13 trade terms that buyers must know about (Complete guide)

By justchinait
 / 
April 26, 2021
 / 

In the process of importing, we often have to deal with some trade terms which we can’t avoid, such as US $100 per piece CIF New York. A trade term is a short English word or abbreviated English letter used to indicate the price structure of a commodity, the procedure through which buyers and sellers should responsible for, the costs and risks they bear, and the boundary at which ownership of the goods is transferred.

Terms such as FOB, CIF, EXW and so on are common terms in international trade, and we will have the opportunity to come into contact with them in general import activities. In fact, these terms are collectively referred to as INCOTERM or International Commercial Terms, which is a set of predetermined commercial terms issued by the International Chamber of Commerce (ICC).

In international trade, the price of goods is affected by the obligations of buyers and sellers. In the long-term practice of international trade, it has gradually formed a direct link between some trade terms closely related to price and price, and formed a number of quotation models. Each model specifies the obligations of buyers and sellers under certain terms of trade.

The term used to describe this obligation is called a trade term. The terms of trade expressed in trade terms are mainly divided into two aspects. First, it indicates the price structure of the commodity, whether it includes the main subordinate expenses other than the cost, namely freight and insurance. Second, define the terms of delivery, that is, the division of responsibilities, costs and risks between the buyer and the seller in the delivery of the goods.

Trade terms are an indispensable part of expressing prices in international trade. The quotation is made in terms of trade terms, clarifying the respective responsibilities, costs and risks to be borne by both parties in the delivery of goods, and explaining the composition of the price of the goods. This simplifies the transaction consultation procedure, shortens the transaction time. Because the international conventions that define the terms of trade give a complete and accurate explanation of the obligations of the buyer and the seller, some disputes that might arise in the performance of the contract due to the inconsistent understanding of the terms of the contract are avoided.

As a result, these terms are used for sales contracts around the world, which is why as importers we hear and deal with them all the time. Then, this blog will briefly introduce 13 terms that define the responsibilities of buyers and sellers for dividing transaction costs.

EXW – Exworks

This is one of the more common terms that represent the minimum obligation of the seller (the shipper), since the seller (the shipper) only needs to deliver the goods to the buyer, and the buyer (the consignee) must perform all import and export customs clearance procedure. In addition, the buyer (consignee) will arrange the whole shipment and insurance.

When the seller delivers the goods to the buyer at its place or other designated place (such as a factory or warehouse) to complete the delivery, the seller will not export or load the goods to any vehicle through customs clearance procedures.

Place of delivery: factory or warehouse of the exporting country

Transportation: buyer responsible

Insurance: buyer responsible

Export procedure: buyer responsible

Import procedure: buyer responsible

Transfer of risk: place of delivery

Transfer of ownership: transfer with sale

Applicable mode of transport: any mode of transport

FCA – Free Carrier

This term means that the seller (the shipper) is obligated to deliver the goods for export clearance to the carrier at the place named by the buyer (the consignee). In addition, the seller (the shipper) will be responsible for the cost of shipping the goods to the designated place. The seller shall deliver the goods to the carrier named by the buyer at the named place and complete the export customs clearance to finish the delivery.

Place of delivery: inland or port of the exporting country, the place of delivery designated by the buyer (consignee)

Transportation: buyer responsible

Insurance: buyer responsible

Export procedure: seller responsible

Import procedure: buyer responsible

Transfer of risk: When the goods are placed at the disposal of the carrier

Transfer of title: transfer with bill of lading

Applicable mode of transport: any mode of transport (including sea transport)

Buyer’s obligations

  1. To conclude a contract for the carriage of the goods from a named place, pay the relevant freight, and promptly notify the Seller of the name of the carrier and the relevant information;
  2. To take delivery of the goods and make payment for the goods in accordance with the provisions of the Contract;
  3. Undertake all costs and risks incurred after taking delivery of the goods;
  4. At its own risk and expense, obtain import license or other official documents, and go through the customs formalities necessary for the import of the goods.

