As an international buyer or seller, there are common terms used in international trade that you should know to protect your interests. Not understanding the shipping terms can lead to delays and disputes that can affect your business. The trade terms outline the responsibilities of both parties for the carriage of goods from the buyer to the seller, and export and import clearance. By mentioning the risks and costs for each party involved in fulfilling a trade, there are no disputes and international trade is facilitated seamlessly.
Incoterms aka International Commercial Terms are considered the common commercial trade terms in the world. However, there are a few countries that have their own trade rules for international trades by making small amendments to Incoterms. The idea behind having common commercial trade terms is to hold both parties accountable for their roles in international trade. Hence, understanding common terms for international trade will protect you from trade risks by allowing you to negotiate the right trade terms for your shipments.
Benefits of Using Common Terms in International Trade
The use of common shipping terms allows buyers and sellers around the world to connect with each other, independent of risks and other barriers to trade. Not many understand and use Incoterms properly. However, when you take advantage of using the right shipping terms, there are fewer disputes and delays in the supply chain process.
- Empowers International Trade
International trade gets a boost with the proper usage of Incoterms. Buyers and sellers can simplify the process by using the correct shipping terms to minimize disruptions. When there are no disruptions to the process, there is a steady flow of goods and money in economies leading to more growth and productivity.
- Financial Advantage
Incoterms allow buyers and sellers who know the terms they need to use to protect their shipments while saving money. When you know the common terms, you may request for changes for favorable terms in trades. As the more beneficial party in a trade, you can focus on offering the savings as discounts for your customers and grow your business.
- Prevents Trade Barriers
International trade has barriers including a language barrier that can lead to a break in communication between buyers and sellers. When common shipping terms are used, buyers and sellers can minimize mistakes in completing trades. Each party will clearly understand the roles and responsibilities so that penalties and criminal activities are avoided.
12 Most Common Terms in International Trade
It is important to note that shipping terms are grouped together depending on the responsibilities of the buyer and seller. Incoterms beginning with the letter F refers to primary shipping costs not paid by the seller. Terms beginning with the letter C refers to shipments paid by the seller. Terms beginning with the letter E refers to the seller’s responsibilities fulfilled when the goods are ready to leave the facility. Terms beginning with the letter D refers to seller’s responsibilities fulfilled when shipments reach a specific point.
EX-Works (EXW)
An advantageous trade term for the seller, Ex-Works places the least amount of responsibility on the seller. The buyer has the most responsibility in the fulfillment of the trade. In an Ex-Works transaction, the seller makes the goods available for pickup at the seller’s facility. The goods are considered “delivered” when they are released to the buyer’s freight forwarder. The buyer has to take care of export and import clearance, insurance, and all other paperwork.
Free On Board (FOB)
FOB specifically refers to ocean shipments or shipments through the inland waterways. The seller uses a freight forwarder to move the goods to the designed port of the buyer. Goods are considered “delivered” when goods are released to the buyer’s forwarder. When the goods are released, the responsibility for insurance and transportation is transferred to the buyer.
Free Carrier (FCA)
The seller is responsible for arranging the transportation to move the goods to the buyer. In FOB, the buyer chooses the freight forwarder of his choice. However, in FCA, the seller chooses the freight forwarder to move the goods to the buyer. The goods are considered “delivered” when they arrive at the destination port. The buyer is responsible for the insurance.
Free Alongside Ship (FAS)
The buyer is at a maximum disadvantage here as he accepts all transportation costs and the risk of loss of goods. The seller clears the goods for export. The goods are considered “delivered” when they’re handed over to the buyer’s forwarder for transportation and insurance costs.
Cost and Freight (CFR)
Formerly known as CNF, it defines the responsibilities for the cost of the goods (‘C’) and freight charges (‘F’). The seller is responsible for moving the goods to the destination port of the buyer. It is the buyer’s responsibility to get insurance to cover the goods from the point of shipment to the buyer’s doorstep. The seller is responsible for the transportation and the forwarder.
Cost, Insurance, and Freight (CIF)
CIF is similar to CFR and differs only by the fact that instead of the buyer insuring goods for moving to the destination port, it will be the seller who insures the goods. The goods are considered “delivered” when they reach the destination port.
Carriage Paid To (CPT)
CPT is similar to CIF and differs only by the fact that the seller has to buy insurance to name the buyer as the insured while the goods move to the destination port.
Carriage and Insurance Paid To (CIP)
CIP relies on the carrier’s insurance. The seller buys a minimum insurance coverage. Freight forwarders usually act as carriers. The buyer’s insurance becomes active when the goods are delivered to the forwarder.
Delivered at Frontier (DAF)
The seller hires a forwarder to move the goods to a border crossing point for export. The goods are considered “delivered” when they are moved to the determined frontier. The buyer is responsible for picking up goods after export clearance and clear them for import. Usually, the buyer’s forwarder handles the task of clearance.
Delivered Ex Ship (DES)
The seller is responsible to move the goods to the destination port or engage with the forwarder to move to the destination port. The goods are considered “delivered” then. Destination changes when the ship is docked becomes the buyer’s responsibility.
Delivered Ex Quay (DEQ)
The buyer is responsible for customs duties, clearance, and other charges. Meanwhile, the seller is responsible for delivering the goods to the destination port or quay.
Delivered Duty Paid (DDP)
The seller is responsible for all the tasks from manufacturing the goods to shipping them to the buyer’s doorstep. Customs duties, insurance, transportation costs, and other charges are taken care of by the seller.
Delivered Duty Unpaid (DDU)
DDU is similar to DDP and differs only by the fact that the buyer is responsible for customs charges, fees, and taxes.
It can be confusing for many to understand the various terms in international trade. However, considering the huge benefits that come with it including huge savings, it pays to give more attention to the trade terms before agreeing on an international trade deal.
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