INCOTERMS

Business dealings of goods with overseas company often involve in transportation and goods handling issues. The business culture in different geographic area are likely to be unique in it's own way. The contact term FOB may be a common in America but the same FOB term could be interpret different in China. Misunderstanding will be very likely to occur during sales negotiation and goods transaction. This inefficiency results in lost in relationship,time and money for the company as well as the international economy.

To avoid this problems, ICC (International Chamber of Commerce) has defined a sets of rules for the interpretation of the most commonly used trade terms in international trade call INCOTERMS. It stands for INternational COmmerical TERMS. With a common interpretation & understanding of the international trading rules/standard among international traders, sales negotiation will be faster and smoother, resulting a a more efficient trade.

The basic purpose of each Incoterm is to states clearly the job scope, risks, cost that have to be undertake by the seller and the buyer. The Incoterm stated in the sales contract, clearly defined their responsibility and obligations.

Incoterms is first published by ICC in 1936. As technology and economy evolve since then, Incoterms are being revised and since then have been updated in 1953, 1967, 1976, 1980, 1990 and the current revision Incoterms 2000.

  
 

The following content only provide a brief overview introduction to Incoterms. and is not a substitute for interpreting and understanding Incoterms 2000 itself.  Always refer to the Incoterms revision for actual interpretation.

There are a few points to include when quoting a sale contract to your buyer using incoterms.

1) Quote a Price
2) Incoterms for the quotation
3) Name place/port/country (more info below)
4) Incoterms revision used, for interpreting

 

 

 

 

 

 

Example:

$33,000, FOB (Singapore), Incoterms 2000

 

 

The following chart Illustrate the cargo transportation process and some of the important checkpoint, namely Group E,F,C,D and Task 1,2,3,4,5,6,7,8,9,10,11,12,13

The task/responsibility is broken down for easy reference during explanation for each incoterm. In practice, the task may varies in sequence and changes with time, depending on the situation. This illustration serve as a general guide in Singapore context.

Nowadays, most company employ freight service to take care of all delivery tasks, from documentation to carrier/port charges, especially if the cargo sent is small and not frequent. The illustration talks about container/ bulk cargo, however it is still useful to know and understand how your goods is delivered.

  

 

  Country X

 

     Country Y
       

 

          
 

          

 

  

       

 
 

Seller

 

Loading Port

      

Discharge Port

  

Buyer
     

 

 Main Carriage      
Group E   F       C   D
Task 1 2 3 4 5 6 7 8     9 10 11 12 13

 

Task 1 Cost of cargo Determine the cost of the cargo

 
Task 2 Prepare documentation For example prepare cargo invoice, certificate of origin, etc...

 
Task 3 Packing and Marking for the cargo Responsible in packing and labelling the cargo for transportation

 
Task 4 Transportation Provide logistic transportation from the seller's warehouse to the Main Carriage

 
Task 5 Loading Port Charges The cargo will be first being sent to the port before loading onto the Main Carriage. There will be charges incur for using the port. Charges will be paid to the PSA, in the case of Singapore port for example.

 
Task 6 Loading Charges Service charged by the main carriage for loading your cargo, onto their carriage.

 
Task 7 Freight Charges Responsible for the freight charges by the main carriage transportation for example, Ship, Plane, Train and Truck company. Charges may also include THC (terminal handling charge), etc...

 
Task 8 Insurance Insurance charges for the cargo to be insured. Nowadays, the cargo can be insured throughout the whole journey. As a practice, the cargo should be insured for 110% of the cargo's value.

 
Task 9 Discharge Port Charges see "Loading Port Charges"

 
Task 10 Tax Tax may have to be paid, depending on the country's trade policy. In Singapore, there are custom tax, GST, etc... . Tariff may be necessary for certain type of goods, and the amount liable for tax can be found in the respective country's HS (Harmonized System) reference book.

 
Task 11 Custom documentation Documentation for custom clearance purpose.

 
Task 12 Transportation Provide logistic transportation from the discharged port to the buyer's warehouse.

