Importing or Exporting? Read This.
Importers and exporters often complain about “hidden” or “unknown” charges associated with their international trade transactions. However, in my experience, strategically negotiating and paying attention to Incoterms rules otherwise known as International Commercial Terms Rules allow an importer to know and capture all the expenses associated with an import shipment or for an exporter to maximize gross profit.
There are currently 11 Incoterms rules that define when liability for the goods is transferred from the exporter to the importer along the supply chain. They are usually stated as three-letter acronyms and separated into four basic categories depending on the letter that they start with: E, F and C or D.
The rules are further categorised based on mode/s of transport:
Rules for any mode(s) of transport: (Sea, Road, Air or Rail)
- EXW Ex Works (named place of delivery)
- FCA Free Carrier (named place of delivery)
- CPT Carriage Paid To (named place of destination)
- CIP Carriage & Insurance Paid To (named place of destination)
- DAT Delivered At Terminal (named terminal at port or place of destination)
- DAP Delivered At Place (named place of destination)
- DDP Delivered Duty Paid (named place of destination)
Rules for sea & inland waterway transport
- FAS Free Alongside Ship (named port of shipment)
- FOB Free On Board (named port of shipment)
- CFR Cost & Freight (named port of destination)
- CIF Cost Insurance & Freight (named port of destination)
The International Chamber of Commerce has a complete list of the Incoterms 2010 and their definitions. Some of the advantages of Incoterms Rules are:
- They are internationally recognised and can avoid costly misunderstandings associated with differences between one business culture, geography or language and another.
- They are legally binding and can be upheld in a court of law when used in a sales agreement.
- They committ either the importer or the exporter to pay for the charges that appear on quotations, commercial invoices, airway bills or bills of lading.
- They define who is responsible for obtaining export licenses or pre-shipment inspections, who’s liable for damaged, pilfered or lost merchandise, or who pays for shipping costs.
- They allow importers and exporters to identify supply chain risks in advance and to mitigate against them.
- They help to build stable and long-term international trading relationships between importers and exporters as the distribution of and obligation for the supply chain risks are defined and known to all parties.
If you are new to international trade transactions and are having difficulty conceptualising some of the potential supply chain risks, here are a few examples for easy reference:
1. The vessel arrives at the destination port but the exporter sends the Original Bill of Lading needed to clear the shipment by the importer one month later. Who is responsible for the port rent and demurrage charges that accrue until the shipment is cleared?
2. A sea vessel sinks while in transit and the cargo onboard is lost at sea. The importer has paid the exporter for the shipment in advance and after explaining that the goods were lost at sea, the exporter has indicated that they will not refund the advance payment. Can the exporter get away with this position?
3. An export shipment of seafood arrives two weeks late and is beyond its “best by” date when the shipment is cleared and transported to the importer’s warehouse. Who will bear the cost?
As you can see from the examples above; strategically negotiating and including Incoterms rules is a disclipline that can add dollars to your bottom line whereas loosely agreeing to Incoterms rules without understanding the cost and risks along the logistics value chain could do just the opposite. Incoterms Rules provide a great foundation for any international sales negotiation and should be supported by a well-prepared