Export / Import Information for Small Business Owners
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:
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