Differences between FCA and FOB

1. Different modes of transport between FCA and FOB: FOB is only suitable for sea transport, while FCA is suitable for any mode of transport.

2, FCA and FOB delivery place is different: FOB mode of transportation delivery at the port of shipment, FCA in the first carrier to complete the delivery;

3. FCA and FOB risk have different boundaries: FOB and buyer risk is transferred to the ship at the port of shipment, FCA risks are transferred when the goods are placed at the disposal of the carrier;

4. The transport documents used by FCA and FOB are different: FOB is only ocean bill of lading, while the transport bills used by FCA are determined by different modes of transport.

FAS — Free Alongside Ship

The term means that the seller (shipper) has fulfilled his obligation when the goods have been delivered to the side of the vessel designated by the buyer at the port dock. The seller’s risks, liabilities and costs are all bound thereto. From this point on, the buyer (consignee) must bear all costs and risks of loss of or damage to the goods from then on.

In practice, “alongside” refers to the scope of the loading and unloading tools at the quay when the vessel designated by the buyer is able to dock directly. If the vessel arranged by the buyer is unable to dock, the seller is responsible for bringing the goods alongside by barge to complete the delivery.

Place of delivery: port, wharf, alongside the vessel named by the buyer

Transportation: buyer responsible

Insurance: buyer responsible

Export procedure: seller responsible

Import procedure: buyer responsible

Transfer of risk: place of delivery

Transfer of title: transfer with bill of lading

Applicable mode of transportation: by sea

FOB — Free On Board

The term means that the seller delivers the goods by loading them onto a ship designated by the buyer. This means that the buyer (consignee) must bear all the costs and risks of the goods from then on. And the seller (the shipper) must clear the goods for export.

Place of delivery: delivery on board at port of shipment

Transportation: buyer responsible

Insurance: buyer responsible

Export procedure: seller responsible

Import procedure: buyer responsible

Transfer of risk: when finishing the delivery at port of shipment

Transfer of ownership: with the bill of lading

Applicable mode of transportation: by sea

CFR– Cost and Freight

The term means that the seller delivers the goods by loading them onto a ship designated by the buyer. The seller (shipper) must pay the costs and freight necessary to bring the goods to the named port of destination, but any additional costs for the risk of loss or damage due to events occurring after delivery are responsible by the seller (shipper). In addition, the seller (the shipper) must clear the goods for export.

Simply put, the seller must pay the cost of bringing the goods to the named port of destination. However, the risk is transferred when the goods are delivered at the port of shipment.

Place of delivery: delivery on board at port of shipment

Transportation: seller responsible

Insurance: buyer responsible

Export formalities: seller responsible

Import procedure: buyer responsible

Transfer of risk: when finishing the delivery at port of shipment

Transfer of ownership: with the bill of lading

Applicable mode of transportation: by sea

CIF – Cost, Insurance, Freight

According to this term, the transaction price includes the freight from the port of shipment to the designated port of destination and the agreed insurance. Therefore, in addition to the same obligations as the CFR term, the seller also has to handle freight insurance for the buyer and pay the insurance premium. According to general international trade practices, the amount of insurance insured by the seller should be 10% added to the CIF price. The CIF term only requires the seller to insure the minimum insurance coverage. If the buyer needs higher insurance coverage, you need to reach an explicit agreement with the seller or make additional insurance arrangements yourself.

The seller (the consignor) must pay the cost of shipping the goods to the destination port and the freight including insurance. However, once the goods are loaded on the ship, the risk is immediately transferred to the buyer (consignee).

Place of delivery: delivered on board at the port of shipment

Transportation: the seller is responsible

Insurance: Seller is responsible

Export procedures: the seller is responsible

Import procedure: the buyer is responsible

Risk transfer: when finishing the delivery at port of shipment

Transfer of ownership: along with the bill of lading

Applicable shipping method: sea

The difference between CFR and CIF

CFR usually refers to FOB fee + freight. The seller must pay the freight and expenses required to transport the goods to the designated port of destination, but the risk of loss or damage to the goods after delivery and any additional costs caused by various events are transferred from the seller to the buyer. However, under CIF conditions, the seller must also apply for marine insurance against the risk of loss of or damage to the buyer’s goods in transit.

