportation by different modes from multiple carriers; this type of transportation is called intermodal.

There is a certain difference between multimodal and intermodal transport.

Compared with multimodal, the latter has several disadvantages:

  1. The number of organizational and paperwork is increasing.
  2. It is very difficult to find the guilty party if the goods were received not on time, or in an imperfect condition.
  3. If carriers do not use their transport, the price is higher, as the number of agents and their agent fees increases.

Ship in the port

What are the Incoterms 2010 for air/road/rail transport?

This group includes the terms EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DAT (Delivery at the Terminal), DAP (Delivery At Place) and DDP (Delivered Duty Paid).

They can be used even if there is no shipping at all.

However, it is important to remember that these terms can also be applied when a vessel is partially used during transportation.

What are the Incoterms 2010 for maritime transport?

The next rules are used for maritime and inland water transport only:

  1. FAS (Free Alongside Ship).
  2. FOB (Free on Board).
  3. CFR (Cost and Freight).
  4. CIF (Cost Insurance and Freight).

What is the difference between Incoterms 2000 and Incoterms 2010?

First of all, in the 2010’ Incoterms edition the number of terms was reduced from 13 to 11.

But at the same time, two new positions were introduced (DAP and DAT).

And the four least popular terms were abolished (DAF, DES, DEQ, and DDU).

In fact, the term DAT (Delivery at Terminal) replaces the term DEQ.

However, the DAT set of rules, unlike DEQ, is applicable for multimodal transport.

According to logistics experts, the delivery to the DAT terminal corresponds most of all to the logistics practice in the port.

The term DAP (Delivery to Point) makes important to specify the exact destination.

It replaces three terms (DAF, DES, DDU).

Speaking of the FOB, CFR, and CIF, the risks and costs are set in a new way.

In Incoterms 2000 the risk passes on after the delivery has been made to the ship’s side.

In Incoterms 2010, on the other hand, the transfer of risks takes place after full loading of the cargo on board of the ship.

You can check Incoterms 2000 via this link.

Can Incoterms 2010 be used for domestic shipments?

Yes, Incoterms 2010 may apply both for domestic and international transportation.

Do Incoterms 2010 cover title transfer?

Incoterms 2010 is mostly a set of rules connected with transportation and customs fees and procedures.

That is why these terms do not determine ownership or transfer title to the goods, nor contain payment rules.

Which Incoterms 2010 are the most favorable for the seller/buyer?

As you can already assume, various Incoterms 2010 rules can be profitable for buyers and seller with a slight difference.

Here we’ll try to figure out the most favorable Incoterms for such parties.

Let’s start with buyers.

FOB should be your #1 choice because under these rules the supplier has to leave the products at the port, prepared and ready for international departure.

As a buyer, you have to hire the shipping company.

This gives you total control of all expenses and coordination of the cargo delivery.

FOB terms are very flexible and useful.

Also, buyers can use EXW and DAP with great success, however, these sets require a good understanding of trading laws and regulations.

As for suppliers, CPT or similar rules where the goods are passed to the carrier without exporting procedures should do just fine.

Incoterms 2010 and revenue recognition: how do these concepts connected with each other?

Please keep in mind that Incoterms 2010 are not written for revenue recognition and the ICC (International Chamber of Commerce) guide specifically says that’s not what they do.

They cover only the supply delivery processes, transfers of risk, import/export procedures and very little else.

Rail port

When the next Incoterms set of rules will be created?

The work under a new set of Incoterms rules has already been started.

Presumably, they’ll come out in 2020.

What kind of insurance obligations could be found in Incoterms 2010?

You have to remember that two Incoterms 2010 only (CIF, CIP) have a provision about the freight insurance, which has to be arranged and paid for by the supplier.

In practice, it can be quite hard to identify the moment in a journey where the damage takes place.

So it is most recommended to ensure the delivery on a warehouse-to-warehouse term.

Also, the freight insurance in this case usually doesn’t cover consequential losses, like the knock-on effects of buyer missing a contract deadline or a sales season.

If desired, this risk can be included in the insurance agreement.

Incoterms 2010 chart of responsibility: what is it?

Incoterms 2010 chart of responsibility is a useful scheme which shows all the terms in one place, with a clear comparison of rules for each set of terms.

You can see the comparison chart in the picture below.

Incoterms comparison scheme

What are the payment terms in the case of Incoterms 2010?

You should know that Incoterms 2010 do not contain any kind of payment terms connected with the purchase of goods.

So, the payment terms in the case of Incoterms refer to all costs and fees for customs and transportation process.

Where can I find an easy tutorial for Incoterms 2010?

It is hard to mention the one and only best way to learn Incoterms with ease.

There are a lot of useful articles and videos on the Web which can help you to become more familiar with Incoterms 2010.

For example, you can check this Youtube video if you want a simple descriptive guide to this topic.

What is the difference between CISG contracts and the Incoterms 2010?

There is no clear connection between Contracts for the International Sale of Goods (CISG) and Incoterms 2010.

CISG is a set of applicable laws for sales of goods between businesses situated in different countries.

Incoterms are a set of rules (not obligatory laws) that simply specify parties’ respective rights and obligations about transportation and delivery of goods (not just internationally but for domestic purposes as well).

You can use both CISG and Incoterms in your trading practices.

Do Incoterms 2010 matter when calculating custom duty?

Yes, it has a huge matter because the import duty and payable taxes are calculated following the complete shipping value, which includes the cost of the imported goods, the cost of freight and the cost of insurance.

That is why it is possible to save on the small amount of taxes if you conduct a good freight cost.

Are Incoterms 2010 required in an invoice for cross-border shipping transaction? Or can I issue an invoice without these terms?

As it was said previously in this FAQ, using the Incoterms 2010 is not compulsory.

You can issue an invoice without the terms as long as the other party is agreed with it.

Can I use Incoterms 2010 on Alibaba/Aliexpress?

Incoterms 2010 can be used by Alibaba suppliers, the vast majority of which are actual manufacturers.

However, you won’t see Incoterms in the case of Aliexpress because all the transportation and customs procedures are already figured out by Aliexpress sellers and carriers (you can only choose the type of carrier when ordering on Aliexpress).

Ask an expert about incoterms now

If you want to dig into the all incoterms, I think you can keep reading this guide. You will be an expert about incoterms.

The best part:

Whether you are fresh to international shipping or want a refresher on the details of Incoterms, I have you sorted.

As an experienced freight forwarder, the three-lettered acronyms are my daily cup of tea.

Since shipping from China is a complicated business, it is essential you understand the trade’s vocabularies, related costs and risks and how it all impacts you.

When brokering an international sales agreement, you should be keen on the terms of sales regarding the sale price.

Therefore, to reduce unnecessary confusion, use International Commercial Terms, the commonly accepted serial of international trade terminologies.

Incoterms are standardized rules developed by the International Chamber of Commerce (ICC), which clarify the predominantly applied international trade terms.

ICC

ICC

The trade terms closely correlate with the U.N. Convention on Contracts for the International Sales of Goods.

They are recognized and enforced by all key trading nations.

Incoterms are a voluntary, assertive, universally accepted and complied with text for defining your responsibilities.

And, that of your seller during the carriage of goods in contracts of sale for international trade.

They aim to plainly explain the risks, costs, and responsibilities associated with the shipment of goods.

But, it is good I made you aware that Incoterms are just a section of the entire international trade transaction agreement.

They do not mention anything to do with the price to be paid for the goods or the payment method to be applied in the transaction.

What’s more?

