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What are Incoterms? And why do these matter for my exports?

Ever wondered why China manufacturers seem to commonly quote their prices as FOB? And is this the buying term you need?

 

International Commercial Terms (or INCOTERMS) are a series of pre-defined terms relating to international commercial law. They are widely used in the international procurement processes and consist of a series of three-letter trade terms related to common contractual sales practices.

 

Common trade terms are EXW (Ex Works), FOB (Free On Board) and DDP (Delivered Duty Paid).

 

There are commonly 11 trade terms in total.These terms are intended to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods.

 

This is very important when setting up an international export order as it will dictate your costs after the goods are manufactured in the factory.

 

Terms start at EXW, where prices are for goods to be made available for pick-up, and end at DDP, where your goods are delivered to a location in the destination country.

 

Here are the most common terms for international production and fulfillment. There are a number of other terms inbetween these main terms. From top to bottom, the responsibility gradually transfers from the Buyer to the Seller.

 

EXW - Ex Works

The seller makes the goods available at their premises, or at another named place. This term places the maximum obligation on the buyer and minimum obligations on the seller. The Ex Works term is often used when making an initial quotation for the sale of goods without any costs included.

 

FOB - Free On-Board

The seller bears all costs and risks up to the point the goods are loaded on board the vessel. The seller must also arrange for export clearance. From the opposite end, the buyer pays cost of marine freight transportation, bill of lading fees, insurance, unloading and transportation cost from the arrival port to destination.

 

CIF - Cost, Insurance & Freight

The seller pays for the carriage of the goods up to the named port of destination and insures the cargo for 110% of their value. Risk transfers to buyer when the goods have been loaded on board the ship in the country of Export. The Shipper is responsible for origin costs including export clearance and freight costs for carriage to named port.

 

DDP - Delivered Duty Paid

Seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination including import duties and taxes. The seller is not responsible for unloading. This term is often used in place of the non-Incoterm "Free In Store (FIS)". This term places the maximum obligations on the seller and minimum obligations on the buyer.

 

No risk or responsibility is transferred to the buyer until delivery of the goods at the named place of destination.

 

There is also another common term named DDU - Delivered Duty Unpaid. This is similar to DDP although the clearance duties in the place of destination is not paid by the seller. This is a common variant of DDP when delivering to a country that is hard to gauge the duties that will be charged for the items. Australia is an uncommon place for DDU shipments, as the relevant duties are quite clear and transparent to the seller.

 

If you need further advice on Incoterms of offshore quotation specifics, please contact us at info@2starlogistics.com.au

 

 

 

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