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International
Commercial Terms, or “Incoterms”, as they
are referred to for short, are a glossary of
internationally-recognized trade industry
definitions. These definitions, or “terms”, are used
exclusively as a common language between an
import/export, buyer/seller relationship and lay out
and define the method to which the buyer and seller
will equally share transaction and transportation
costs. There
are several variations of incoterms agreements, we
will not cover all of them here. However, we will
take a look at four of the most popular incoterms at
each end of the trade spectrum.
1) EXW is the incoterm for “Ex Works
(named place)”. What this means is that the
seller makes his product available at their place of
business, and the buyer is responsible for
transport, insurance, and liability upon pickup of
the shipment by the first carrier. Ownership is
transferred to the buyer at this point. For example,
a shoe company in China sells 3,400 pairs of shoes
to a United States buyer. The Chinese company makes
the shoes, packages them, and places the crates in
their shipping area. It's up to the US buyer to get
those crates to their warehouse.
2) FOB is the incoterm for “Free On Board”.
What this means is that the seller provides for
shipment to the loading port of origin, and the
loading of the product onto the ship. The buyer pays
for the transport, insurance, unloading, and
shipping to their destination. The point of
ownership occurs at ship's rail at the destination
point, this means the second the product crosses
from the ship to the dock, it is now owned by the
buyer.
3) CFR is the incoterm for “Cost and
Freight”. What this means is the seller pays for
shipment to the loading port of origin, loading onto
the ship, just like with FOB. However, this time the
transfer of ownership occurs at ship's rail at the
port of origin. So as soon as the product is loaded
onto the vessel, it belongs to the buyer. In
addition, CFR states that the seller pays for the
transport to the destination port. A slight
variation on this incoterm is CIR, which is the same
as CFR but also includes the seller providing
insurance as well.
4) DDP is the incoterm for “Destination
Duty Paid”. This is the complete opposite of EXW,
and it means that the seller is responsible for all
charges getting the product to the buyer's door.
Ownership changes at the point of final delivery.
For example, in the Chinese shoe company example
used above, with DDP the Chinese company pays for
shipping to the port of origin, loading onto the
ship, insurance, freight for transport, unloading,
any tariffs or duties upon arrival, and shipment to
the buyer. Once the buyer signs for the delivery it
is now their merchandise.
You can find more information on incoterms here:
http://www.iccwbo.org/incoterms/id3045/index.html
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Incoterms