Incoterms do not cover the transfer of goods ownership, liability for goods or breach of contract.

You should take care of these issues in your contract of sale.

Moreover, Incoterms cannot overrule any compulsory laws.

Incoterms explain between you and your China supplier, who is responsible for:

  • Customs clearance
  • Transportation of goods

And, who bears the risk for the goods’ conditions at particular times during the transportation process.

Incoterms

Incoterms

However, it is not mandatory you include them in your contract.

But when included, your contract of sale ought to cite the most current revision of Incoterms: Incoterms 2010.

Although you could conceptually apply Incoterms 2000 in place of 2010, I would dissuade you from doing so to prevent complications.

I  have prepared this comprehensive Incoterms 2010 guide for you who has little or no experience of managing international shipping.

It offers detailed information, understandably describing each Incoterm.

Incoterms 2010

The latest revision of international trade terms, Incoterms 2010, took effect on January 1, 2011, and comprises of 11 Incoterms.

Incoterms 2010 has grouped the 11 rules into two categories depending on the method of delivery:

1.      Rules for Any Mode of Transport that Constitute the Terms:

  • EXW (Ex Works)
  • FCA (Free Carrier)
  • CPT (Carriage Paid To)
  • CIP (Carriage and Insurance Paid To)
  • DAT (Delivered at Terminal)
  • DAP (Delivered at Place), and
  • DDP (Delivered Duty Paid)

2.      Rules for Sea and Inland Waterways Only that Constitute the Terms:

  • FAS Free Alongside Ship)
  • FOB (Free on Board)
  • CFR (Cost and Freight), and
  • CIF (Cost Insurance and Freight)

2010 Incoterms

2010 Incoterms

We can as well group the Incoterms into four categories depending on the point of delivery.

  • Group “E” – includes (EXW)

The point of delivery is the seller’s premises.

  • Group “F” – includes(FOB, FAS & FCA)

The point of delivery is before or up to the main transporting vessel, with the carrier unpaid by the consignor or seller.

  • Group “C” (CFR, CIF, CPT & CIP)

The point of delivery is up to and beyond the main transporting vessel, with the carrier paid by the consignor.

  • Group “D” (DAP, DAT & DDP)

The point of delivery is the final destination.

In summary, under the terms beginning with the letter C or D, the seller is responsible for finalizing the agreement with the carrier/shipping company.

Conversely, under the terms beginning with letter E or F, it is you the buyer who contracts the carrier.

Buyer and seller

Buyer and seller

The seller should ensure that you are in a position to receive the products from the carrier at the named destination when he undertakes carriage.

Ensuring that is specifically essential as far as the shipment contract is concerned.

You should then get documentation from the supplier, such as a bill of lading, which will allow you pick the goods from the transporter.

Of course this is after handing over an original of the documentation in exchange for the goods.

If your China supplier undertakes a carriage agreement with one of the D terms, they should be in charge of the goods until the designated delivery point.

It is their responsibility to guarantee successful delivery of the goods to your named place of destination.

In case a problem comes up during transportation, they (seller) carry the risk.

In contrast, under terms beginning with letter C, your supplier is responsible for arranging and paying for the carriage only.

Therefore, in case a problem comes up during transportation, it is you who bears the risk.

Incoterms groups

Incoterms groups

EXW (Ex Works), FOB (Free On Board) and FCA (Free Carrier) are the most popular incoterms 2010 rules.

Though, there is a lot more concerning these and other alternatives to learn.

Since they are legal terminologies, written from a legal point of view, International Commercial Terms can be complex or easily misunderstood.

Making the wrong decision might result in your shipment being a costly nightmare.

For this reason, I’ve prepared this comprehensive Incoterms 2010 guide to make your shipping from China easy and simple.

Let’s go straight to the 11 rules of Incoterms 2010 – shouldn’t we?

CIF – Cost, Insurance, and Freight

When you use CIF terms for shipping from China, it is the seller who has the responsibility to do:

i. Export clearance

ii. Insurance coverage

iii. Main transportation costs to the designated destination port

The Incoterm is applicable only in Inland and marine modes of transport.

CIF Incoterm

CIF Incoterm – Photo courtesy: International Commercial Terms

Seller’s Responsibilities (summary)

Below are some of the main responsibilities of the seller:

· Licenses and Customs Documentations

At their own risk and cost, the seller obtains all necessary export customs licenses and paperwork.

They also pay the required export duties and taxes.

· Carriage and Insurance

Your supplier is responsible for transporting and insuring the goods up to the port of destination.

However, once the cargo crosses the ship’s rail at the destination port, you take up liability for loss or damage.

I would recommend you insist on an insurance policy which allows you to file a claim directly to the insurance company.

· Delivery

The seller has the mandate to transport the goods up to your port of destination.

The delivery is considered done once the goods have docked at your named destination port.

· Costs

Your supplier covers all the transportation costs, insurance and all charges related to exporting from China.

Buyer’s Responsibilities (summary)

Below are some of the main responsibilities of the buyer:

· Licenses and Customs Documentation

As the buyer, you are mandated to undertake and meet all the costs associated with the import protocol comprising applicable duties and taxes.

· Carriage

You are responsible for the transportation of the cargo from the mentioned port of arrival to the final delivery point.

· Risk Transfer

You take up responsibility for risk of loss or damage from the immediately the consignment crosses the ship’s rail at the arrival port.

· Costs

You are liable for all the charges regarding the goods from the time they dock at your destination port.

The charges include unloading, port handling, and import customs clearance fees.

Despite the seller being liable for sourcing and meeting the insurance during the shipping, you may possess an “insurable interest” as soon as the consignment reaches the destination port.

I would recommend you get an additional insurance cover for the goods while transporting them to your final location.

Example of how to calculate the price under CIF terms

You may enter into a contract of sale with a trading company in China to supply you with 2000 bench clamps.

The supplier is responsible for transporting the products to the container terminal.

Your seller (trading company) gets the goods from a manufacturer who prices their VAT invoice at 117 RMB per bench clamp.

Assume the manufacturer enjoys a VAT refund rate of 5%, which results in 117/1.17X0.05 = 5 RMB refund per unit.

If, for example, your seller wants to make a net profit of 12 RMB per bench clamp, thenan additional 12 – 5 = 7 RMB ought to be added to the unit price.

Assume the approximate stuffing, customs clearance, and commodity inspection charges total to 2 RMB for each unit; then the total FOB price ought to be 117 + 7 + 2 = 126 RMB.

If the exchange rate is 1 USD = 6 RMB, the FOB price will be 126/6 = 21 USD.

At times the agreement says that the point of delivery is in the seller’s warehouse.

Then the cost of transport from the warehouse to the container terminal, which is taken to be 0.6 RMB for each bench clamp, ought to be paid for by you.

Therefore, the FOB price ought to be 126 RMB+0.6 RMB = 126.6 RMB, which converts to 21.1 USD as per the exchange rate.

And assuming the freight cost of a 20’ container to your location is 2000 USD, and 2000 units of bench clamp can fit in one 20’ container. Thus the average freight cost of each bench clamp will be 1 USD.

Therefore, CFR=FOB+FREIGHT=21+1=22 = (21.1)+1=22.1 USD

Note: the price in brackets is when the delivery point is at the seller’s warehouse.

When the insurance cost is worked out as 0.8/100 of the 110% of the value of invoice, then the insurance cost can be calculated as:

22(22.1) X 1.1 X0.008 = 0.19 USD

Thus, CIF=CFR + Insurance Cost = 22/(22.1) + 0.19 = 22.19/(22.29USD

Ex Works (EXW)

Under EXW, the seller puts the goods within your reach either at their premises or the container terminal.

