incoterms-chart-1INCOTERMS (International Commercial Terms), also known as shipping terms, freight terms, or trade terms, are the global standard terminology and definitions used in international trade to determine which parties are responsible for the shipment at varying times during transit.

Since the whole transportation can be divided into several parts, it’s necessary for the shipper and consignee to be aware of who pays for internal delivery, who prepares documents, who manages customs, or so. It’s all about freight cost and responsibility (or risk).

Here comes the question, how to choose the term or which one is better for me when importing from China? Let’s dive into.


An Introduction to Incoterms

The Incoterms rules or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) that are widely used in International commercial transactions or procurement processes.

The latest version is Incoterms 2010.

A series of three-letter trade terms related to common contractual sales practices. The most common ones we’ve seen in an import & export process are FOB, CIF/CFR and DAP.

Here’s a video explanation of Incoterms 2010.

The rules are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of most commonly used terms in international trade.

They are aimed to reduce or remove altogether uncertainties arising from different interpretations of the rules in different countries. As such they are regularly incorporated into sales contracts worldwide.

New buyers often confuse incoterm and payment term.

  • Incoterm means how many kinds of charges to pay, such as FOB Shanghai
  • Payment term means how and when to pay, such as 30% prepaid + 70% against the copy of B/L

Incoterms 2010 Chart

incoterms-chart-2Click to view the larger table

These rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods. Please check the chart above, which is the charges of buyer/seller according to Incoterms 2010, and it defines:

  • The obligations of both parties
  • Which party handles insurance, permits, and permissions
  • Which party handles the transport until where
  • At which point costs and risks are transferred from the seller to the buyer

The eleven terms in the chart can be divided into following 4 parts.

1. Departure

EXW = Ex Works + a named place

With this term, the seller has the least costs, risks and obligations. When the products are ready at the seller’s factory or warehouse, his job is all done. Not even the seller is responsible for loading the goods onto the first carrier (usually truck) that sends by the buyer to pick them up.

We’ve seen some importers choose EXW for maximum control. In our opinion, it’s not necessary at all. So it is not advisable to use EXW.

2. Main Carriage Not Paid By Seller

  • FCA = Free Carrier + a named place
  • FAS = Free Alongside Ship + a named port of loading
  • FOB = Free On Board + a named port of loading

FAS is applied to bulk cargo.

FCA is a very flexible term, because it allows the delivery of the goods, both on the premises of the seller and at various points such as ports, airports, container terminals, etc., which are located in the country of the seller.

FCA can be used for any freight shipping via air/sea/rail/road, while FOB is the oldest Incoterm and together with CIF the most widely used with sea transport only.

Incoterms 2010 rules advised to use FCA instead of FOB, because the containers are delivered regularly in the port’s container terminal and not loaded onto the ship. But in practical work, almost all the Chinese supplier will use FOB instead of FCA.

3. Main Carriage Paid By Seller

  • CFR = Cost and Freight + a named port of destination
  • CIF = Cost, Insurance and Freight + a named port of destination
  • CPT = Carried Paid To + a named place of destination
  • CIP = Carriage And Insurance Paid To + a named place of destination

CIF acts the same as CFR, but the seller pays the insurance as well. CPT and CIP can be used for all modes of transport, while CFR and CIF for shipping by sea only.

4. Arrival

  • DAT = Delivered at Terminal + a named place of destination
  • DAP = Delivered at Place + a named place of destination
  • DDP = Delivered Duty Paid + a named place of destination

The place of delivery may be the buyer’s premises or a place nearby, other than a transport terminal in the country of destination.

DDP is somewhat the reverse of Incoterms EXW; it represents the greatest obligation for the seller because he assumes all costs and risks of the operation, including import procedures, to deliver the goods at the agreed place in buyer’s country.

The only difference between Incoterms DDP and DAP is that in DDP all costs and taxes of import clearance are paid by the seller while in DAP are paid by the buyer.

