International trade terms are specialized terms that use three English abbreviations to indicate the price composition of commodities, explain the location of transactions, determine the responsibilities of buyers and sellers, expenses, and risk division.
It was drafted by the International Chamber of Commerce (ICC) in 1936 and has since been revised and developed many times. It has been updated to the 2020 version, and the incoterms 2020 has taken effect on January 1, 2020.
The incoterms 2020 is divided into 2 types, 4 groups, and 11 trade terms:
2 types:
Applicable to any mode of transportation (EXW, FCA, CPT, CIP, DAP, DPU, DDP); only applicable to sea transportation (FOB, FAS, CFR, CIF).
4 groups:
C group, D group, E group, F group.
Group C terms: The seller arranges and pays the freight to a designated location, which indicates the destination of the goods (such as “Incoterms2020 CIF Shanghai”)
Group D terms: The seller arranges and pays the freight to a designated place, which indicates the destination and place of delivery of the goods (eg “Incoterms2020 DAP No. 1, Shanghai Road, China “)
Group F terms: usually paid by the buyer and arranged for transportation (main freight)
EXW (Factory Delivery): The seller delivers to the buyer at the seller’s factory
In terms of the D, E, and F groups, the risk is transferred from the seller to the buyer when the goods are “delivered” in the legal sense under the contract of sale at the designated location.
11 terms:
EXW, FCA, FAS, FOB, CFR, CIF, CPT, CIP, DPU, DAP, DDP, etc.
The following is a detailed explanation of incoterms 2020:
1. FOB (Free on Board)
FOB also known as “FOB” followed by the name of the port of shipment. e.g. Export FOB Shanghai Import FOB London The seller is only responsible for the cost of the goods, and the buyer is responsible for freight and insurance.
Seller’s obligations:
① Shipment + notification to the buyer
② Handle export customs clearance procedures
③ Responsible for all costs and risks of the goods before boarding at the port of shipment
④ Submit documents
Buyer’s obligations:
① Payment
② Handle import customs clearance procedures
③ All costs and risks after the goods are on board the ship at the port of shipment
④Receive goods and documents
Precautions:
① “On board at the port of shipment” is the point of delivery and risk division
-The premise for the seller to transfer the risk to the buyer: the goods have been specified (marked) under the contract;
-If the seller is unable to deliver the goods on time due to the buyer’s reasons (the buyer is delayed in sending the ship), as long as the goods are specified, the risk transfer time can be advanced
② Chartering and booking: the buyer’s responsibility.
-If requested by the buyer, the seller can take the insurance instead, and the buyer will still bear the costs and risks
-If the seller does not agree to take out the insurance on its behalf, the buyer should be notified immediately
③ Cargo-ship connection: If there is a phenomenon that ships and other cargoes or cargo ships occur, the responsible party shall bear the loss
2. CFR (Cost and Freight)
Followed by the name of the port of destination
e.g. Export CFR London Import CFR Shanghai The seller is responsible for the cost and freight of the goods, and the buyer is responsible for insurance
Precautions:
① Charter boat booking:
-The seller only needs to charter or book space in accordance with usual conditions (regular routes, conventional types of ships);
-The buyer has no right to restrict the type, nationality, age, vessel, and shipping company of the ship;
-In actual business, the buyer puts forward the above requirements, if no extra freight is incurred, the seller can accept
② The seller issues a shipment notice in time, and the buyer purchases insurance-if the seller fails to notify in time, the seller shall be liable
③ The risk transfer point (on the ship) and the expense transfer point (destination port) are separated
3. CIF (Cost, Freight and Insurance), also known as “CIF”
Followed by the name of the port of destination
e.g. Export CIF New York Import CIF Shanghai The seller is responsible for the cost, freight, and insurance of the goods
Precautions:
①The risk transfer point (on the ship) and the cost transfer point (destination port) are separated
②Because it is a “shipment contract”, the seller does not need to guarantee the arrival of the goods; if the goods are in danger on the way, the buyer shall make a claim to the insurance company
③ The seller only needs to insure the lowest insurance: ICC(C), Ping An Insurance
4. FCA (Free Carrier) “Cargo Delivery Carrier”
Name of the country of export
e.g. Export FCA XIAN Import FCA COVENTRY is similar to FOB, the seller is only responsible for the cost of the goods
Precautions:
① Delivery place:
-In the case of the seller’s location, the seller is responsible for loading the goods to the buyer and arranging the carrier’s means of transportation
-For other locations, the seller only needs to deliver the goods to the carrier and complete the delivery obligation on his own means of transport without unloading
② Risk transfer point: Cargo delivery carrier
-Prerequisite: The goods have been specified under the contract
-If the buyer delays in appointing the carrier, as long as the goods are specified, the risk transfer time can be advanced.
5. CPT (Carriage Paid to) “Carriage Paid to”
Destination name; similar to CFR
-The seller is responsible for the cost of the goods and concludes the contract of carriage
-Risk transfer point (cargo delivery carrier) fee transfer point (destination) breakdown
6. CIP (Carriage, Insurance Paid to)
Destination name; similar to CIF
-The seller is responsible for the cost, signing the contract of transport and insurance
-The seller needs to insure ICC(A), all insurance
7. EXW (Ex Works)
-The only term in which the buyer handles export customs clearance procedures, and the buyer bears the greatest risk, responsibility, and expense
-When the buyer cannot directly handle export customs clearance procedures, he should avoid using EXW and use FCA instead
8. FAS (Free Alongside Ship)
Followed by the name of the port of shipment
FAS = FOB-Shipment costs and risks
-When the vessel sent by the buyer cannot dock, the seller shall use a barge to transport the goods to the side of the vessel designated by the seller
-Barge costs are the responsibility of the seller
9. DAP (Delivered at Place)
Destination e.g. DAP X COMPANY
-The seller is not responsible for unloading
10. DPU (Delivered at Place Unloaded)
-2020 new
-The seller is responsible for unloading, and the rest of the content is the same as DAT. The unloading place can be any place such as a wharf, station, container yard, etc.
11. DDP (Delivered Duty Paid)
Followed by the name of the country of import
-The seller transports the goods to the destination specified in the contract and completes import customs clearance
-The seller is not responsible for unloading the goods when the goods are delivered on the means of transport-The only term in which the seller is responsible for import customs clearance procedures, and the seller bears the greatest risk, responsibility, and expense
-If the seller is unable to handle import customs clearance procedures, DAP, or DPU should be used
Trade terms are usually not included in transportation contracts, but are applied to many basic sales contracts that support international trade. It is wise for buyers and sellers to clarify which version of the general rules for the interpretation of international trade terms (such as “Incoterms 2020”).