EXW

EXW

After delivery to this point, you will take up all the risks and costs from the seller.

Also, it is important you know that this incoterm is applicable in all modes or multimodal transport.

Seller’s Responsibilities (summary)

Here are some of the main responsibilities of the seller under EXW Incoterm:

· Licenses and Customs Documentation

On your request, risk and expense, the seller should offer help in acquiring the licenses, documents and permits you will need to export and import the products.

· Carriage

You should be aware that this term does not obligate the seller to offer carriage of goods.

· Costs

The seller covers all the costs till the products have been placed within your reach, in most cases at the seller’s premises or the container terminal.

These costs comprise export packaging or certificate of inspection (if necessary.)

EXW Incoterm

EXW Incoterm

Buyer’s Responsibilities (summary)

Some of the main responsibilities of the buyer under EXW Incoterm include:

· Licenses and Customs Paperwork

At your risk and cost, you have the burden of securing all the necessary export and import licenses, permits, documentation, duties, and taxes.

· Risk Transfer

You take up all the risk of loss or damage from the moment the seller has placed the goods within your reach.

· Costs

You cover all the subsequent expenses from the moment the seller has made the goods available to you.

It includes any expenses as a result of you failing to receive the goods during delivery.

You will realize that sellers use Ex Works rule when making the first quote for the sale of their products.

It represents the price of the goods minus any additional costs.

· Example of How the to Calculate the Price Under EXW terms

I will still use the previous example in this scenario:

You buy bed clamps through a trading company from a manufacturer in China, and the price on the VAT invoice is 117 RMB.

Because the manufacturer enjoys a 5% tax refund rate, the tax refund for every unit is 117/1.17X0.05 = 5 RMB.

And let’s say your seller (trading company) wants a net profit of 12 RMB per unit, then an additional 12 – 5 = 7 RMB ought to be included in the price.

Thus, the EXW price of every unit ought to be 117+7 = 124 RMB. Suppose the exchange rate is 1 USD = 6 RMB, the EXW price is thus 124/6 = 20.67 USD per bench clamp.

Free Carrier (FCA)

This Incoterm requires the seller to clear the goods for export then deliver them to the named carrier as directed by you.

The term is fit for all modes or multiple modes of transportation.

CFA

CFA

Seller’s Responsibilities (summary)

Some of the main responsibilities of seller under CFA Incoterm include the following:

· Licenses and Customs Paperwork

The seller is required at their own risk and cost to undertake all export protocols, including getting necessary licenses, permits and paying duties and taxes.

· Carriage

The seller is not required to offer transportation after they have delivered the goods to your appointed carrier.

· Delivery

The seller is assumed to have delivered the products once they either load them onto your provided carrier or deliver them to your appointed freight forwarder or carrier.

· Costs

The seller covers all the costs till he delivers the goods to your appointed carrier or freight forwarder.

Buyer’s Responsibilities (summary)

In this Incoterm, the buyer has the following responsibilities:

· Licenses and Customs Paperwork

You are required to undertake and meet the cost of all formalities associated to import, including getting necessary licenses, permits and paying duties and taxes.

· Carriage

You are in charge of transportation from the moment the seller delivers the goods to the carrier.

· Risk Transfer

You assume responsibility for the risk of loss, theft or destruction right after the seller dispatches the goods to the carrier.

· Costs

You take up responsibility for the carriage cost and insurance immediately after the seller has delivered the goods to the carrier.

“Carrier” has a distinct and somewhat broader definition.

A carrier can be an airline, trucking company, railway, or a shipping line.

Moreover, a carrier can as well be a person or company who assigns the means of transport, like a freight forwarding agent.

Free Alongside Shipping (FAS)

This Incoterm mandates the seller to undertake the export customs clearance and then arranges for the delivery of goods alongside the named shipping vessel at the named port of shipment.

Quick ref to Incoterms

FAS

This term is applicable in inland waterway and marine modes of transport only.

Seller’s Responsibilities (summary)

The main responsibilities here include:

· Licenses and Customs Paperwork

The seller is needed at their own risk and cost to perform all procedures relating to export including getting necessary licenses, permits, documentation and paying export duties and taxes.

· Carriage

The seller only offers pre-carriage to the quay.

· Delivery

Goods delivery is considered done when the seller gets the products alongside the vessel at the agreed time.

· Costs

The seller takes care of all the costs till he places the cargo alongside the named shipping vessel.

Buyer’s Responsibilities (summary)

The main responsibilities include the following:

· Licenses and Customs Paperwork

You are required to undertake all import protocols, including securing relevant licenses, permits documentations and paying import duties and taxes.

· Carriage

You take responsibility for transportation from the named shipment port.

· Risk Transfer

Risk of loss or destruction passes down to you from the moment the seller places the goods alongside the named shipping vessel.

· Costs

You cover all the expenses for transport and insurance right from the moment seller places the products alongside transporting vessel.

Free On Board (FOB)

FOB term makes the seller responsible for export customs clearance and delivery of your merchandise on board the named shipping vessel at the designated port of shipment.

This Incoterm is applicable in inland and marine waterway shipments only.

FOB

FOB

Seller’s Responsibilities (summary)

The main responsibilities of the seller include:

· Licenses and Customs Paperwork

The seller undertakes at their own risks and costs all the procedures of export, including getting relevant licenses, permits, documents and paying duties and taxes.

· Carriage

The seller offers transport to and loading of goods onto the named vessel.

· Delivery

The seller is considered to have done the delivery once they have loaded the goods onto the named shipping vessel at the designated port and scheduled time.

· Costs

The seller takes care of all the costs till the goods on board the designated shipping vessel.

Buyer’s Responsibilities (summary)

Here are the main responsibilities of the buyer in FOB Incoterm:

· Licenses and Customs Paperwork

You are required to undertake all the import protocols, including getting where applicable, documents, licenses, permits and pay for duties and taxes.

· Carriage

You are in charge of the goods transportation from the named shipment port to your final destination.

· Risk Transfer

The risk of loss, theft or damage is passed from the seller to you once the goods are on board the shipping vessel.

· Costs

You meet all the cost of transportation and insurance from the moment seller loads the goods onto the named shipping vessel.

For some kinds of consignment, you will have to carry out other activities before the vessel departs from the port of shipment.

  • Stowing and lashing – placing the consignment appropriately in the ship (factoring the stability of the vessel, other goods loaded, etc.) and securing the consignment to avoid its movement in turbulent seas.
  • Dunnaging – balancing & securing of consignment packaging materials, airbags etc.

Nonetheless, FOB rule does not cover these activities – the seller achieves his responsibility when the cargo is “loaded on board.”

So in case these are needed for a particular freight and are to be undertaken by the supplier, you can write the term as FOB stowed and lashed.

Importantly, ensure to include the responsibility for these costs in the commercial contract.

Depending on who is responsible for the loading charges, some FOB variations are usually applied such as:

  • FOB liner term indicates that the person settling the cost of loading is the party (which you) responsible for shipping cost. This term is the same as that a freight liner.
  • FOB under tackle indicates that the seller places the goods within the disposal of the tackle of the shipping vessel, and you cover the cost of loading after the cargo is lifted.
  • FOB stowed, FOBS, indicates that the seller is liable for the loading of the cargo on board the shipping vessel, and covers both the loading and stowage charges.
  • FOB trimmed, FOBT, indicates that the seller is liable for the loading of the cargo on board the shipping vessel, and covers both loading and trimming charges

Example of How to Calculate Price Under FOB terms

I will still use our previous example for this illustration:

Let’s suppose you enter into a trade deal with a trading company in China to supply you with 2000 bed clamps.

