International Trade terms are the standard terms in a trade that explain the rights and responsibilities of the parties making transaction. It elaborates on the obligations of the buyer and seller by explaining the deal and its cost aspects. These aspects include carriage, transportation, insurance, etc. The use of trade terms by buyers and sellers in international trade when specifying prices not only saves time and costs for negotiation, but also simplifies the content of the negotiation and sale contract, which is conducive to the conclusion of the transaction and the development of trade.
Five common trade terms
The full name of this term is EX Works (…. …namedplace)”, which means that the seller is responsible for delivering ready goods to the buyer at his workshop, factory, warehouse, etc., but is not normally responsible for loading the goods onto vehicles prepared by the buyer or for clearing them through customs. The buyer assumes the entire cost and risk of transporting the goods from the seller’s premises to their intended destination.
EXW Incoterms is the term for which the buyer has the most obligations and is not suitable if the buyer is unable to clear the export.
Exw Shipping Terms Pros:
- From the beginning, all costs are specified，It’s unusual to suffer additional fees.
- The supplyer cannot increase the delivery margin.
Exw Shipping Terms Cons:
- Without more examination, the costs are not as evident.
- You are responsible for all the risks from your supplier’s premises to your front door.
The full name of this term is “Free on Board”, It means that the seller delivers the goods over the ship’s rail at the named port of shipment and that the buyer assumes all costs, risks, loss or damage to the goods after the goods have passed the ship’s rail.
The FOB term requires the buyer to clear imports and the seller to clear exports and is applicable to sea and inland water transport.
FOB Shipping Terms Pros:
- Seller handles local export documentation in the fob origin.
- You get control over your transport costs after the ship’s rail.
FOB Shipping Terms cons:
- Higher product costs.
- Higher local transport costs.
The full name of this term is “FreeCarrier(…namedplace)”， It means that the seller delivers the goods to a carrier or other person appointed by the buyer at its place or at another named place. If there is more than one carrier, the risk also passes when the goods are delivered to the first carrier.
Under FCA incoterms, the buyer shall specify as clearly as possible with the seller the place of delivery within the designated place, where the risks and costs are transferred from the seller to the buyer. The FCA incoterms require the buyer to clear imports and the seller to clear exports and is applicable to sea and inland water transport.
FCA Shipping Terms Pros:
the supplier can’t add a margin on top of the original cost of loading the cargo.
FCA Shipping Terms Cons
Compared to most trade terms with a later liability transfer, the buyer gets more responsibility in FCA.
The full name of this term is “Cost and Freight(named port of shipment)”， It means that the seller must pay the cost and freight required to bring the goods to the named port of destination, but that from the time the goods are handed over to the deck of the ship, the risk of loss or damage to the goods and additional expenses resulting from accidents are transferred from the seller to the buyer once the goods have crossed the ship’s rail at the named port.
The CFR incoterms requires the buyer to clear imports and the seller to clear exports and is applicable to sea and inland water transport.
CFR Shipping Terms Pros:
The buyer does not have to bother about arranging ship transportation. The vendor handles everything, such as loading containerized cargo.
CFR Shipping Terms Cons:
The buyer faces damage during shipping.
The full name of this term is “Cost Insurance and Freight(…named port of shipment)”， It means that the seller is responsible for paying freight charges, shipping insurance policy, and further additional fees that come along with those.
CIF incoterms applicable to sea and inland water transport.
CIF Shipping Terms Pros:
The seller is responsible for having the insurance paid. You won’t have to worry about applying for an insurance claim or paying extra costs as a buyer.
CIF Shipping Terms Cons:
CIF is not the most cost-effective shipment term. As the seller is responsible for most costs, they can also choose to charge the buyer more. Some sellers lie and state that the expenses for the carriage used and shipping freight forwarders are higher than they are. The seller tricks the buyer into paying more for the cargo.
The buyer gets little control. In CIF, the seller gets more control than the buyer.
Incoterms are a set of rules defining the terms of sale. Furthermore, people use it all over the world. In addition, these rules share the costs and responsibility between the buyer and the seller. They are used while transporting goods from the seller to the buyer. Incoterms refer primarily to the UN Convention on Contracts for the International Sale of Goods.
Division of Incoterms
Incoterms 2020 are divided into four groups (C, D, E, F). The rules are classified according to the fees, risk, responsibility for formalities, as well as issues related to import and export.