The difference between CIF and FOB

FOB(free on board)

It is delivered on board the port of shipment. Therefore, the seller will deliver the goods in compliance with the contract to the ship designated by the buyer at the time and port of shipment stipulated in the contract, and notify the buyer in time. The subsequent shipping and insurance fees have nothing to do with the seller.

CFR(cost and freight)

It is the seller who is responsible for handling the transportation of the goods and bears the freight to the designated port of destination. It is shipped at the port of shipment and the specified period of shipment specified in the contract, notifying the buyer, submitting relevant documents, and responsible for completing the delivery obligation after customs clearance. The seller is not responsible for insurance.

CIF(cost, insurance and freight)

As the name implies, it is more insurance than the CFR clause. That is, the seller is responsible for signing the transportation contract from the place of departure to the destination and paying for the normal transportation costs. In CIF terms, the seller is also responsible for handling cargo insurance and paying the corresponding insurance premiums.

CPT – Carriage Paid To

This term means that the seller (the consignor) delivers the goods to the carrier designated by the buyer, but the seller (the consignor) must additionally pay the transportation costs required to transport the goods to the designated destination, while the buyer (consignee) bear all costs incurred after the delivery of the goods. In addition, the seller (consignor) must clear the goods for export.

Delivery place: designated place at the border, exporting country mainland or port

Transportation: seller responsible

Insurance: buyer responsible

Export procedures: seller responsible

Import procedure: buyer responsible

Transfer of risk: when the cargo is delivered to the carrier for disposal

Transfer of ownership: along with the bill of lading

Applicable mode of transportation: any transportation method

CIP – Carriage and Insurance Paid

The term is the same as CPT, but the seller (consignor) must also purchase insurance to prevent the buyer (consignee) from losing or damaging the goods during transportation.

Delivery place: designated place at the border, exporting country mainland or port

Transportation: seller responsible

Insurance: seller responsible

Export procedures: seller responsible

Import procedure: buyer responsible

Transfer of risk: when the cargo is delivered to the carrier for disposal

Transfer of ownership: along with the bill of lading

Applicable mode of transportation: any transportation method

Comparison of related terms

Item

 

FOB、CFR、CIF

 

FCA、CPT、CIP

 

Bear the risks and costs of export procedures Seller Seller

Bear the risks and expenses of import procedures

Buyer Buyer
Suitable mode of transportation Sea transportation Any mode of transport
Place of delivery Port of loading Mainland or port of exporting country
Risk division point

When the goods are loaded on the vessel at the port of departure

DAF – Delivered At Frontier

Delivered At Frontier refers to when the seller delivers the unloaded goods on the delivery vehicle to the buyer at a designated location and specific delivery point at the border before the border of the country’s customs borders and completes the export customs clearance procedures. The delivery is completed when the import customs clearance procedures have not been completed.

The term “border” can be used for any border, including the border of the exporting country. Therefore, it is extremely important to accurately define the borders referred to by designated locations and specific delivery points. However, if all parties concerned hope that the seller shall be responsible for unloading from the delivery means of transport and bear the risks and costs of unloading, it should be clearly stated in the sales contract.

Delivery place: the designated delivery place at the border

Transportation: the seller is responsible

Insurance: the buyer is responsible

Export procedures: the seller is responsible

Import procedure: the buyer is responsible

Risk transfer: the designated delivery location at the border

Transfer of ownership: along with the bill of lading

Applicable transportation methods: various transportation methods for land border delivery

DES – Delivered Ex Ship

The seller (consignor) delivers the goods when the goods are handed over to the buyer (consignee) on the ship for disposal, and does not need to clear customs at the designated port of destination for import. The seller (consignor) bears all costs and risks of transporting the goods to the designated port before unloading. If the parties want the seller to bear the risks and costs of unloading, the DEQ term should be used.