The company sources for your order from a manufacturer whose price for each unit on the VAT invoice is 117 RMB plus 17% VAT.

The manufacturer enjoys a 5% tax refund rate, meaning the tax refund for every unit of bed clamp is 117/1.7X0.05 = 5 RMB.

Assume the trading company wants a net profit on each unit to be 12 RMB, then an additional 12-5 = 7 RMB ought to be included in the price.

Normally, the point of delivery defined by the agreement is at the named port of shipment with the consignment on board the designated vessel.

The trading company should be responsible for the pre-carriage cost to the container terminal, which 0.6 RMB per unit.

Say the customs clearance, stuffing, commodity inspection, dock handling and terminal handling costs are 2 RMB per unit.

Therefore, the FOB price is 117+0.6+7+2=126.6 RMB.

Suppose we use an exchange rate of 1 USD = 6 RMB, the ultimate FOB price is thus 126.6/6=21.1 USD.

FOB is among the most misused Incoterms 2010 revision rules.

The term should be applied for marine and inland waterway modes of transport only and not for air or truck shipments.

NYK Line

NYK Line

Moreover, the term applies to non-containerized goods only.

So if you are using FOB presently for containerized, consider FCA shipping terms instead.

Cost and Freight (CFR)

When shipping under this Incoterms, your supplier is responsible for the customs clearance in China and carriage charges to the named destination port.

This term is applied only for marine and inland waterway transport.

Seller’s Responsibilities (summary)

The main responsibilities here include:

· Licenses and Customs Paperwork

The seller secures at their risks and costs all the export licenses, permits, paperwork, duties, and taxes.

Also, he or she undertakes all the required export procedures.

· Carriage

The seller is legally bound to fully arrange for the transportation of goods to your designated destination port.

But, as soon as the products cross the ship’s rail at the port of departure, you become responsible for loss, theft or damage.

· Delivery

The seller completes the obligation of delivery the moment he loads your shipment onto the shipping vessel at the outbound port.

· Costs

The seller covers all the costs of transportation to the named destination port.

Buyer’s Responsibilities (summary)

Here, the main responsibilities include:

· Licenses and Customs Paperwork

You are mandated to undertake all the import procedures and take care of all the costs including duties and taxes.

· Carriage

You are responsible for the on-carriage from the destination port to your final destination.

· Risk Transfer

You should know that the transfer of risk from the seller to you takes place immediately the goods have crossed ship’s rail at the port of shipment port.

· Costs

You are in charge of any extra expenses from the moment the goods reach your port of destination.

Though the seller may not be lawfully liable for the shipment once they cross the ship’s rail at the outbound port, they may retain an “insurable interest” during the journey.

For this reason, I recommend they buy supplementary insurance cover.

Example of How to Calculate Price Under CFR Terms

I will use an example where you buy directly from the manufacturer rather than through a trading company.

We will apply the same order of 2000 bed clamps stuffed in one 20’ container, and you want a CFR SYDNEY price.

The approximate cost of manufacturing a unit of bed clamp is 56 RMB.

Let’s assume the manufacturer wants a net profit of 5RMB and the packaging fee per unit is 2 RMB thus, the factory price of every unit of bed clamp will be 63 RMB.

Let us suppose the cost of carriage from the factory to the container terminal is 2000 RMB, meaning 1 RMB per unit.

If the cost of export customs clearance, terminal handling, stuffing and commodity inspection totals to 4000 RMB, meaning it costs 2 RMB per bed clamp.

Therefore, FOB price = Factory price (63 RMB) + carriage cost (1 RMB) + port charges (2 RMB) = 66 RMB.

Assume we calculate these costs using an exchange rate of 1 USD = 6.6 RMB, then you will pay a FOB price of 66/6.6 = 10 USD for each bed clamp.

Because the freight charge of a 20’ container from China to Sydney is 2000 RMB, thus the freight charge for each unit is 2000USD/2000 units = 1 USD per unit.

Hence, CFR price = FOB price + Freight cost = 10+1 = 11 USD per unit of bed clamp.

Carriage Paid To (CPT)

With this Incoterm, the seller undertakes export customs clearance and carriage to the named destination.

You assume all risks of loss, theft or destruction from the moment the seller gives the goods to the main carrier.

CPT

CPT

CPT term applies in any mode of transport

Seller’s Responsibilities (summary)

In this Incoterm, the responsibilities of the seller include the following:

· Licenses and Customs Paperwork

The seller gets at their risk and expense all export licenses, permits, duties, and taxes.

They also undertake all the export procedures.

· Carriage

The seller is in charge of the transportation to the designated terminal or harbor at the destination.

· Delivery

The seller is considered to have delivered the goods to you once he surrenders them to the main carrier.

· Costs

The seller takes care of all the charges till the goods land up at the named delivery terminal or port, but unloaded.

Buyer’s Responsibilities (summary)

As a buyer, your responsibilities will include the following:

· Licenses and Customs Paperwork

You are obligated to take care of all formalities related to import, including customs clearance and paying import duties and taxes

· Carriage

You are under no obligation to offer the main transportation of freight.

· Risk Transfer

You begin to be responsible for the risk of loss, theft or damage right from the time the products are handed over to the initial carrier.

· Costs

You are responsible for any extra expenses after the seller has taken the goods to the agreed delivery point.

Even though you nor the supplier has the responsibility to provide insurance coverage during the transportation, both of you may possess an insurable interest.

Due to this fact, I recommend you buy an extra marine insurance cover.

In the case of multimodal transportation, the risk shifts from the seller to you when the seller delivers the products to the initial carrier.

Carriage and Insurance Paid To (CIP)

Here, the seller takes care of the export customs clearance, insurance coverage, and carriage to the named destination.

But as the buyer, you are liable for all the risk of loss, theft or damage from the moment the seller dispatches the goods to the main carrier.

CIP also falls among the Incoterms that applies in any transport mode.

Seller’s Responsibilities (summary)

As the seller, your responsibilities will include the following:

· Licenses and Customs Paperwork

The seller acquires at their risk and expense all relevant export licenses, duties, taxes, permits and export procedures.

· Carriage and Insurance

The term mandates the seller to arrange for the main transportation and insurance cover for your goods to the point of delivery.

Importantly, the insurance should allow you to file claim personally from the insurer.

· Delivery

The seller is considered to have completed the delivery once he has dispatched the goods been to the main transporter.

· Costs

Your supplier in China covers the carriage and insurance charges until the designated port of destination.

Buyer’s Responsibilities (summary)

The main responsibilities of the buyer include:

· Licenses and Customs Paperwork

You are under obligation to meet all the costs associated with import procedures comprising duties and taxes.

· Carriage

This Incoterm does not obligate you to offer transportation to the designated terminal or destination port.

· Risk Transfer

You assume liability for loss, theft or damage immediately after the seller has delivered the goods to the main carrier.

· Costs

You are responsible for any extra charges after the goods have dicked at the designated terminal or destination port.

DAT – Delivered at Terminal

This Incoterm obligates the seller to cover all expenses related to getting your products to the terminal at the designated destination.

The cost also covers unloading from the arriving vessel of transport.

DAT

DAT

If you are looking for an Incoterms that can apply to any mode or multiple modes of transport, then DAT is one of your options.

