Incoterms 2023 Explained | Meaning, Rules, Pros & Cons

When conducting international trade and negotiating with your seller, you will use trade terms such as EXW, FOB, and CIF. These 3-letter incoterms may be overwhelming because you may not understand their meaning in shipping, what you and the seller are responsible for, and which one to choose from among so many incoterms.

Furthermore, the use of Incoterms in international trade is flexible in practice. Adding one more seller’s responsibility when you and your seller sign the contract may change from one term to another.

If you are looking for a comprehensive guide to Incoterms 2020, then you have come to the right place. The following aspects can help you clearly understand trade terms: Incoterms 2020.

• Understanding Incoterms in International Trade
• The 11 Types of Incoterms
• Trade Terms for Any Transport Modes
• When to Use EXW, FOB, CIF, And DDP
• What Are Freight Collect or Prepaid Incoterms?
• What Are Trade Terms on Alibaba?
• Benefits and Drawbacks of Incoterms

Understanding Incoterms in International Trade

Incoterms – International Commercial Terms, published by the International Chamber of Commerce (ICC), aims to provide a globally unified explanation of the different trade modes in international trade. Each trade mode has different obligations for both buyers and sellers, which can lead to varying product quotations. Incoterms define these obligations, as well as the tasks, costs, and risks that buyers and sellers should bear. It also clarifies the price composition, including shipping costs, insurance fees, and other additional charges, apart from the original product price. That’s why they are also known as international trade terms, price terms, shipping terms, and delivery terms.

As general rules for trade between countries, Incoterms can be directly used when negotiating with your seller, simplifying the negotiation process. They also help in resolving disputes, making it easier to determine who is at fault. Therefore, Incoterms are essential to businesses involved in international trade.

The 11 Types of Incoterms

The International Chamber of Commerce updates Incoterms every few years and the latest version is Incoterms 2020. It explains the 11 trade terms and divides them into rules for sea and inland waterways and rules for any mode of transport.

FOB

FOB (Free On Board) is a common trade term for sea freight. It means that the seller must send the goods to the vessel at the designated port, after which the buyer will be responsible for all tasks, costs, and risks.

Suppose you buy and ship your cargo under FOB from Yiwu, China to New York, USA. Then, your seller should:

• Send your cargo to Port of Ningbo (the nearest China port to Yiwu) and load it on the vessel.
• Pay shipping costs from their factory to Port of Ningbo.
• Deal with export customs declaration and pay declaration fees.
• Take the risks of damage and loss of goods until goods are loaded on the vessel.
• Once the cargo is on the vessel, you will be responsible for the goods, so you have to:
• Book shipping space, buy cargo insurance, arrange all transportation from Ningbo Port to your destination and pay the shipping costs.
• Go through customs clearance when goods arrive in New York and pay import duties and taxes.
• Bear all risks after the goods are loaded on the vessel.

Of course, you can let your freight forwarder help you arrange shipping and deal with customs clearance. This will save you lots of trouble, especially in the event of random customs checks.

As for FOB price, because sellers have to pay all expenses before sending the goods to the vessel, they will include the costs in the product quotation:

FOB Price (Ningbo) = product price + shipping cost to Port of Ningbo + customs declaration fees

Onestopimport can help you buy and ship goods under FOB.

FAS

Under FAS (Free Alongside Ship), the seller does not need to help you load the goods onto the ship as FOB, but only needs to put the goods alongside the ship, i.e. beside the ship at Port of Ningbo in the example above. And you will be responsible for risks from then on. Others are the same as FOB. FAS is not commonly used.

CFR

On the basis of FOB, if your seller is also responsible to book shipping space, arrange shipping to the port in your country, and pay the freight, then it should be CFR (Cost and Freight) trade term. In the example above, your seller should also help you pay sea freight from Port of Ningbo to Port of New York. Thus,

CFR price = FOB price + sea freight

CIF

On the basis of CFR, if you want your seller to help you buy cargo insurance against damage and loss during transportation, then you should choose CIF (Cost, Insurance, and Freight). Simply put, the CIF price includes the FOB price, sea freight, and insurance.

Many buyers wonder about the difference between CIF vs FOB. As shown in the price formula, the main difference is that the seller is responsible for the sea freight and cargo insurance.

Onestopimport can help you purchase and ship goods under CIF.

• Note: Although these four terms are sea freight Incoterms according to regulations, in practice, FOB and CIF are sometimes also used for air freight.

Trade Terms for Any Transport Modes

EXW

EXW (Ex Works) means the seller must deliver your cargo to you at their location, such as their factory or warehouse. You will be responsible for all costs and risks of shipping the goods from the seller’s location to your destination. As a buyer, you will take on the most tasks and risks under EXW.

For example, if your seller’s factory is in Yiwu, then you must handle the export declaration, arrange all cargo transportation from Yiwu to your destination, handle import customs clearance, pay import duties, and cover all expenses incurred during the process. If your goods are damaged or lost, it is also your responsibility.

Since the seller does not need to pay any costs after the cargo leaves their location, the product quotation you get is the original product price, without any other fees included.

Onestopimport can help you get competitive original product prices.

FCA

Under FCA (Free Carrier), the seller should deliver your cargo to your carrier (usually your freight forwarder) at any designated place, such as the seller’s factory and warehouse, road, rail or air cargo terminal, dock, container yard, etc. The seller should also help you with the export customs declaration.

For example, if you buy and ship cargo from Yiwu, China, your freight forwarder will collect your goods at their warehouse in Yiwu. Your seller should:

• send the goods to the freight forwarder’s warehouse
• deal with the export customs declaration
• bear the risks before delivering goods to your freight forwarder

The seller will pay for all costs in the above process, but they will include these fees in the quotation in advance.