Delivery place: delivered on board at the port of destination

Transportation: the seller is responsible

Insurance: the buyer is responsible

Export procedures: the seller is responsible

Import procedure: the buyer is responsible

Risk transfer: when the goods are handed over to the buyer for disposal on the ship at the port of destination

Transfer of ownership: along with the bill of lading

Applicable shipping method: by sea

DEQ – Delivered Ex Quay

DEQ means that the seller delivers the goods to the buyer at the designated port of destination for disposal, and the delivery is completed without import customs clearance procedures. The seller shall bear all risks and expenses of transporting the goods to the designated port of destination and unloading to the dock.

Delivery place: destination port terminal

Transportation: the seller is responsible

Insurance: the buyer is responsible

Export procedures: the seller is responsible

Import procedure: the buyer is responsible

Transfer of risk: when the goods are handed over to the buyer for disposal at the terminal of the port of destination

Transfer of ownership: along with the bill of lading

Applicable shipping method: by sea

DDU – Delivered Duty Unpaid

Delivered Duty Unpaid (… named place of destination) means that the seller delivers the goods to the buyer at the designated destination for disposal without going through import procedures or unloading the goods from the delivery vehicle, that is, the delivery is completed.

This type of trade term means that in the actual work process, the importer and exporter deliver goods in a certain place in the importing country, and the exporter must bear all the costs and risks of the goods delivered to the designated place, as well as the costs and risks of customs procedures. However, it must be noted that DDP does not include duties, taxes and other official fees that need to be paid when importing goods. Importers need to deal with the additional costs and risks caused by the inability to handle the import customs clearance process of the goods in a timely manner.

Generally speaking, the details of the costs involved in DDU are very complicated. If this trade term is used, the importer must leave a written text when confirming the price with the freight forwarder, and seal it to avoid future disputes.

Place of delivery: on the means of transport at the designated destination

Transportation: the seller is responsible

Insurance: seller is responsible

Export procedures: the seller is responsible

Import procedure: the buyer is responsible

Transfer of risk: when the goods are handed over to the buyer or another person designated by the buyer for disposal

Ownership transfer: transfer with the bill of lading

Applicable mode of transportation: various transportation methods

DDP – Delivered Duty Paid

“Delivered Duty Paid (…designated destination)” means that the seller completes import customs clearance procedures at the designated destination and delivers the goods that have not been unloaded on the delivery means of transport to the buyer to complete the delivery. The seller must bear all risks and costs of transporting the goods to the designated destination, including any “taxes and fees” that should be paid at the destination when customs formalities are required (including the responsibilities and risks of customs formalities, as well as the payment of handling fees, duties, taxes and other fees).

Under this trade term, the exporter needs to bear all risks in the process of delivering the goods to the designated destination, and also needs to carry out customs clearance procedures at the destination port, and pay taxes, handling fees and other fees. It can be said that under this trade clause, the seller’s liability is the greatest. If the seller cannot obtain an import license directly or indirectly, the term should be used with caution.

The buyer bears the greatest responsibility under the EXW term, while the seller bears the greatest responsibility under the DDP term.

Place of delivery: on the delivery vehicle at the designated destination

Transportation: the seller is responsible

Insurance: seller is responsible

Export procedures: the seller is responsible

Import procedure: the seller is responsible

Risk transfer: the goods are handed over to the buyer or another person designated by the buyer for disposal

Ownership transfer: transfer with the bill of lading

Applicable transportation methods: various transportation methods

The biggest difference between DDU and DDP lies in who bears the risks and costs of the goods during customs clearance at the port of destination. The buyer must bear this “tax and fee” and the costs and risks caused by the failure to timely import the goods and customs clearance procedures.

DDP and DDU generally only deal with missed shipments or damaged goods caused by the seller. Generally, the buyer will not require the seller to do DDP or DDU because the seller, as a foreign party, does not understand the domestic customs clearance environment and national policies. , The customs clearance process will inevitably incur many unnecessary costs, and these costs will definitely be passed on to the buyer, so the buyer usually achieves CIF at most.

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