What are Incoterms?

International trade terms (abbreviated as Incoterms) are sales terms used by both buyers and sellers in international trade to clarify the responsible party for the delivery of goods (including related tasks, costs and risks). These legally binding agreements are issued by the International Chamber of Commerce (ICC) and are followed by almost all countries.

The International Chamber of Commerce updates the Incoterms every ten years to ensure consistency with current international trade processes. The Incoterms were last updated on January 1, 2020, and include a total of 11 different trade terms.

When buyers make international purchases, sellers usually use the three-letter abbreviations in the Incoterms to define trade terms. These terms cover various tasks, costs, risks and logistics links involved in the process of goods transportation (including sea, air and land transportation).

Each international trade term stipulates the following transport responsibilities and obligations:

● Place of Delivery - This section Outlines the location where the goods will be transferred from the seller to the buyer.

● The party bearing the transportation cost - This section stipulates which party shall bear the freight. This part of the cost is usually divided into two methods: prepaid freight and collect freight.

● Export and import requirements - Each clause defines whether the seller or the buyer is responsible for bearing the costs of the import and export of goods and facilitating them.

● The responsible party for freight insurance - In some international trade terms, freight insurance is a mandatory requirement. Each international trade term clearly stipulates who will bear the cost of freight insurance.

The following is a simplified explanation of each shipping trade term:

● EXW - Factory Delivery or Warehouse Delivery: The seller is responsible for packaging the products and ensuring that the goods are available for delivery. The goods are delivered to the buyer at the seller's warehouse. The buyer is subsequently responsible for exporting, transporting and importing the goods to its destination.

● FCA (Delivery to Carrier) : The seller is responsible for transporting the goods to the designated destination in its country of origin, which is usually a freight terminal. After the goods arrive at the designated destination, they will be handed over to the buyer. The buyer is required to pay the freight and complete the import and delivery processes. Depending on the designated location, the goods may be exported by either the seller or the buyer.

● FAS (Free at Ship's Side) : The seller must be responsible for the entire process of the goods' export until they reach the terminal of the vessel or other means of transport. Once the goods arrive at the ship's terminal, the risk is transferred to the buyer. The buyer is responsible for loading the goods onto the vessel designated by it and transporting the goods to the final destination.

● FOB (Free on Board) : The seller is responsible for the entire export process of the goods and ships them on board. After the goods have been safely loaded, they will be delivered to the buyer. The buyer shall pay the freight for transporting the goods to the destination and bear all import costs.

● Cost and Freight (CFR) : The seller is responsible for transporting the goods to the buyer's port. After the goods arrive at the port, the responsibility is transferred to the buyer. The buyer must then unload the goods and import them to the destination country, and then transport the goods to the final destination.

● CIF (Cost, Insurance and Freight) : The seller is responsible for transporting the goods to the port designated by the buyer and bears the corresponding transportation and insurance costs. After the goods arrive at the port, the ownership of the goods is transferred to the buyer. The buyer shall subsequently bear the costs of unloading, importing and delivering the goods. The CIF terms require the seller to purchase cargo insurance.

● CPT (Freight to Pay) : The seller must unload the goods from the vessel at the designated place of delivery. After the goods are unloaded, they are transferred to the buyer, who is responsible for importing the goods and transporting them to the final destination.

● CIP (Full Payment of Freight and Insurance) : The seller must bear the freight and insurance for transporting the goods to the designated place of delivery. After the goods are unloaded and delivered to the designated wharf, the ownership is transferred to the buyer. The buyer must be responsible for importing the goods and completing the remaining transportation process to deliver the goods to the final destination. The CIP clause requires the seller to purchase cargo insurance.

● DAP (Delivery to Destination) : The seller must deliver the goods to the final designated destination. After the goods are delivered, the ownership is transferred to the buyer. The buyer is responsible for unloading from the truck and bears the import duties, taxes and customs clearance fees.

● DPU - Delivery at Place of Discharge: The seller must transport and unload the goods to the final destination. After the goods are successfully unloaded to the buyer's warehouse, the responsibility is transferred to the buyer. The buyer is responsible for import duties, taxes and customs clearance matters.

● DDP (Free After Duty) : The seller is responsible for transporting the goods to the final destination and paying the import duties, taxes and customs clearance fees. After the goods arrive at the destination, the responsibility is transferred to the buyer, who must bear the unloading costs. DDP is the only international trade term that requires the seller to pay all tariffs.

The advantages of using international trade terms

The Incoterms are binding agreements between the buyer and the seller, outlining the responsibilities of the manufacturer and the purchaser of the goods in terms of product delivery.

Although sellers are not required to provide Incoterms in international trade, doing so helps to avoid misunderstandings between buyers and sellers regarding roles and responsibilities. Due to the common language barriers and cultural differences in international trade, these terms can simplify usually complex processes and help clarify most of the information during the transfer of goods from the seller to the buyer. If you are a novice in the Incoterms for imports and international Trade, you may consider cooperating with a Chinese freight forwarder to avoid costly misunderstandings.