Seller’s Responsibilities (summary)

The main responsibilities of the seller include the following:

· Licenses and Customs Paperwork

The seller acquires at their risk and expense all required export licenses, duties, taxes, permits, and export procedures.

· Carriage

Your supplier is obligated to transport and ensure the goods are available to you at the destination terminal.

Also, he should unload the consignment from the transportation vessel.

· Delivery

The seller completes the delivery after he unloads the goods from the carrier at the destination terminal or port.

· Costs

Your supplier covers all the expenses till the destination terminal, comprising any terminals handling and other associated costs.

Buyer’s Responsibilities (summary)

Your responsibilities as a buyer will include the following:

· Licenses and Customs Paperwork

You are obligated to conduct and pay for all import related procedures including customs clearance and export duties and taxes.

· Carriage

You are not responsible for arranging for the main transportation of the cargo

· Risk Transfer

The risk is transferred from the seller to you after them making the goods available to you at the terminal.

· Costs

This Incoterm makes you responsible for any subsequent expenses after the supplier has delivered the shipment to the named destination.

Before we move to the next Incoterms 2010 rule, I feel it is important informing you about “delivery ex quay” (DEQ).

Some suppliers in China may still opt to use it.

DEQ was one of the Incoterms 2000 rules that required the seller to deliver the products to the wharf at the arrival port.

However, DAT replaced the term in the Incoterms 2010 version.

Definition of Delivered Ex Quay

As I have stated above, DEQ was a trade term explained by the Incoterms 2000 revision.

You realize that the “D” part of the Incoterm made it onerous to the seller.

The seller had the burden of all the risks and costs till he delivered the goods as indicated in the agreement of sale.

DEQ

DEQ

Delivered ex quay meant the seller was to deliver the goods at a wharf and was therefore applicable in marine and inland waterway modes of transport.

It was written as either duty paid or unpaid depending on the contract.

DEQ was an option to delivered ex ship (DES).

Under DES term, the seller availed the goods to you on board a shipping vessel at the port of destination.

On the contrary, DEQ required the seller to dispatch the products to the wharf.

For you to use DEQ, your seller had to possess an import license or be legally allowed to deliver in your country.

It was upon the seller to complete all the legal documentation and procedures necessary for the transportation of the products to the wharf in your country.

DAT rule has replaced DEQ in the Incoterms 2010 revision.

DAT is a broader term than DEQ since the referenced “terminal” can be any location, either on a waterway or a dock for another type of transportation path.

DAP – Delivered at Place (…named place of destination)

This Incoterm obligates the seller to deliver the goods to the designated location at the destination (mostly your door), ready for unloading from the means of transport.

DAP

DAP

DAP gives you limited responsibility as you are only obligated to undertake import customs clearance.

If DDU was your favored Incoterm for shipping, then you have a substitute in DAP.

Seller’s Responsibilities (summary)

Your responsibilities will include:

· Licenses and Customs Paperwork

The seller undertakes at their risk and expense all the export procedures, duties, and taxes.

· Carriage

The seller is made responsible for the transportation of the goods to your designated destination.

· Delivery

The seller completes the delivery obligation the moment he delivers the products to your designated destination location, though unloaded.

· Costs

The seller is responsible for all the costs till he delivers the consignment to the designated destination.

Buyer’s Responsibilities (summary)

Your responsibilities as the buyer include:

· Licenses and Customs Paperwork

As the importer, you are responsible for all the import related procedures including doing the customs paperwork, getting the relevant licenses and paying duties and taxes.

· Carriage

This term places no responsibility on you as far transportation of the goods is concerned.

· Risk Transfer

You should know that you begin being liable for all risks after the seller avails the goods to you at the designated destination place.

· Costs

You start being responsible for any costs from the moment the seller has delivered the goods to the designated destination location.

Some sellers in China still choose to use Incoterms 2000 revision rules in their sale contracts.

So you may still come across the terms DAF, DES, and DDU.

Though DAP has substituted the terms.

It is important I made you understand them to avoid complications during shipping.

Delivered at Frontier (DAF)

Incoterms DAF made the seller responsible for the carriage of the goods to the designated place at the frontier.

In addition, the seller was also responsible for all the export customs protocols and documentation, including duties and taxes.

DAF

DAF

DAF majorly was used in highway or rail transport, but could as well be used in other modes of transport.

Delivered Ex Ship (DES)

If you ship on DES terms, the place of delivery is on the vessel at the port of destination, and it is on applicable with marine and inland waterway modes of transport only.

Under the Incoterm, the seller was considered to have delivered the goods once he or she brought them on board the shipping vessel at the port of destination.

DES

DES

Moreover, the risks and costs for the transportation of the products to the port of destination were on the seller.

Delivered Duty Unpaid (DDU)

Shipping from China under DDU terms meant the seller was responsible for the carriage of good to the designated destination, with duty unpaid.

You were responsible for the unloading since the seller achieved his delivery obligation after availing the goods to you on board the shipping vessel at the destination.

As you can see, this term made you responsible for the unloading, import customs clearance, and all other subsequent costs.

Because insurance is an essential component when shipping from overseas, DDU terms obligated the seller to arrange for marine insurance for the goods.

Delivered Duty Paid (DDP)

Here is another Incoterm that leaves you with minimum responsibility.

With DDP, the seller is liable for all the expenses related to getting the goods to your named destination place, cleared for import though not unloaded from the vessel.

DDP

DDP – Photo Courtesy: Trade Finance Global

The Incoterm applies to any mode of transport.

Seller’s Responsibilities (summary)

As your seller, your responsibilities will include the following:

· Licenses and Customs Paperwork

At their risk and cost, the seller secures all the export and import licenses, documentation, duties, and taxes.

· Carriage

The seller is legally bound to transport the goods to your designated destination.

· Delivery

Goods delivery is taken complete once the seller has brought them to your named destination, but not unloaded from the vessel of transport.

· Costs

The seller is responsible for all the expenses till he delivers the cargo to your designated destination, mostly your doorstep.

Buyer’s Responsibilities (summary)

As a buyer, your responsibilities include the following:

· Licenses and Customs Paperwork

You are needed to offer, upon your supplier’s request, help in acquiring necessary export and import licenses, paperwork, and permits.

· Carriage

Based on the goods transportation, the term does not put any responsibility on you.

· Risk Transfer

You only take up all risks of loss, theft or destruction after the seller has dispatched the shipment to you at the designated place of destination.

· Costs

All subsequent costs after the supplier has brought the products within your reach at the designated destination are on you.

Here is a quick reference chart of Incoterms 2010;

Quick ref to Incoterms

Quick ref. to Incoterms

Comparison of the Incoterms

In this section, I am going to compare different types of Incoterms you can consider for your next shipping from China.

Differences between Incoterms CIF and CIP

Here’s everything you need to know:

· Mode of Transport

CIF can only apply to port-to-port marine transportation.

CIP applies in all modes of transport comprising air, sea, rail, land and multimodal transportation.

· Delivery

Under CIF terms the seller delivers the products on board the shipping vessel at the loading port.

Under CIP terms the seller delivers the products to the carrier or another individual chosen by the supplier at an agreed location if the two of you agree on the location of delivery.

· Risk Transfer

Under CIF terms the transfer of risks happens at the on the vessel at the outbound port.

Under CIP terms the transfer of risks happens after delivery of goods to the carrier.

Loading and Unloading Costs

Under CIF terms the party responsible depends on the variation of the term.

Under CIP the costs are covered by the supplier, without deformation.

