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Chapter Six: Terms of Trade or Incoterms
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Chapter Six: Terms of Trade or Incoterms

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  1. Chapter Six:Terms of Trade or Incoterms

  2. International Commerce Terms Understanding Incoterms Overview of all 13 Incoterms Electronic Data Interchange Common Errors in Incoterms Incoterms as a Marketing Tool

  3. International Commerce Terms • 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 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.

  4. Understanding Incoterms • 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.

  5. Understanding Incoterms • 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

  6. Thirteen Incoterms

  7. Thirteen 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

  8. 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. Scope EXW can be used for any type of goods Modality EXW can be used for all modes of transportation Syntax EXW [City where goods are made available]

  9. Ex-Works (EXW) Exporter • packages the goods for the international voyage • provides the importer with the documents necessary to clear Customs Importer • does everything else Transfer Point • when the exporter makes the goods available to the importer

  10. 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. Scope FCA can be used for any type of goods Modality FCA can be used for all modes of transportation Syntax FCA [City where goods are delivered to the carrier]

  11. Free Carrier (FCA) Exporter • packages the goods for the international voyage • provides the documents necessary to clear Customs • clears the goods for export Importer • does everything else Transfer Point • when the exporter delivers the goods to the carrier

  12. 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. Scope FAS can be used for any type of goods Modality FAS can only be used for ocean transportation Syntax FAS [Port of Departure]

  13. Free Alongside Ship (FAS) Exporter • 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 Importer • does everything else Transfer Point • when the exporter delivers the goods to the carrier

  14. 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. Scope FOB can be used for any type of goods Modality FOB can only be used for ocean transportation Syntax FOB [Port of Departure]

  15. Free on Board (FOB) Exporter • 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 Importer • does everything else Transfer Point • when the goods cross the ship’s rail

  16. 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. Scope CFR can be used for any type of goods Modality CFR can only be used for ocean transportation Syntax CFR [Port of Destination]

  17. Cost and Freight (CFR) Exporter • 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 Importer • does everything else Transfer Point • when the goods cross the ship’s rail in the port of departure

  18. 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. Scope CIF can be used for any type of goods Modality CIF can only be used for ocean transportation Syntax CIF [Port of Destination]

  19. Cost, Insurance, and Freight (CIF) Exporter • 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) Importer • does everything else Transfer Point • when the goods cross the ship’s rail in the port of departure

  20. 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. Scope CPT can be used for any type of goods Modality CPT is used for non-ocean modes of transportation Syntax CPT [City of Destination]

  21. Carriage Paid To (CPT) Exporter • 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 Importer • does everything else Transfer Point • when the goods are delivered to the carrier in the city of departure

  22. 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. Scope CIP can be used for any type of goods Modality CIP is used for non-ocean modes of transportation Syntax CIP [City of Destination]

  23. Carriage & Insurance Paid To (CIP) Exporter • 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) Importer • does everything else Transfer Point • when the goods are delivered to the carrier in the city of departure

  24. 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. Scope DES is generally used for bulk goods only Modality DES can only be used for ocean transportation Syntax DES [Port of Destination]

  25. Delivered Ex-Ship (DES) Exporter • provides the documents necessary to clear Customs • clears the goods for export • arranges and pays to transport the goods to the port of destination Importer • does everything else Transfer Point • when the goods are delivered to the port of destination

  26. 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. Scope DEQ is generally used for bulk goods only Modality DEQ can only be used for ocean transportation Syntax DEQ [Port of Destination]

  27. Delivered Ex-Quay (DEQ) Exporter • 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 Importer • does everything else Transfer Point • when the goods are delivered to the importer

  28. 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. Scope DAF can be used for any type of goods Modality DAF can only be used for land-based transportation Syntax DAF [City/Location of Border Crossing]

  29. Delivered at Frontier (DAF) Exporter • provides the documents necessary to clear Customs • clears the goods for export • arranges and pays to transport the goods to the border city Importer • does everything else Transfer Point • when the goods are delivered to the border city

  30. 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. Scope DDU can be used for any type of goods Modality DDU can only be used for any mode of transportation Syntax DDU [City in the importing country]

  31. Delivered Duty Unpaid (DDU) Exporter • 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 Importer • clears Customs in the importing country Transfer Point • when the goods are delivered to the city in the importing country

  32. Delivered Duty Paid (DDP) Under DDP, the exporter agrees to deliver the goods to a location in the importing country, after having cleared Customs. Scope DDP can be used for any type of goods Modality DDP can only be used for any mode of transportation Syntax DDP [City in the importing country]

  33. Delivered Duty Paid (DDP) Exporter • 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 Importer • takes delivery of the goods in the importing country Transfer Point • when the goods are delivered to the city in the importing country

  34. Incoterm Summary X = Exporter’s Responsibility I = Importer’s Responsibility

  35. Incoterm Summary

  36. Incoterm Summary

  37. Electronic 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.

  38. Common 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.

  39. Common 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.

  40. Incoterms 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.