International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or...

International Logistics: The Management of International Trade Operations

Ch. 6: Terms of Trade or Incoterms© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.

Chapter Six:Chapter Six:Terms of Trade Terms of Trade

or Incotermsor Incoterms



International Commerce TermsInternational Commerce Terms

Understanding IncotermsUnderstanding Incoterms

Overview of all 13 IncotermsOverview of all 13 Incoterms

Electronic Data InterchangeElectronic Data Interchange

Common Errors in IncotermsCommon Errors in Incoterms

Incoterms as a Marketing ToolIncoterms as a Marketing Tool



International Commerce TermsInternational Commerce Terms

In 1936, the International Chamber of Commerce developed the International Commerce Terms (or Incoterms) that formalize these responsibilities. Incoterms were revised in 1953, 1967, 1980, and 1990.

The latest version of Incoterms is dated 2000. A new set is due to be implemented in 2011.

For each international sale, it is important to determine, who — the exporter or the importer — is responsible for:

• Domestic transportation in the exporting country• International transportation• Domestic transportation in the importing country• The risks involved in international transportation• Customs clearance in the importing country




Incoterms formally define the following aspects of an international sale:

• Which tasks will be performed by the exporter• Which tasks will be performed by the importer• Which activities will be paid by the exporter• Which activities will be paid by the importer• When the transfer of responsibilities takes place

There are 13 different Incoterms, all abbreviated with a 3-letter acronym, such as EXW, DEQ, FOB, and so on.




Choosing the correct Incoterm depends on which export strategy a company is following. The following factors are particularly important:

• The type of product being sold (weight, volume, perishability, value, sensitivity to temperature changes, and so on)

• The method of shipment• The ability and willingness of either of the exporter and

importer to perform the tasks involved• The amount of trust placed by either of the parties toward

the other



Thirteen IncotermsThirteen Incoterms



Thirteen IncotermsThirteen Incoterms

Every Incoterm has:

• A scope — The type of products for which it can be used• A modality — The mode of transport for which it can be used• A syntax — The way it has to be stated on invoices and

paperwork

Every Incoterm defines:

• The responsibilities of the exporter• The responsibilities of the importer• A specific transfer point at which the responsibilities for the

goods shifts from the exporter to the importer



EXW [City where goods are made available]

Syntax

Ex-Works (EXW)Ex-Works (EXW)

The exporter has to make the goods available to the importer at a point located in the exporting country, at a mutually-convenient time.

EXW can be used for any type of goods

Scope

ModalityEXW can be used for all modes of transportation



Ex-Works (EXW)Ex-Works (EXW)

• packages the goods for the international voyage• provides the importer with the documents necessary to clear

Customs

Exporter

Importer

• does everything else

Transfer Point

• when the exporter makes the goods available to the importer



FCA [City where goods are delivered to the carrier]

Syntax

Free Carrier (FCA)Free Carrier (FCA)

FCA was created for goods shipped through multi-modal transportation. The exporter/seller delivers the goods to a carrier specified by the importer.

FCA can be used for any type of goods

Scope

ModalityFCA can be used for all modes of transportation



Free Carrier (FCA)Free Carrier (FCA)

• packages the goods for the international voyage• provides the documents necessary to clear Customs• clears the goods for export

Exporter

Importer


Transfer Point

• when the exporter delivers the goods to the carrier



FAS [Port of Departure]

Syntax

Free Alongside Ship (FAS)Free Alongside Ship (FAS)

FAS was created for goods shipped by ocean transportation. The exporter/seller delivers the goods to a port of departure specified by the importer.

FAS can be used for any type of goods

Scope

ModalityFAS can only be used for ocean transportation



Free Alongside Ship (FAS)Free Alongside Ship (FAS)

• packages the goods for the international voyage• provides the documents necessary to clear Customs• clears the goods for export • delivers the goods to the port of departure

Exporter

Importer


Transfer Point

• when the exporter delivers the goods to the carrier



FOB [Port of Departure]

Syntax

Free on Board (FOB)Free on Board (FOB)

FOB was created for goods shipped by ocean transportation. The exporter/seller delivers the goods to the port of departure and pays to have them loaded on a ship specified by the importer.

FOB can be used for any type of goods

Scope

ModalityFOB can only be used for ocean transportation



Free on Board (FOB)Free on Board (FOB)

• packages the goods for the international voyage• provides the documents necessary to clear Customs• clears the goods for export • delivers the goods to the port of departure and pays to have

them loaded on board

Exporter

Importer

Transfer Point

• when the goods cross the ship’s rail




CFR [Port of Destination]

Syntax

Cost and Freight (CFR)Cost and Freight (CFR)

CFR is for goods shipped by ocean transportation. The exporter arranges the international transportation of the goods and pays to have them shipped to a port of destination specified by the importer.