Documents of Carriage

Under CIF terms the documents constitute the bill of lading for inland waterway and marine transport.

Under CIP terms the documents constitute the bill of lading for inland, marine, air, rail and multimodal transport.

· Name of the Destination

For both CIP and CIF the name of the destination must be added right after the term.

Difference between CPT and CFR:

Before I enlighten you on the differences between the two Incoterms, let me first inform you of the main similarities between the two.

Comparing Incoterms 2010

Comparing Incoterms 2010

  • Both CPT and CFR are shipping terms where the seller is only required to deliver the goods on schedule but, is not required to assure their arrival of on schedule.
  • Under both terms, the seller is responsible for the arrangement and payment of the cost of carriage.
  • The transfer of risk in both Incoterms happens after the seller delivers the consignment to the carrier.

Let’s now check the main differences between the CPT and CFR Incoterms.

· Mode of Transport

CPT applies to all modes of transport

CFR applies to marine and inland waterway transport only

· Place of Delivery

Under CPT terms, the place of delivery is dependent on the mode of transport.

Under CFR terms, the place of delivery is the outbound port.

· Risk Transfer

In CPT, the risk is transferred after the seller takes the cargo to the carrier.

In CFR, the risk transfer happens the moment the goods cross the ship’s rail.

Differences between FCA and FOB

FOB has for a long time been traders favorite Incoterm.

But, due to the developing interest in container shipment, multimodal transportation has drawn the attention of most traders.

FCA VS FOB

FCA vs. FOB – Photo Courtesy: FBABEE

For this reason, ICC in their Incoterms 2010 revision developed FCA rules, which is suitable for containerized shipments.

As I have explained already, under FCA shipping terms, the seller arranges for the pre-carriage up to the place of delivery, which is where the carrier receives the goods.

Under FOB terms, the seller arranges for the pre-carriage until the goods are on board the shipping vessel.

· Description of FOB and FCA Rules by Incoterms 2010 Revision

FOB rule applies to marine and inland waterway transport only.

The delivery obligation is satisfied as soon as the seller loads the cargo onto the designated shipping vessel at your nominated port of shipment.

After the seller has put the goods on board, the risk of loss or destruction is shifted to you.

Meaning you are liable for all subsequent risks and costs.

This makes FOB unfit for transactions where risk transfer happens before the goods are on board.

Like when the seller completes delivery at the container terminal. In such scenarios, you should use FCA shipping terms.

FCA rule is suitable for single or multimodal means of shipping.

Delivery responsibility is complete when the seller gets the goods to your nominated carrier or freight forwarder at the named place.

You should specify the point of delivery since it is where the risk of loss or damaged shifts from the seller to you.

· Similarities in Responsibilities of the Seller Under FOB and FCA Terms

By now you should realize that both terms are Group F Incoterms.

Hence, they share a number of similarities in relation to the obligations of the seller.

Both FOB and FCA belongs to the Group F incoterms.

· General Seller Obligations

Under both FOB and FCA rule, the seller is required to supply the:

  • Products
  • Commercial invoice
  • Supplementary receipts or certificates in accordance with the agreement of sale

If both of you agree, then electronic records with equal legal impacts can be applied instead.

· Carriage and Insurance Agreements

When shipping under either FOB or FCA terms, the seller is not legally obligated to undertake the main transportation to your destination port.

However, the seller can still arrange for shipment if such trade practice exists or on your request at your own risk and cost.

The seller, in all case, has the right to decline to enter the carriage contract though they should communicate to you in time.

The same case applies for the insurance contracts; the seller is not obligated by both terms to provide insurance coverage for the goods.

But, if you request at your own risk and cost, the seller should provide you with all relevant information needed to secure insurance.

· Export fees and Customs Clearance Procedures


The seller is fully in charge of all the risks and costs of securing the export certificate or other formal documentation.

He or she also undertakes all the customs protocols for the export of your ordered goods.

Cleared for public release by USARCENT PAO, MAJ Renee Russo. For additional information, contact MCC Anthony C. Casullo at anthony.casullo@me.navy.mil or DSN 318-439-6250 or COM 011-973-1785-6250

Customs Clearance

It is upon the seller to meet all the costs of customs duties, taxes and other required customs procedures during export.

· Obligation of Notice

Provided you are responsible for the risks and costs;

FOB term compels the seller to provide you with a detailed and timely notice about the delivery of goods in compliance with the contract of sale.

Similarly, FCA terms mandate the seller to issue you with comprehensive and timely notice.

That is, whether the goods, in accordance with the sale contract, have been delivered to the carrier as scheduled or not.

· Symbolic Delivery

FOB and FCA shipping terms fall under the symbolic delivery category since the seller completes the delivery without direct contact.

The seller delivers the goods to the carrier, either unloaded or loaded on board the shipping vehicle at the designated place on the stipulated time.

The seller is taken to have completed their delivery obligation after supplying you with documents as proof of delivery to the carrier, including documents of title.

This means that the arrival of goods at your specified destinations needs not to be guaranteed.

In simple terms, the seller makes the delivery based on the documents, and you make the payment based on the documents too.

Provided the seller, in accordance with the sales contract, has issued complete documentation, you are obligated to pay for the goods.

It does not matter even if some of the goods are lost or damaged.

Conversely, in case the documentation issued by the seller does not conform to the sales agreement, even if the goods remain in perfect condition on arrival, you are legally correct not to make payment.

For this reason, you realize that symbolic delivery is the trading of the contract documents!

The Differences in the Seller obligation between FOB and FCA

· Transfer of Risk

Before the introduction of Incoterms 2010, the transfer of risks under FOB rules happened when the goods crossed the ship’s rail.

Simply put:

The seller was liable for all the risks and losses prior to the goods crossing the ship’s rail.

After that point, the risks were passed down to you.

But in actual life practice, it is normally very difficult to employ the ship’s rail as the boundary for obligation transfer.

This is because lifting the goods from the yard to the shipping vessel is a complete and ongoing process, yet the ship’s rail is an abstract point.

For this reason, it is illogical to consider the ship’s rail as the boundary for risk transfer.

Fortunately, ICC noted this discrepancy and revised in Incoterms 2010 version FOB point of risk transfer.

With the current revision, transfer of risks happens when the seller loads the cargo on board the shipping vessel nominated by you rather than when they cross the ship’s rail.

Apparently, the present revision is more convenient for both of you in distinguishing your obligations in trade contracts.

As per the description of FCA terms, the seller should dispatch the goods to an inland carrier or individual nominated by you at the designated place in conformity with the agreement.

This is also the point where the transfer of risks from the seller to you takes place.

You should, therefore, note that there exist two main differences between FCA and FOB regarding the boundary of risk transfer.

ETIHAD Cargo

ETIHAD Cargo

First, transfer of risk under FCA takes place when the seller delivers the cargo to the carrier contrary to FOB situation where the seller must load the goods onto the vessel.

Therefore, the seller satisfies the delivery obligation without having to bear the risks and costs of loading the shipment on board the transporting vessel.

Second, under FOB terms, the seller loses the goods ownership partly when they are handed over to the carrier.

While they are still liable for all the risks till they load the merchandise onto the named means of transport.

Therefore, the boundary of responsibility and risk transfer is different under FOB terms.

On the contrary, the boundary of responsibility and risk transfer is the same under FCA terms, which is the carrier’s acceptance of the goods delivery.

· Cost Covered by the Seller

There are a number of differences between FOB and FCA terms with regard to the costs borne by the seller.

First, the inland transportation and insurance charges are different.