 
Task 13 Payment Responsible to pay for the cargo.

 

 

The following are the official Incoterms defined under Incoterms 2000 revision. There are also changes to the incoterms since the previous revision. Incoterms FRC, FOR, FOT, FOA, C&F, etc.. have been rename or removed from the previous 1980 revision. The illustration here only deals with terms relating to Incoterms 2000 revision.

There might be other non standard terms used in today's business like Ex-factory, DTD (door-to-door), etc... and they are not cover under Incoterms 2000 for interpretation. They can be privately interpret between the buyer and seller. However if there is any conflict arises, it would be more complicated.

  

 

  Term Description Mode of Transport
      Sea Air Rail Truck
Group E            
  EXW EX Works * * * *
Group F            
  FAS Free Alongside Ship *      
  FCA Free CArrier * * * *
  FOB Free On Board *      
Group C            
  CFR Cost and FReight *      
  CIF Cost, Insurance and Freight *      
  CPT Carriage Paid To * * * *
  CIP Carriage and Insurance Paid to * * * *
Group D            
  DAF Delivered At Frontier     * *
  DES Delivered Ex Ship *      
  DEQ Delivered Ex Quay *      
  DDU Delivered Duty Unpaid * * * *
  DDP Delivered Duty Paid * * * *

 

Here is the brief summary of the terms defined in Incoterms 2000. Please note that you should refer to the official Incoterms document for interpretation and understanding of the standard. You should not rely solely on the brief content below.  

 

  Comment
Group E  
EXW (... named place)

EX Works, use for Sea, Air, Rail, Truck delivery

 Seller's Responsibility -> Task 1, 2

Buyer's Responsibility -> Task 2 to 13

Seller will prepare the goods for the buyer to pick up at an accessible named place (e.g. factory or warehouse) as stated in the sales contract. The seller has no responsibility to load goods for transportation.

Risk passes from Seller to Buyer when buyer pick up the goods from the seller's place. Auto Risk Transfer applies. If the buyer is not able to pick up the goods before the date/time agreed upon, the risk is automatically pass to the buyer even the buyer did not pick up the cargo.

Advantages:

 
   
Group F  
FAS (... named port of shipment)

Free Alongside Ship

 Seller's Responsibility -> Task 1 to 5

Buyer's Responsibility -> Task 6 to 13

 
FCA (... named place)

Free CArrier

 

 Seller's Responsibility -> Task 1 to 6

Buyer's Responsibility -> Task 7 to 13

 
FOB (... named port of shipment)

Free On Board

 Seller's Responsibility -> Task 1 to 6

Buyer's Responsibility -> Task 7 to 13

 
   
Group C  
CFR (... named port of destination)

Cost and FReight

 Seller's Responsibility -> Task 1 to 7

Buyer's Responsibility -> Task 8 to 13

 
CIF (... named port of destination)

Cost, Insurance Freight

  
CPT (... named place of destination)

Carriage Paid To

  
CIP (... named place of destination)

Carriage and Insurance Paid to

 

  
   
Group D  
DAF (... named place)

Delivered At Frontier

  
DES (... named port of destination)

Delivered Ex Ship

  
DEQ (... named port of destination)

Delivered Ex Quay

  
DDU (... named place of destination)

Delivered Duty Unpaid

  
DDP (... named place of destination)

Delivered Duty Paid

  

 

 

I am not a profession in international trading and import/export. This reference is written with knowledge from my diploma course. Hoping that beginners like me to have some basic knowledge to begin with, advancing to understanding the actual Incoterms standard use in international trade.

If there is any mistake or incorrect statement, please do email me at siongboon@yahoo.com.sg

Written by: Lim Siong Boon, Dated: 15-Jul-05

 

References

[1] incoterms introduction, SITPRO Ltd, http://www.sitpro.org.uk/trade/incoterms1.html

[2] incoterms 2000 resources, ICC, http://www.iccwbo.org/index_incoterms.asp