Incoterms are essentially terms between buyers and sellers. These terms dictate what responsibilities the buyer and seller are responsible for during a transaction. This includes determining who pays for the insurance, who is responsible for paying for the carrier to transport the goods, and who will cover the costs for related import duties and fees.
The international Chamber of Commerce (ICC) created Incoterms as a way to help facilitate healthy global trade between nations. Therefore, Incoterms are internationally accepted by every country.
Types of INCO Terms
In total, there are 11 unique rules contained within the Incoterms ®. These 11 rules come from the 2010 edition and cover various trade terms as they relate to international shipment. 7 of the terms can be applied to any mode of transportation, while 4 specifically apply to shipments that are transported via ship. Below are the 11 types of Incoterms ® with a brief explanation of the associated conditions:
EXW
These terms are very seller friendly as the buyer is responsible for all costs and risks for the shipment. The seller is only obligated to make the goods available for pickup at the origins destination.
FCA- Free Carrier
Not too
dissimilar from EXW, this rule is favorable to sellers. In this situation,
the seller is responsible for bringing the goods to the carrier and
nothing more. Once the first carrier has the goods, the buyer is
responsible for the remainder of the shipment.
CPT- Carriage Paid to
This agreement has shared responsibilities related to the shipment and goods. The seller pays for the shipment from origin to agreed upon terminal before final transportation to destination. However, the ownership of goods and risk of loss transfer to the buyer once the goods are loaded at the origin.
CIP- Carriage and Insurance Paid to
Similar to the CPT terms, the only difference is that the seller is also responsible for the cost of insurance during shipment. The buyer still maintains all risk throughout the shipment.
DAT- Delivered At Terminal
As the name implies here, the goods are considered delivered once they’ve arrived at the buyer’s terminal. Up to this point, the seller assumes all responsibility for the shipment including costs, risks, and insurance. In Incoterms ® 2020, DAT has been relabeled as DPU- Delivered At Place Unloaded.
DAP- Delivered At Place
DAP terms are very buyer friendly in that the seller is responsible even for the final leg of journey from the terminal to the destination.
DDP- Delivered Duty Paid
These terms take the DAP conditions one step further. In this scenario, the seller even pays any associated duties related to the shipment.
The 4 types below are applicable specifically for shipments via ship:
FAS- Free Alongside Ship
In this situation, costs and risks transfer from the seller to the buyer when goods have been delivered to the port where the ship will load the goods.
FOB- Free On Board
Only slightly different than FAS terms, FOB conditions essentially split the responsibility 50/50. The seller assumes costs and risks up to the goods being loaded onto the ship at the departure port. Once the goods have made it to the buyer’s arrival port, all responsibilities shift to the buyer.
CFR- Cost and Freight
CFR terms extend responsibilities for the seller just slightly beyond FOB conditions. Under CFR terms, the seller covers the cost of the shipment up to the point where goods are offloaded at the arrival port.
CIF- Cost, Insurance, and Freight
The only modification to these conditions compared to CFR terms is that the seller also pays for insurance as well up to the same point.
As you can see, each set of terms is unique in its own way. Being aware of the specifics for each one should help guide you to selecting the right terms for your specific shipments.
The Three Most Common Incoterms for Sourcing from China
Generally speaking, the three incoterms that offer the most viable options when importing goods from China are FOB, EXW, and CIF.
Sourcing from China Under the FOB Incoterm
Your Responsibilities With FOB:
- Ocean freight costs and surcharges
- Ocean freight insurance
- Arrival fees
- Customs clearance
- Inland transportation costs from the port of arrival to the destination
- All associated taxes and tariffs
Your Seller’s Responsibilities With FOB
- Inland transportation from the warehouse in China to your chosen port of loading
- Provision of certificates required at the port of loading
- Management of customs clearance in China
- Customs fees in China
- Port expenses
Sourcing from China Under the EXW Incoterm
Your Responsibilities With EXW:
- Paying for the cargo
- Ensuring the cargo
- Departure fees
- Arrival fees
- Customs clearance at origin and destination
- Inland transportation at origin and destination
- All associated fees and duties
Your Seller’s Responsibilities With EXW
- Making the goods available for transportation
- Provision of all certifications and documents ready for export
Sourcing from China Under the CIF Incoterm
Your Responsibilities With CIF:
- Pay for the cargo
- Arrival fees
- Customs clearance at the destination
- Port to warehouse transport fees
- Import taxes
Your Seller’s Responsibilities With CIF:
- Delivery of goods as agreed
- Management of export documentation
- Warehouse to port transportation costs in China
- Charges at the port of origin
- Customs clearance in China
- Customs fees in China
- Ocean freight costs
- Insurance costs
A solid understanding of Incoterms® and careful negotiation between you and your Chinese supplier can make your trade go smoothly. We are always here to help!