Incoterms, Shipping, and Trade Terms Defined - FOB, EXW, FCA, CPT, CIP, DDP etc.
Are you unsure about the trade terms of Alibaba or Chinese suppliers? Don't know what the 3 letters that came with your quote mean? Cosmo has defined the 2010 Incoterms abbreviations, such as FOB, CFR, and DAP for international trade.
When you’re getting quotes from suppliers they will almost always give you three pieces of information: the price per unit, the MOQ (minimum order quantity) and the shipping terms. The shipping terms, commonly called incoterms, are usually given as just three letters at the end. For instance, this is a quote I recently received, “1000-1.75/pc, 2000-1.65/pc, 10000-1.50/pc, EXW.” In this case, the EXW stands for Ex-Works and defines what the shipping terms are and what obligation the buyer or the seller has to get the product to its final destination. I’m often asked if Alibaba prices include shipping. The answer is no–they almost always quote prices in EXW on the website.
Incoterms, often called trade terms or shipping terms, are an international contract of sale. Incoterms is shot for International Commercial Terms EXW and FOB are far and away the two most common incoterms. Incoterms have two parties, 'the buyer' and 'the seller.' ‘The seller,’ is typically a factory, manufacturer, trading company, or a wholesaler. ‘The Buyer’ is the person who is purchasing the goods from overseas and importing them for final sale. If you are running an FBA business then you will be classified as the buyer in these examples. This guide is for the most recent incoterms, which was updated in 2010. There are now 11 recognized terms, down from 13 in 2000. incoterms are published by the International Chamber of Commerce (ICC) who hold the copyright.
Steps of the shipping process
In the shipping process, there are essentially 10 steps that need to be completed in order to get a product from a factory to the final destination.
Transport to the export port
Unloading the carriage in the export port
Loading onto the vessel
Export customs clearance (to clear for export)
Shipping on the vessel (such as ocean shipping or plane)
Unloading the vessel at import port
Import customs and clearance
Import duties and taxes
Loading of the carriage in import port
Unloading at the destination (terminal)
The final destination is defined by the buyer and if you are an FBA seller then that typically would be either Amazon's warehouse or a prep and ship center. The incoterms explain who is responsible for doing each action. It’s very common for a buyer or seller to hire a freight forwarder to do the shipping for them.
Note about freight forwarder:
It should be noted that most of the shipping steps are not done by the seller of the buyer but by a freight forwarder. However, depending on the trade terms, it is the responsibility of the buyer or seller to find and pay a freight forwarder.
Trade terms defined
Before we get into the incoterms, there are a few words that need to be defined:
Seller: Typically the manufacturer, trading company, or wholesaler who is supplying the goods for sale.
Buyer: The person who is purchasing the goods and will receive them upon final delivery.
Delivery: The point in the process in which the risk is transferred from seller to buyer.
Arrival: The point when the delivery has been paid. The place should be named by the seller.
Free: How far the seller has an obligation to deliver the goods to be picked up by the buyer.
Carrier: The party that is obligated to transport the goods. This can be done by any means necessary for instance as ship rail or truck.
Freight Forwarder: A firm that is commonly contracted to make shipping arrangements.
To Clear for export: When export permission is granted.
Terminal: The final destination of the shipment; such as a dock or warehouse. For FBA sellers this is most commonly an Amazon fulfillment center.
As EXW and FOB are the most common, we’ll start there. Personally, when we ask for initial quotes from manufacturers in our RFQ’s, we request them to quote prices in EXW and FOB. Why? We want to know the EXW price, as that is the price of just the product itself. The FOB to gauge the shipping prices and because the export port is a good place for our freight forwarder to pick up an item. Most of our project are FOB and we contract with a freight forwarder to complete the rest of the shipping.
This is the most basic shipping Incoterm that a supplier can provide. The seller makes the item available to pick up at the factory and is not responsible for the product once it leaves the factory doors. The buyer is responsible for transporting it all the way from the factory and covers all export and import clearances as well as the insurance cost.
If you are getting initial quotes from a factory for the first time, then they will almost always give you a quote for EXW, unless you explicitly ask for a quote in another term. The reason factories and suppliers quote in EXW are simply because it’s the lowest price for them and it looks good when you're comparing quotes and need the lowest price.