FCA price = product price + shipping cost to the delivery place + export declaration fees

Once the goods are delivered to your carrier, you will be liable for them, including all later tasks, costs, and risks.

CPT

According to FCA, if your seller is responsible for arranging shipments and paying freight costs to your destination, you should use CPT (Carriage Paid To). This means that the CPT price is equal to the FCA price plus the freight costs.

Under CPT, once the cargo is handed over to your forwarder, you are responsible for all risks and costs after that, except for the shipping cost to your destination, as your seller has already paid for it.

CIP

If you want your seller to buy cargo insurance for you, you can use CIP (Carriage and Insurance Paid to), which is based on CPT. This means that the CIP price is equal to the FCA price plus the freight costs plus the cost of insurance.

Note: The price compositions and responsibilities of buyers and sellers under FOB and FCA, CFR and CPT, CIF and CIP are similar. The main difference lies in different delivery places and when you begin to bear the risk of damage and loss. Therefore, if you ship cargo by sea under FOB, CFR, CIF, correspondingly, you can use FCA, CPT, CIP for air freight.

DAP And DPU

DAP (Delivered At Place) means that the seller is responsible for exporting customs declarations, shipping the goods to the destination, such as your place in New York, and handing over the cargo to you there.

Your seller should bear all shipping costs, other fees, and risks incurred during the transportation process, except for import customs clearance and customs duties & taxes. You are required to obtain any licenses required for customs clearance in advance and pay customs clearance fees and duties.

Note that under DAP, the seller is not required to help you unload the goods from the vehicle. If you need the seller to do that for you, DPU (Delivered At Place Unloaded) is the right trade term for you.

DAP and DPU only differ in whether the seller should unload the cargo at the destination. All other aspects are the same.

DDP

If you want your seller to handle import customs clearance and pay import duties and taxes, you should opt for DDP (Delivered Duty Paid). It is a door-to-door trade term, which means that your seller will take care of all the tasks, costs, and risks involved during the transportation and send your cargo directly to your door. You just need to assist your seller when required.

When it comes to DDP, we should also talk about DDU (Delivered Duty Unpaid). Although Incoterms 2010 and 2020 no longer mention DDU, it is still widely used in practice. The difference between DDU and DDP is that the seller will not help you with customs clearance and customs duties. This sounds like DAP. In fact, DAP can be used to replace DDU in real business.

• Note: If you have decided to use one trade term but still hope that the seller can assist you with some things outside of their responsibility, you can negotiate with them and entrust them to handle it on your behalf.
• For example, according to FOB rules, the seller is not responsible for booking and buying cargo insurance. However, in practice, some buyers will entrust the seller to help with these things, or even use the seller’s freight forwarder.

When to Use EXW, FOB, CIF, And DDP

Among the many trade terms, EXW, FOB, CIF, and DDP are the most commonly used. EXW is suitable for buyers who are familiar with the exporting country and export customs declaration.

FOB is preferred by buyers with some importing experience. They will have their cooperative forwarders handle the shipping from the port in the seller’s country to their destination.

CIF is more suitable for new buyers. The seller will help ship the cargo to your country. And it is not very difficult for you to deal with the latter things.

DDP is popular among eCommerce sellers such as Amazon FBA sellers. They let their suppliers ship cargo directly to the Amazon warehouse, which is quite convenient.

What Are Freight Collect or Prepaid Incoterms?

For each incoterm, it clearly defines who pays for shipping costs. According to whether the seller or the buyer should pay international shipping costs, these trade terms can be divided into:

• Freight collect incoterms (i.e. the buyer pays international freight when receiving the goods at the destination): EXW, FCA, FOB, FAS.
• Freight prepaid incoterms (i.e. the seller pays international freight before shipping): CFR, CIP, CPT, CIF, DAP, DPU, DDU, DDP.

All types of freight charges will be shown on the bill of lading.

What Are Trade Terms on Alibaba?

As the largest international wholesale platform, many importers find suppliers and source products from Alibaba.

Generally, sellers on Alibaba display EXW price or FOB price on the product profile. But this is only a reference to price. If you want to know the specific product quotation or other quotations like CIF price or DDP price, you can contact and negotiate with the supplier.

Furthermore, you have the flexibility to use any trade terms that your supplier is capable of accommodating. For instance, if your supplier lacks the resources to assist you with import licenses, import customs clearance, and customs duties payment, they may not be willing to utilize the DDP Incoterm.

Allow Onestopimport to connect you with suppliers that offer better prices than Alibaba.

Benefits and Drawbacks of Incoterms

The greatest advantage of using Incoterms is the standardization and specificity they bring to complicated aspects of international trade. With a system that eliminates ambiguity between nations, negotiating terms becomes much simpler and saves time and money that would have previously been spent on lawyers. These lawyers would basically break down Incoterms into different languages to avoid misunderstandings.

One notable drawback of Incoterms is that buyers and sellers often have different preferences when using them. For example, sellers may choose CIF because they understand their shipments better than buyers do. Buyers, on the other hand, may prefer FOB for the same reasons. However, the terms themselves are not the issue, and it becomes more a matter of negotiation over which terms to use versus the clarity of the terms themselves.

Conclusion

We hope this article has provided you with a clear understanding of Incoterms. If you have any questions, please feel free to leave a comment below.

At Onestopimport, we are a premier sourcing company in China that can assist you in purchasing various products at competitive prices. Additionally, we can arrange shipping under various trade terms, such as EXW, FOB, CIF, DDP, and more. We will provide you with the most cost-effective shipping solution based on your individual needs. Furthermore, we offer a range of other services, including product quality inspection, customization, follow-up production, and more. If you require any assistance with importing from China, please do not hesitate to CONTACT US.