CFR can be used for any type of goods

Scope

ModalityCFR can only be used for ocean transportation



Cost and Freight (CFR)Cost and Freight (CFR)

• packages the goods for the international voyage• provides the documents necessary to clear Customs• clears the goods for export • delivers the goods to the port of destination

Exporter

Importer


Transfer Point

• when the goods cross the ship’s rail in the port of departure



CIF [Port of Destination]

Syntax

Cost, Insurance, and Freight (CIF)Cost, Insurance, and Freight (CIF)

CIF applies to goods shipped by ocean transportation. The exporter arranges and pays for the international ocean transportation of the goods, as well as for international insurance.

CIF can be used for any type of goods

Scope

ModalityCIF can only be used for ocean transportation



Cost, Insurance, and Freight (CIF)Cost, Insurance, and Freight (CIF)

• packages the goods for the international voyage• provides the documents necessary to clear Customs• clears the goods for export • delivers the goods to the port of destination• pays for international insurance (always 110 percent of value)

Exporter

Importer


Transfer Point

• when the goods cross the ship’s rail in the port of departure



CPT [City of Destination]

Syntax

Carriage Paid To (CPT)Carriage Paid To (CPT)

CPT is similar to CFR, except that it applies to goods shipped by non-ocean means of transportation, or shipped on a multi-modal bill of lading that may include ocean transportation.

CPT can be used for any type of goods

Scope

ModalityCPT is used for non-ocean modes of transportation



Carriage Paid To (CPT)Carriage Paid To (CPT)

• packages the goods for the international voyage• provides the documents necessary to clear Customs• clears the goods for export • arranges and pays to transport the goods to the city of destination

Exporter

Importer


Transfer Point

• when the goods are delivered to the carrier in the city of departure



CIP [City of Destination]

Syntax

Carriage & Insurance Paid To (CIP)Carriage & Insurance Paid To (CIP)

CIP is similar to CIF, except that it applies to goods shipped by non-ocean means of transportation, or shipped on a multi-modal bill of lading that may include ocean transportation.

CIP can be used for any type of goods

Scope

ModalityCIP is used for non-ocean modes of transportation



Carriage & Insurance Paid To (CIP)Carriage & Insurance Paid To (CIP)

• packages the goods for the international voyage• provides the documents necessary to clear Customs• clears the goods for export • arranges and pays to transport the goods to the city of destination• pays for international insurance (always 110 percent of value)

Exporter

Importer


Transfer Point

• when the goods are delivered to the carrier in the city of departure



DES [Port of Destination]

Syntax

Delivered Ex-Ship (DES)Delivered Ex-Ship (DES)

DES applies to bulk goods shipped by ocean transportation. The goods are unloaded at the expense of the importer in the port of destination.

DES is generally used for bulk goods only

Scope

ModalityDES can only be used for ocean transportation



Delivered Ex-Ship (DES)Delivered Ex-Ship (DES)

• provides the documents necessary to clear Customs• clears the goods for export • arranges and pays to transport the goods to the port of destination

Exporter

Importer


Transfer Point

• when the goods are delivered to the port of destination



DEQ [Port of Destination]

Syntax

Delivered Ex-Quay (DEQ)Delivered Ex-Quay (DEQ)

DEQ applies to bulk goods shipped by ocean transportation. The goods are unloaded at the expense of the exporter in the port of destination.

DEQ is generally used for bulk goods only

Scope

ModalityDEQ can only be used for ocean transportation



Delivered Ex-Quay (DEQ)Delivered Ex-Quay (DEQ)

• provides the documents necessary to clear Customs• clears the goods for export • arranges and pays to transport the goods to the port of destination• pays for unloading the goods in the port of destination

Exporter

Importer


Transfer Point

• when the goods are delivered to the importer



DAF [City/Location of Border Crossing]

Syntax

Delivered at Frontier (DAF)Delivered at Frontier (DAF)

DAF applies to goods shipped by land transportation. The goods are delivered to the importer at the border between two countries.

DAF can be used for any type of goods

Scope

ModalityDAF can only be used for land-based transportation



Delivered at Frontier (DAF)Delivered at Frontier (DAF)

• provides the documents necessary to clear Customs• clears the goods for export • arranges and pays to transport the goods to the border city

Exporter

Importer


Transfer Point

• when the goods are delivered to the border city



DDU [City in the importing country]

Syntax

Delivered Duty Unpaid (DDU)Delivered Duty Unpaid (DDU)

Under DDU, the exporter agrees to deliver the goods to a location in the importing country. The only thing that the importer has to do is to clear Customs in the importing country.

DDU can be used for any type of goods

Scope

ModalityDDU can only be used for any mode of transportation



Delivered Duty Unpaid (DDU)Delivered Duty Unpaid (DDU)

• provides the documents necessary to clear Customs• clears the goods for export • arranges and pays to transport the goods to the city in the

importing country

Exporter

Importer

• clears Customs in the importing country

Transfer Point

• when the goods are delivered to the city in the importing country



DDP [City in the importing country]

Syntax

Delivered Duty Paid (DDP)Delivered Duty Paid (DDP)

Under DDP, the exporter agrees to deliver the goods to a location in the importing country, after having cleared Customs.