P.S.

The eleven can also be divided into 2 parts based on different modes.

Rules for Sea and Inland Waterway Transport:

  • FAS
  • FOB
  • CFR
  • CIF

Rules for Any Mode(s) of Transport:

  • EXW
  • FCA
  • CPT
  • CIP
  • DAT
  • DAP
  • DDP

Most Common Incoterms

FOB

Cost for the consignee includes, but not limited to:

  • ocean freight costs including all surcharges
  • on-carriage landside transportation by either road or rail

Cost for the supplier includes, but not limited to:

  • packing of container
  • customs clearance for export
  • pre-carriage landside transportation by either road or rail
  • port handling costs (example Terminal Handling Charges) at port of loading

CFR

Cost for the consignee includes, but not limited to:

  • port handling costs (example Terminal Handling Charges) at port of discharge
  • on-carriage landside transportation by either road or rail

Cost for the supplier includes, but not limited to:

  • packing of container
  • customs clearance for export
  • pre-carriage landside transportation by either road or rail
  • port handling costs (example Terminal Handling Charges) at port of loading
  • ocean freight costs including all surcharges

DAP

Cost for the consignee includes, but not limited to:

  • customs clearance, duties, taxes etc

Cost for the supplier includes, but not limited to:

  • packing of container
  • customs clearance for export
  • pre-carriage and on-carriage landside transportation by either road or rail
  • port handling costs (example Terminal Handling Charges) at port of loading and port of discharge
  • ocean freight costs including all surcharges

Incoterms Examples

Basically an incoterm consists of two components: a three letter code and a city name. Without an incoterm, you have no idea how far the supplier will ship your cargo.

When it comes to import from China, you can find a price quoted by a supplier in China is always based on an incoterm and a city. Let’s take two basic incoterms in practical use as examples.

FOB Shenzhen Port

  • You book shipping space loading at Shenzhen Port
  • Your supplier handles the inland delivery to Shenzhen Port
  • Your supplier handles Customs export declaration
  • Your supplier pays all cost at the Shenzhen Port until departure
  • You pay the shipping cost to get the B/L
  • You pay all cost after the cargo leaves

You pay sea freight charges, destination port charges, Customs, VAT, tariff and duties, inland transportation to your door or warehouse.

You can choose a shipping agent to handle your cargo transportation from the facility of your supplier to your destination.

CIF Sydney Port

  • Your supplier book shipping space from a nearer loading port
  • Your supplier handles the inland delivery to the port
  • Your supplier handles Customs export declaration
  • Your supplier pays all cost until the cargo arrives at Sydney Port
  • You pay all cost after the cargo arrives at Sydney Port

You pay destination port charges, Customs, VAT, tariff and duties, inland transportation to your door or warehouse.


How to Choose Incoterm When Importing from China?

Based on the incoterm you select, you can let your China supplier handle the shipping of
products to a nearby port in China or all the way to your front door. Besides, you can
compare the pricing between two or more suppliers with the same Incoterm.

If you are new to importing or unfamiliar with shipping, try to choose an incoterm that takes the cargo as far as possible, DAP to door for example.

If you have found a reliable shipping company, hopefully us, try to choose FOB. And let the freight forwarder handle the rest.

If you are confused by FOB and CIF, click here to dig into.


Wrapping Up

Be certain you understand INCOTERMS, and properly using INCOTERMS is essential to freight savings.

In today’s marketplace, it’s not just enough to save money on your freight management costs. Companies also want to know that they are getting the most for their money by finding a logistics provider that can offer a wide array of value-added services, and lower their transportation costs.

CFC here wants to be your “one stop shop” for your supply chain needs. We do this by working in virtually every aspect of the supply chain and offering our customers splendid services. Partnering with us, and shipping is no longer a problem at all.

Please feel free to let us know if you need any assistance.

— Last updated Mar. 16, 2016