When we make an online purchase, we always check the price of the product and the delivery fee first. Trading is not that much different. One of the most frequently asked question while trading is about the price and shipping. When importing and exporting, the price of the product and the shipping terms are negotiated, depending on the number of products ordered. The shipping terms, in specific, are capable of dividing the fare from the warehouse to the port of shipping, from the shipping port to the port of destination and from the destination port to the importers warehouse.
In this article, the international trade terms, made in order to avoid conflicts from differences in interpretation while trading, are shown. If you took any classes related to trading before or have experience in trading, I’m sure you would be familiar with the word ‘INCOTERMS’ (International Commercial TERMS). ‘INCOTERMS’ presents who delivers the item, who designates the transportation contract and who is responsible for the customs clearance. Among those several terms, I would like to focus on the shipping process and explain the terms exporters prefer. The information in this article is based on the newly updated ‘INCOTERMS 2020’. Therefore, I assure that you will achieve newly updated information.
‘INCOTERMS’ is composed of 11 different terms and can be separated into 4 categories. I will start explaining from the terms in which the exporter has the least to do.
1. E term, the importer bears the whole transportation cost
The E term consists only one term named as EXW (EX Work). In the EXW term there is mostly nothing that the exporter is responsible of. The only thing the seller has to do is to leave the item at the seller’s place. Then the buyer collects the item with its own money. It is the simplest term for a quotation, since there aren’t any parts the exporter needs to worry about.
2. F term, the exporter is responsible for the domestic transportation
which all starts with an F.
In the FCA (Free CArrier) term, the seller needs to transport the product to the place and person the buyer demands. Since the buyer decides the location for the collection of the item, compared to the EXW term, the range of participation in delivery of the seller is wider.
FAS (Free Alongside Ship) term is a term where the seller is responsible of delivering the item alongside the ship at the port of shipping.
The term in which the seller needs to load the product on the designated ship is called FOB (Free On Board). While the price of loading is not included in FAS, the FOB term asks for the seller to bear the loading cost.
3. C term, is an insurance necessary?
The C term contains CFR, CIF, CPT and CIP. If you consider that the highest cost coverage of the exporter before was the FOB, which is up to the loading on the ship, it would be easy to deduce that the following C terms all include the loading cost as a default, and will add on the delivery cost to the port of destination. The difference between the C terms is that some require the seller to pay for the insurance costs of the items also.
CFR (Cost and FReight) and CIF (Cost Insurance and FReight) can be seen as one group while CPT (Carriage Paid To) and CIP (Carriage and Insurance Paid to) is another group.
Both CFR and CIF include the payment to the destination port of the seller. The only difference is that the CIF term includes insurance fees.
CPT and CIP both mention that the seller needs to be responsible of the price sending the item to a specific place the buyer asks. The difference between these two is the same as the previous two: the insurance cost. The designated location in the importing country can only be reached after unloading the products from the ship, which indicates that the cost covered by the seller is higher than that of the CFR term.
4. D term, advantageous to the importer
DAP (Delivered At Place) has a condition that the seller needs to be responsible of the item until it arrives at a designated location. There are several rules that ‘INCOTERMS’ regulates, such as the delivery of goods, transfer of risk, and burden of cost. Only cost burden is mentioned in this article, which might result confusion between DAP and CPT. However, these two are different because in CPT the seller takes the risk until the product is shipped, while in DAP the risk is taken by the exporter until it arrives at the location chosen by the importer. The diverging point for the risk and cost is different in the C term. Unlike the C term, D term takes the risk up to the point the payment is made.
DPU (Delivered at Place Unloaded) term is newly named in ‘INCOTERMS 2020’. In ‘INCOTERMS 2010’, it was known as DAT (Delivered At Terminal). However, it eliminated the limits for place designation, and at the same time changed the name into DPU.
In the DAP term it is not required for the seller to unload the item. In contrast, the seller has a duty to unload the item in DPU term.
DDP (Delivery Duty Paid) is the term the exporter takes the most responsibility. It may seem similar with other D terms, but it is different in the part that the seller has to cover all expenses related to import clearance including customs.
5. THE TRADE TERM EXPORTERS MOST FREQUENTLY USE
Among various trade terms the two most often used are FOB and CIF. Domestic transportation in the arrival country is dvantageous when approached by the importer. So, FOB term which the exporter just needs to load the goods on the ship, is frequently used. In the same context, CIF term increases the efficiency, and at the same time prevents exporter’s hassle. In the CIF term, the exporter is responsible for the cost until the product arrives at the destination port. The rate of cost is calculated in the exporting country which makes it is easy to deal with it. Moreover, losses can be prevented by using the insurance. These two terms show why the DDP term, which needs to care about everything from the start to the end, is so inefficient for the exporter.
The terms in ‘INCOTERMS’ were introduced above and discusses the range of responsibility of each term between the exporter and importer. The terms above were shown mostly at the perspective of an exporter, so we expect it to be helpful to people who are willing to export goods. The cost burden is mainly focused in the article. However, there are more complex information in trading that is not dealt above. This might occur difficulties to those who are not used to trading. However, there is nothing to worry, because at Bonsystems Global there are experts in exporting and importing. If you have any difficulties just visit our website and we’ll always be ready to talk with you. Thank you.