As a buyer, what terms should I pay attention to that are not included in the Incoterms?

The Incoterms help communicate most of the contents in the logistics and goods transportation processes, so most international traders choose to rely on them. Although these terms cover a wide range, there is still a considerable amount of information that remains unexplained. The buyer should not only fully understand the meanings of these terms, but also be aware of what each term does not include, as poor communication can easily lead to misunderstandings and costly mistakes.

International trade terms help clarify the delivery terms of internationally purchased products. These terms do not stipulate the payment method for the product or any other external rights, nor do they explain how the buyer should pay for the goods, nor do they specify who should be held responsible when the product has defects, errors or malfunctions.

The Incoterms are not intended to protect buyers from fraud or guarantee product quality in any way. It only defines the responsibilities of all parties during the transportation process. The Incoterms are not contractual agreements for the sale of products. On the contrary, it helps to convey part of the purchase agreement content to both the buyer and the seller.

For some buyers, a confusing aspect is how to determine whether Incoterms can protect buyers from the risk of damage, loss or theft of goods. Each Incoterms can help define these risks; However, it must be pointed out that only two Incoterms require the seller to purchase insurance for the goods. Unless an agreement on cargo insurance has been reached before shipment, the buyer needs to purchase cargo insurance separately.

The responsibility of understanding international trade terms

Not all international trade terms are applicable to all types of goods transportation. Although all international trade terms are applicable to waterway transportation, some terms can only be used for waterway transportation and not for land or air transportation. It is crucial to understand these differences because if you use international trade terms that are only applicable to waterway transportation but opt for other modes of transport, you may have to pay additional and unexpected costs.

The following is a list of international trade terms that you can use for all modes of transportation;

● EXW - Factory delivery or warehouse delivery

● FCA - Delivery to the carrier

● CPT - Freight paid to

● CIP - Freight and insurance have been paid

● DAP - On-site delivery

● DPU - Delivery at Unloading Location

● DDP - Delivery after tax payment

The following international trade terms are only applicable to sea and inland waterway transportation:

● FAS - Free Transport at the side of the ship

● FOB - Free on Board

● CFR - Cost Plus Freight

● CIF - Cost, Insurance, Freight

What's the difference between "freight collect" and "freight prepaid"?

"Freight prepaid" and "freight collect" are terms often used by both buyers and sellers when discussing international freight. When the seller mentions "freight collect", it refers to one of the four Incoterms, which requires the buyer to collect and pay all freight on behalf of the buyer. The Incoterms related to "freight collect" include:

● EXW - Factory delivery or warehouse delivery

● FCA - Delivery to the carrier

● FAS - Free Transport at the side of the ship

● FOB - Free on Board

Prepaid freight means that the seller will pay the freight. The remaining seven Incoterms all include prepaid freight provisions:

● CFR - Cost Plus Freight

● CIF - Cost, Insurance and Freight

● CPT - Freight paid to

● CIP - Freight and insurance have been paid

● DAP - On-site delivery

● DPU - Delivery at Unloading Location

● DDP - Delivery after tax payment

According to the CIF and CIP international trade terms, what types of insurance does the seller need to purchase during transportation?

There are two international trade terms that require sellers to purchase insurance for the goods before shipment. These two terms are CIF and CIP respectively. Each term has different requirements for the type of insurance that the seller must purchase.

CIF (Cost, Insurance and Freight) requires that the insurance policy at least cover the minimum coverage of the Association's cargo Clause (C).

CIP (Freight and Insurance Payment) requires that the insurance policy at least cover the coverage of the Association's Cargo Terms (A).

How can the buyer and the seller reach an agreement on which international trade term to use?

Unless otherwise requested by the buyer, the seller usually has its own preferred Incoterms that best suit itself and its customers. Buyers also often have their unique preferences and will inform the sellers of these preferences. Through communication, the buyer and the seller can reach an agreement on the Incoterms that are most suitable for their transaction.

For Incoterms to have contractual effect, the relevant provisions must be listed in the purchase agreement, sales invoice or sales contract. As these are contract terms, both the buyer and the seller should reach a clear consensus on them and cannot rely on oral communication to define the responsibilities of each party in international transportation.

When choosing international trade terms, no special documents or forms are required. On the contrary, this term should be listed together with the product price and defined as an international trade term agreed upon by both parties.

The Incoterms may change during the order processing. For instance, if goods originally planned to be transported by sea need to be replaced by air due to delays or unforeseen circumstances, the IncoTerms may be subject to change. As we discussed earlier, not all terms apply to air transport. If the terms are changed, both the buyer and the seller need to communicate, just as they communicate about any other changes in the purchase agreement.