There are more than 200 countries in the earth that are engaged in cross-border trade (CBT). Each country has different culture and history, which has to be a unified rule to make transaction easier and more convenient.
In this regard, the International Chamber of Commerce (ICC) established Incoterms to limit the risks and costs that may arise in the process of exchanging goods between countries.
Incoterms 2020: Classification of eleven rules.
< RULES FOR ANY MODE OR MODES OF TRANSPORT>
1. EXW EX WORKS
- Refers to the sellers (or also regarded as shippers) handing over contracted product from their factory or warehouse to the buyer (or also considered as consignee)
- The seller has minimum obligation, on the other hand, buyer covers all costs and organizes transport. (Buyer takes resposibility from seller's factory)
- Convenient condition for exporters who are not familiar with trade transactions since buyers takes own risk and cost for carrying out all the trade process.
- EXW is proceeded when seller is in A's position and buyer is in B's position.
2. FCA FREE CARRIER
- Seller's obligation: EXW + Transportation to specific place + customs clearance cost
- When the seller clears the delivery to the specific designated place nominated by the buyer, seller's obligation is terminated (risk and cost)
- If FCA takes place within the seller's territory, the seller must load the goods into the buyer's transportation, but in a place other than the seller's area, the seller is not obliged to unload the goods from their vehicle. It is the buyer's duty to unload and reload it on the new vehicle.
3. CPT CARRIAGE PAID TO
- Seller's cost: FCA + transportation costs to designated destinations (where the destination is an agreed point inland)
- The seller must enter into contract of carriage. When the seller delivers the goods to the frieght forwarder, only the junction of the risk is terminated, and the bifurcation of the cost is terminated only when the goods arrive at the designated destination of the export destination. The bifurcation of risk and cost is different.
- If CFR, which is a maritime transport condition, is changed to a combined transport method, it becomes CPT.
- The seller must clear export customs, but the seller has no obligation to clear import customs and pay customs duties.
4. CIP CARRIAGE AND INSURANCE PAID TO
- Seller's cost: CPT + insurance contract settlement obligation
- If the CIF, which is a condition for sea transport, is changed to a combined transport method, then it becomes CIP condition
- The conditions under which the seller is required to pay the shipping cost and additional insurance premiums to the designated destination, which are mostly similar as the CPT. As with CPT, the junction of the risk is terminated upon delivery to the freight forwarder.
5. DAP DELIVERED AT PLACE
- Seller's Cost: When the goods are left at the designated destination without being unloaded, the breakpoint of the seller's risk and cost is terminated.
- Arrival transportation method can be ship and designated destinations can be a port.
6. DPU DELIVERED AT PLACE UNLOADED
- DPU rule [seller's obligation of concession] is added in Incoterms 2020.
- This is a condition in which delivery takes place after the seller dismisses at the destination or at the agreed point of agreement.
- The seller bears the risks and costs of the transfer and the arrival of the destination is the same. If the seller does not want to bear the risks and costs of the transfer, the DAP condition must be used.
7. DDP DELIVERED DUTY PAID
- Seller's expenses: DPU + import duties and payment of VAT or GST.
- Sellers are required to pay both customs clearance and customs duties at their designated destination.
- The seller should deliver the goods to the buyer's area or warehouse. While EXW is the seller's minimum obligation, DDP is the seller's maximum obligation.
< RULES FOR SEA AND INLAND WATERWAY TRANSPORT>
8. FAS FREE ALONGSIDE SHIP
- Seller's cost: inland freight to the port + wharf freight alongside ship
- The buyer is responsible for shipping costs loaded from the ship to the ship. In other words, the divergence of risk and cost for the seller is terminated by simply placing the contracted product on the side of the ship. It is mainly used for bulk cargo [ex) grain, coal, log, etc.]. When the product is in a container, it is better to use FCA than FAS.
9. FOB FREE ON BOARD
- FOB is the most commonly used condition with CIF in practice.
- The divergence of risk and cost ends when the seller puts the goods on board of the buyer's nominated ship. Subsequent risks and additional costs are all up to the buyer.
-The buyer has the right to sign the nomination of vessel (frieght forwarder) and the contract of carriage, and at the same time bear all costs such as freight and insurance to the destination (port).
10. CFR COST AND FREIGHT INCLUDING FREIGHT
- Seller's Cost: FOB + seller bears the freight to the designated port of destination.
- When placing goods on the deck of the ship, the seller's junction of risk is terminated, but the seller must bear the export customs clearance and shipping costs (friehgt) to the port of destination. The end points of the divergence of risk and cost are different.- If CFR is changed to a combined transport method, it becomes CPT.
11. CIF COST INSURANCE AND FREIGHT Fare.Including Insurance Charges
- Seller's Cost: CFR + Sea Insurance Fee
- Under the CIF terms, if there is no agreement for insurance between each other. The seller must pay for insurance. When signing an insurance contract, the policyholder and the insured are the sellers, but after the transaction begins and the goods are shipped, the insured becomes the buyer.
- The rules dealing with the rights and obligations of the parties under the CIF are the Warsaw-Oxford Rule-Waluso-Oxford Rules.
- If CIF is changed to a combined transport method, it becomes CIP.
I have been doing trading business for more than 3 years. Incoterms rule gives exporters and importers the standard point of whom bearing the risk and the cost. As an exporter, I frequently use FOB or CIF when transportation through ocean, and EXW or DDP through air transportation. Normally it Incoterms differ according to the weight and the volume of the amount of contract. Small amount can be shipped by air, whereas bulk trade is proceeded by ocean. When the buyer is more eager to buy the specific product and has their own transportation method, then EXW is used. However, most buyers do not have their shipping systems, so I tend to nominate the vessel and freight forwarder, which leads to the incoterms of FOB and DDP.
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