As I have already indicated, under FOB shipping terms, delivery is complete after the seller gets the products on board the transporting vessel at the port of shipment.

This means the seller should cover the transportation and insurance charges from their factory to the named shipment port.

But under FCA shipping terms, the seller is only required to transport the cargo to the carrier at the designated place.

Usually, when it is a containerized cargo, the point of delivery is the seller’s premises or warehouse.

For that matter, the seller is not obligated to take care of the transportation and insurance charges to the named shipment port.

Second, the dissimilarities in loading and unloading fees.

Under FOB terms, the seller pays for the loading fees at the shipment port.

But under FCA terms, because of the difference in location of delivery, the loading and unloading fees the seller needs to pay also differ.

In a situation where the delivery point is the seller’s premises, the seller should take care of the cost of loading the goods onto the carrier’s methods of transportation.

On the other hand, in the case where the delivery is beyond the seller’s premises, the seller will only, using their vehicles, transport the goods to the carrier.

They will not be required to meet the cost of unloading from their vehicle and that of loading onto the carrier’s vessel.

· Documents of Carriage

FOB and FCA have varying descriptions on the modes of transport. FOB rule applies in marine and inland waterway means of transport only.

FCA, on the other hand, applies to all modes of transport including multimodal modes.

Bill of Lading

Bill of Lading

Due to this fact, FCA shipping term is far-reaching with regard to the method of shipping and is capable of meeting your inland shipping needs.

Thus, the mandatory documents of carriage to be provided by the seller also differ under the two Incoterms.

Since FOB term of shipping is applicable in marine and inland waterway transport only, the corresponding carriage documentations are sea waybill and marine bill of lading.

But since the sea waybill is not a representation of the document of ownership, you do not require the sea waybill for you to pick the goods from the carrier.

Instead, you need to issue the carrier the identity certificates only.

But before the transfer of the cargo from the transporter to you, the seller, with written notice, retains the right to change the buyer so as to enjoy control over the shipment.

The marine bill of lading is always considered as the document of title.

Normally, the party possessing it has the lawfully right to demand delivery of goods from the assigned carrier.

The bill of lading also gives you the right to own and transact with the goods.

Because of these facts, when using FOB terms, always ask for a bill of lading and not sea waybill from your supplier.

There are several kinds of bill of lading when it comes to FCA terms.

This is due to the fact that you can apply the term in any method and multimodal methods of shipping.

Therefore, your supplier needs to specify the bill of lading based on the selecting method of shipping in the agreement.

FOB Incoterm

FOB Incoterm

Due to the great adoption of combined modes of transport, multimodal bill of lading has become the most preferred under FCA shipping terms.

· Time for Delivery and Payment

When comparing FOB and FCA terms, we note under FOB; it is the carrier who provides the bill of lading at the port of departure.

While under FCA, the multimodal bill of lading is provided by the carrier to the supplier at the named location of transfer.

This, therefore, indicates that the multimodal bill of lading can be provided to the seller earlier and this benefits the seller.

You will pay them earlier after them issuing you the multimodal bill of lading.

This shortens their capital turnover and minimizes the cost of interest.

· The “Warehouse-to-Warehouse” Privilege

The “Warehouse-to-Warehouse” clause means the insurance policy covers the goods from the seller’s warehouse to your warehouse at the named destination.

Warehouse

Warehouse

In most cases the “Warehouse-to-warehouse” clause covers the whole journey in ocean, inland waterway and barge transport.

At, times, the insurer may not reimburse for all losses incurred in the course of the shipping process.

Let’s consider FOB scenario where the “Warehouse-to-Warehouse” clause is applied, and you are responsible for the insurance.

If you incur losses before the goods get on board the shipping vessel at the outbound port, the seller becomes liable for the losses.

But has no legal right to demand compensation from the insurer.

This happens so because, in international cargo insurance, the policyholder has to have an insurable interest in the goods.

In the event of loss before completing the risk transfer, you as the policyholder does not benefit from the privilege of Insurable interest on the cargo.

The seller enjoys the insurable interest privilege though he or she is not the policyholder.

This situation results to “vacancy of the insurance,”.

Meaning the seller does not benefit from the “Warehouse-to-warehouse” term and cannot claim any reimbursement from the insurer.

However, with FCA term, if delivery is completed at the seller’s premises, you start enjoying benefits of the “Warehouse-to-Warehouse” term.

That is as soon after the seller has handed over the shipment to the carrier.

Also, the supplier does not bear the effects of “vacancy of the insurance.”

Differences between FAS and FOB Incoterms

First I would wish to make you aware of the similarities between the two Incoterms in details as follows:

FAS

FAS

  • The first thing you ought to realize about FAS and FOB is that the two apply in port-to-port marine shipment only.
  • Under the two incoterms, the seller undertakes the export customs clearance protocols while you do the same for the import.
  • The supplier delivers the products to you in your country. For this reason, the two are referred to as “sales on departure” international commerce terms.
  • In both terms, it is you who pays the freight cost. The bill of lading, which ought to be issued by the seller is supposed to include “freight collect” term.
  • Under both incoterms, the seller is not obligated to offer marine insurance.

Now I can state the difference between Free alongside Ship and Free on Board according to Incoterms 2010 revision.

Differences between FAS and FOB

· Delivery

Under FAS terms the supplier is taken to have delivered the goods to you as soon as they have placed them alongside the shipping vessel.

Under FOB terms the seller is taken to have delivered the goods once they have placed them on board the named shipping vessel.

Incoterms 2010: The US Perspective

If you are a buyer from the United States, then you ought to understand the Incoterms 2010 revision due to the following reasons.

Incoterms vs. the Uniform Commercial Code

As a trader from the U.S., you should know that the trade terms CIF, FOB and so on are explained in the United States federal Uniform Commercial Code (UCC).

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UCC

The UCC was first produced in 1952 and covers several aspects of commercial agreements.

It includes “shipment and delivery” clauses that have concurring objectives to those of Incoterms rules.

A number of UCC terms have similar three-letter acronyms as those in the Incoterms system.

Though their definitions completely differ.

Commonly, “FOB” can have several varying definitions within UCC, where most do not concur with the ICC Incoterms FOB description.

The publishing of major UCC revision in 2004 complicated the situation further.

The revised publication abolished most of these terms.

Nevertheless, for reasons not attached to the “shipment and delivery” clauses, this revision faced serious resentment from many states.

Thus in 2011, the sponsors retracted the changes.

Some U.S. States are selectively adopting aspects of the UCC which suit domestic conditions.

Nonetheless, the practical remedy to this confusion is to harmonize the application of ICC Incoterms rules for all commercial transactions, be it domestic or international.

The Incoterms 2010 has was drafted to ensure the understanding of the rules is very straightforward for local trades.

For instance, all obligations in relation to export or import procedures should only be brought up ‘where applicable.’

· EXW, EAR and Routed Transactions

As we all know by now, the EXW rule leaves the responsibility of export customs clearance with the buyer, not the supplier.

Nevertheless, US exporters enticed by this chance to avoid work ought to be reminded of US Export Administration Regulations.

EXW

 EXW

Due to this fact, any breach of regulations or misrepresentation of information filed still is the obligation of the US seller as US Principal Party of Interest (USPPI.)

At times, commercial transactions can be taken care of by an overseas purchaser and not the exporter.

They are described as “routed” transactions and will be under extra scrutiny.

The use of EXW hence creates enormous compliance risk for the seller.

Typically the exporter should be in charge of the transportation by applying a term such as CPT or CIP.