DDP can be used for any type of goods

Scope

ModalityDDP can only be used for any mode of transportation



Delivered Duty Paid (DDP)Delivered Duty Paid (DDP)

• arranges for transportation and pays for transportation from the country of export to the city of delivery in the importing country

• clears Customs in the importing country

Exporter

Importer

• takes delivery of the goods in the importing country

Transfer Point

• when the goods are delivered to the city in the importing country



TASK EXW FCA FAS FOB CFR CIF CPT CIP DES DEQ DAF DDU DDP

Export Packing X X X X X X X X X X X X X

Inland Freight I X X X X X X X X X X X X

Export Clearance I I X X X X X X X X X X X

Arrange Carrier I I I I X X X X X X X X X

Load onto Carrier I I I X X X X X X X X X X

Pay Carrier I I I I X X X X X X X X X

Unload Carrier I I I I I I I X I X X

Pay Insurance X X

Import Clearance I I I I I I I I I I I I X

Pay Duty I I I I I I I I I I I I X

Pay Inland Freight I I I I I I I I I I I X X

Incoterm SummaryIncoterm Summary

X = Exporter’s Responsibility I = Importer’s Responsibility



Mode of Transport EXW FCA FAS FOB CFR CIF CPT CIP DES DEQ DAF DDU DDP

Ocean Cargo YES NO YES YES YES YES NO NO YES YES NO YES YES

Multi-Modal (FCL) YES YES NO NO NO NO YES YES NO NO YES YES YES

Multi-Modal (LCL) YES YES NO NO NO NO YES YES NO NO YES YES YES

Rail YES YES NO NO NO NO YES YES NO NO YES YES YES

Road YES YES NO NO NO NO YES YES NO NO YES YES YES

Air YES YES NO NO NO NO YES YES NO NO NO YES YES




BulkBreak-Bulk

RO-RO Container Small Packet

EXW Yes Yes Yes Yes Yes

FAS Yes Yes Yes Yes No

FCA No Yes Yes Yes Yes

FOB Yes Yes Yes Yes No

CIF Yes Yes Yes Yes No

CIP No Yes Yes Yes Yes

CFR Yes Yes Yes Yes No

CPT No Yes Yes Yes Yes

DES Yes No No No No

DEQ Yes No No No No

DDP Yes Yes Yes Yes Yes

DDU Yes Yes Yes Yes YesDAF Yes Yes Yes Yes No




Electronic Data InterchangeElectronic Data Interchange

For a number of Incoterms, there is no transport document that is issued at the point where the responsibility shifts from the exporter to the importer (for example, a Bill of Lading).

Electronic Data Interchange has attempted to solve this problem.

Whenever there is no transport document possible, the exporter can still send an EDI “notice” to the importer, which acts as a proof of delivery for both parties. The exporter has a record of the notification sent, and the importer knows unambiguously when the goods were delivered to the quay or when they arrived in port.



Common Errors in Incoterm UsageCommon Errors in Incoterm Usage

Domestic Terms as International Terms of Trade

An inexperienced exporter will use “FOB factory” rather than the correct corresponding Ex-Works (EXW) Incoterm.

Confusion with Older Incoterm Versions

The International Chamber of Commerce modified the Incoterms in 1980, 1990, and 2000. It eliminated some Incoterms, modified others and created some new ones. For a number of reasons, several exporters have failed to adapt to these changes, and will use an obsolete Incoterm.



Common Errors in Incoterm UsageCommon Errors in Incoterm Usage

Improper Use of Correct Incoterms

Incoterms are sometimes specific to certain modes of transportation and types of cargo, and cannot be used for others.

The most frequent misuse is when FOB is used with an air shipment: FOB is designed to be used only with an ocean shipment term.

The correct Incoterm to use for an air shipment should be Free Carrier (FCA), to clearly outline the responsibilities of the exporter and of the importer.



Incoterms as a Marketing ToolIncoterms as a Marketing Tool

A strategic advantage can be gained by an exporter willing to facilitate the sale of its products by assisting a novice importer in the handling of a shipment.

On the other hand, an experienced importer may be intent on performing all or most of the tasks involved in the shipment.

Most exporters would gain by being flexible, offering a quote where they list several possible Incoterms:

• EXW Cleveland, Ohio, USA $ 245,000• FOB Miami, Florida, USA $ 258,000 • CIF Santos, Brazil $ 285,000

and let the importer decide which Incoterm it would rather use.

Date post:	23-Dec-2015
Category:	Documents
Upload:	rudolph-gervase-craig
View:	221 times
Download:	0 times

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or...

Documents