FOB - Free on Board
FOB means that the seller ships the goods to the nearest port and the seller is responsible for everything after that. The Seller will drop this off at the port of shipment and the Buyer will either pick it up themselves or more commonly work with a freight forwarder to ship it for them. The seller is the one to clear the goods for export and the buyer is responsible for the good from the port onwards. It’s very important when getting FOB quotes to make sure that you get the name of the port that they are dropping the goods off at.
One of the big reasons that this is the most popular Incoterm used is that the Export port is a good place to have a 3rd party inspection service inspect the goods. Further, the seller is responsible for all activities in the country of export while the Buyer is responsible for all activities once the goods leave the country, which just makes things simple. In addition, most freight forwarders will have an office at or near the port and it’s an easy spot for them to pick up the goods on your behalf.
FCA - Free Carrier
This is just one step up from EXW, in which the seller clears the goods for export and delivers the goods to the port of export. The buyer has to unload the goods in the port and is responsible for the goods once they reach the port. The carrier is arranged by the buyer. The biggest difference between EXW is that the seller is obligated to loading the goods on the buyers' carrier. It should be noted, this is often confused for FOB–feel free to ask your supplier to elaborate and give details.
CPT - Carriage Paid To
The seller pays for the goods to be shipped to the import port chosen by the buyer. The risk is transferred to the buyer once the goods arrive at the port. The buyer is responsible for unloading the vessel and arranging further transportation from there. Even though the seller is responsible for the cost to the export port, the buyer assumes the risk and insurance cost once the goods are unloaded at the export port. The seller is responsible for export clearance, and freight cost.
CIP - Carriage and Insurance Paid To
Effectively the same as CPT except the seller is required to obtain insurance for the goods during transit. CIP also covers all modes of transportation while CIF is specifically for sea freight. It should be noted that CIP and CIF are the only two methods in which risk and insurance are different. Once the goods are unloaded at the export port The seller assumes the insurance cost, but not the risk until goods are unloaded at the import port.
DAT - Delivered at Terminal
The Seller delivers the goods (unloaded) to the import port, and the buyer is responsible for the cost and risk of the goods from that point on. The seller takes on all risk or cost associated with the goods until it reaches the import port. The buyer pays for import and customs.
DAP - Delivered at Place
The seller delivers the goods to the final destination of the buyer. The seller assumes all risk with the shipping and either loads or pays a third party to load the good for shipment. The buyer is only responsible for paying the customs fee and clearing the goods for import. The buyer also pays to unload the goods at the final destination.
DDP - Delivered Duty Paid
With these terms, the seller pays for and is responsible for everything. The seller pays all cost and assumes all risk to the final destination. The buyer is only responsible for unloading the goods once they arrive at the final destination as chosen by the buyer.
We often get asked, why not get every project DDP? While it is the easiest for the buyer, it is certainly not the cheapest. The seller picks the shipping company and will choose the one they like best; not the cheapest or most reliable for you. You are putting a ton of trust in the shipping company. I would suggest getting a quote for DDP from your supplier, a quote for FOB and a quote from a freight forwarder and then compare the final total price of the two.
Note: FOB, FAS, CFR, and CIF are specifically for waterway based shipments (both ocean and inland waterways) while the above are for all forms of shipping including water. Other forms of transportation can include rail, trucking, or air cargo.
FAS - Free Alongside Ship
The seller is responsible for delivering all goods to the side of the vessel at the named export port. The seller pays for and assumes all risk until the goods are placed in the port and the seller clears the goods for export. The buyer then takes on all cost and risk from that point on, including loading the ship. This has one less step than FOB, in which the buyer bears the cost and risk of loading the ship.
CFR - Cost and Freight
The seller is responsible for bearing the cost of shipping til the named import port, however, the risk is given to the buyer once the goods are loaded onto the ship at the export port and final delivery of goods from the destination port. This is effectively the same as CPT above except CFR is specifically for a water-based transport.
CIF - Cost Insurance and Freight
Effectively similar to the one above except that the buyer will require the seller to take on the risk or obtain insurance for the good until the destination port. The seller bears all cost of shipping and assumes the risk of the goods until the destination port. The seller is also responsible for clearing customs but the buyer is responsible for paying the duty. Again this is effectively the same as CIP except CIF is specifically for water.
IN NEED OF PROFESSIONAL HELP?
Cosmo has been helping source products from China, Vietnam and elsewhere for years. If you’re interested in hiring a sourcing company, contact Cosmo for all your sourcing needs at Info@cosmosourcing.com or visit our product request page. We are happy to answer any sourcing questions you may have.