Home News Six International Commercial Terms You Ought to Know
2012/12/6 16:07:25
Six International Commercial Terms You Ought to Know

Global Trading Tips: Esperanto never really caught on as a universal global language. But in the world of international trade, where language barriers and misunderstandings cost time and money, there is a kind of common lingua franca.

This "language" is called Incoterms®. Created in 1936 by the International Chamber of Commerce, Incoterms® (protected by ICC copyright and trademark) is a set of globally recognized definitions and rules that clarify the obligations, costs and risks involved in the purchase of goods and their delivery from sellers to buyers.

Incoterms® themselves are three-letter acronyms for standard shipping methods and related commercial arrangements. Because they are frequently used in purchasing contracts, a working knowledge of their meanings is essential for importers and exporters who want to avoid unpleasant surprises and who don't want to be at a disadvantage during trade negotiations.

Here's a table of six common Incoterms® and their meanings according to transportation mode:

Terms

Definition

Risk

Cost

EXW
Ex Works (Multimodal transport)

Buyer arranges for pick up of goods at the seller's location. Seller is responsible for packing, labeling, and preparing goods for shipment on a specified date or time.

Buyer assumes all risk.

Buyer pays all transportation costs.

FCA
Free Carrier
(Air)

Seller is responsible for costs until the buyer’s named freight carrier takes charge.

Seller and buyer

Split evenly

FAS
Free Alongside Ship (Ocean)

Buyer arranges for ocean transport. Seller is responsible for packing, labeling, preparing goods for shipment and delivering the goods to the dock.

Seller: until the goods reach the dock.

Buyer: from dock to destination.

Buyer pays all ocean transport costs.

Seller is responsible for costs associated with transporting the goods to the dock.

FOB
Free On Board
(Ocean)

Seller arranges for ocean transport of the goods, preparing them for shipment and loading onto a ship.

Buyer assumes ownership of goods the instant they are loaded onboard. Buyer therefore assumes cost and risk of shipping.

Seller pays wharfage (charges to load the goods onto the ship) and freight forwarder fees.

CFR
Cost and Freight (Ocean)

Seller has the same responsibilities as when shipping FOB, but shipping costs are prepaid by the seller.

Seller assumes risk until the shipment reaches the overseas dock.

Seller pays costs of freight fees up to destination.

CIF
Cost, Insurance, and Freight
(Ocean)

Seller has the same responsibilities as when shipping CFR with the addition of including a marine insurance policy.

Seller assumes risk until the shipment reaches the overseas dock.

Seller pays insurance and freight forwarder fees.

 

Incoterms® are updated periodically (the last update was in 2010) so in contracts it's important to specify which vintage of terms are being used as definitions may vary. You can learn more though Internet research and by visiting the International Chamber of Commerce website. The ICC sells an Incoterms® guide and online training.