However, if this is not practical, then it is recommended to be responsible for export clearance and apply Free Carrier.

Incoterms 2010 FAQs

In this section, I am going to walk you through a few questions that most clients ask me every day.

2. Why Should I Care about Incoterms?

Understanding and applying them correctly will spare you headaches!

If you are involved in international commerce, you should understand what you’re saying as far as Incoterms are concerned.

Here are some reasons Incoterms should be of great concern to you:

  • They make sure that everyone is reading from the same script. You and seller can refer to a standardized rule that plainly defines roles, risks, and costs.
  • They minimize the risk of legal complications because everything is clarified plainly and there is no chance for misinterpretation or he-said/she-said games.
  • In as Incoterms do not cover pricing, they do help both you and the seller understand the responsibilities of each party, so there are no costly surprises in the course of the transaction

3. At what point do I need to consider Incoterms?

You ought to consider Incoterms prior to negotiating the contract of sale.

Or risk the seller short-changing you on the agreement or encountering uncalled for complications during the shipping process.

4. Which is the best incoterm when shipping from China?

To simplify the process of transportation, while still getting maximum cost control and transparency, buy goods on FOB terms.

And then engage your carrier or freight forwarder on DAP terms.

Thus, your supplier will take care of the transportation from their premises to the outbound port.

In addition, they are as well responsible for the export customs clearance protocols.

Your carrier or forwarder takes care of the transportation from the outbound port, import customs clearance, and transportation to your final destination.

5. Should I avoid any Incoterm?

Well, the ultimate decision depends on you but, as an experienced freight forwarder, I would recommend you stay away from CIF terms as much as possible.

This term is largely disadvantageous to you since you are not made aware of the final cost of shipping.

CIF only covers transportation to the destination port, but not the domestic charges.

Most freight forwarders will intentionally add some “hidden” charges, such as port charges, to your invoice when you should not be paying for them.

In business perspective, they are right provided you asked for a CIF quote, which by description only covers the shipping cost.

6. Can I cut cost by buying goods under Ex Works (EXW) terms?

The EXW price is the lowest among all the incoterms because it does not include any transportation charges.

The term leaves it upon you to take care of the transportation right from the seller’s premises.

Furthermore, your seller will not assist in the export customs clearance procedures, which is mandatory before the goods leave China.

Since you are the one in charge of the goods right from the factory warehouse, you will find the most cost-effective partners to work with during the entire shipping process

In fact, you might end up paying more than it is worth when you buy your goods on FOB or CIF terms from the onset.

8. Can I still transact under the Incoterms 2000?

Well, the International Chamber of Commerce is not that strict on the Incoterms version to apply.

All agreements made under Incoterms 2000 are still considered valid.

Even though the ICC recommends applying Incoterms 2010 in trade contracts, parties to an agreement of sale can decide to apply any Incoterms version.

It is essential, nonetheless, to clearly state the selected Incoterms revision you are applying (i.e., Incoterms 2000, Incoterms 2010, or any earlier revisions).

11. How does Incoterms use vary within the major trading nations?

The information I have provided here covers the majority of the nations in most cases.

Case in point, customs protocols easier at porous borders, such as the EU.

I must bring to your attention.

However, there are exceptions likely to impact your shipment: When importing goods into the UK, you will need a Deferment Account and the US is the only nation that demands a Customs Bond.

12. When should I challenge advice on Incoterms choice?

You will realize that some freight forwarding agents prefer only to use a favored selection of incoterms since they ‘appear to work.

So you should not be surprised when your forwarder objects your choice of incoterm, regardless of it being the best alternative for your shipment.

13. What is not covered by Incoterms?

Before you embark on shipping from China, you should know that International Commerce Terms do not cover:

  • Breach of contract
  • Possible force majeure scenarios
  • Transfer of ownership or title.

You should ensure these are captured in your contract of sale.

In addition, I also feel it is important you know that save for C terms.

All Incoterms do not obligate the seller to arrange for insurance.

Therefore, goods insurance is a separate cost for you.

14. How do I write the named place in the Sales Contract?

If you have included the incoterm in the Contract of Sale, the named place ought to come immediately after the three-letter incoterm acronym.

For instance, “FCA Shenzen Yantian CFS.”

Be specific when describing the location, particularly with bigger cities that might have a number of terminals.

Besides, when dealing with bigger terminals that might have various drop-off points.

Always countercheck your designated port codes before entering the named place.

15.  What is a documentary letter of credit?

In this payment method, you let your chosen bank make the payment to the seller.

It is always done before the seller dispatches your goods.

The bank agrees to pay your supplier upon presenting documentation showing the goods he should to supply.

These documentations will constitute transport documents as proof of delivery of products to the shipping company or loading of goods onto the transporting vessel.

16.  What is Documentary collection?

Here, the seller issues your bank with documents showing the goods he should supply.

You pay the seller when the documents have correctly indicated the goods ordered for.

Or in case of an extension of the credit terms, you accept a term draft, dedicating yourself to pay on a later date.

This payment method is less secure compared to a letter of credit.

It is because there is no upfront payment by the bank as is the case with a letter of credit.

As a result, in some modes of transport, this enables the seller to remain in charge of the shipment until you pay or consent to pay.

17. When should I consider paying using a documentary collection or letters of credit?

These are in some cases called “secure terms” payment methods.

You should consider using them if there is limited trust between you and the seller.

At times, you may doubt whether the seller will complete the delivery according to the purchase contract.

On the other hand, the seller may also be worried that you will not be able to make the payment due to varied reasons.

18. How Do Letters Of Credit affect the choice of Incoterm?

If you would like to complete the sale with a documentary credit or letter of credit, the process begins with the seller issuing several documentations to the bank, including the bill of lading.

I recommend you use the letter of credit if you have limited trust in the supplier.

However, this method of payment is not practical with EXW because, with this incoterm, you will have to pay the seller before you take the goods.

On the other hand, F terms call for trust, since if you cancel the transaction, your supplier will not have a bill of lading to issue to the bank.

D terms also need trust, since the seller is responsible for all the costs of transportation.

You realize, therefore, the best incoterms option to use with a letter of credit are the four C terms.

Conclusion

As you can realize, each Incoterm offers you distinct, concise rules that enable you to understand your responsibilities.

They explain any gray areas in agreements that can save you the unnecessary headaches when applied correctly.

By correctly applying Incoterms, you will be capable to form a harmonious partnership, ship and deliver your products more easily.

Now, it your turn.

Do you find it difficult to choose a suitable Incoterm?

Well, you can talk to us here at BanSar.

Further Reading:

Where can I get a copy of the Incoterms 2010?

You can buy a copy of the Incoterms 2010 from the ICC website, or you may as well consult Bansar for in-depth advice.

Where can I get more details on the latest revision of Incoterms?

Do not search anywhere further because you are at the home of Incoterms; I’m here to provide you with all the relevant information on Incoterms.

However, there exist several government organizations that provide seminars, webinars, and workshops related to the latest revision of Incoterms.

Which Incoterms come with insurance?

You would realize that from the definition, CIF terms come with insurance by default.

However, this should not be of much concern since you can always get insurance cover regardless of the Incoterms used.

That said, if it is not CIF, you should always instruct your carrier or forwarding agent to book insurance.

If not directed to do so, they will fail to insure your cargo.

How do I select the best incoterm for shipping from China?

I advise that you choose an incoterm that transports the goods as close to you as possible.

This excludes FOB and EXW because, with the two, the seller is responsible for the goods when they are still in China.