International Logistics: The Management of International Trade Operations
Chapter Six:
Terms of Trade
or Incoterms
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
International Commerce Terms
Understanding Incoterms
Overview of all 13 Incoterms
Electronic Data Interchange
Common Errors in Incoterms
Incoterms as a Marketing Tool
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
International Commerce Terms
For each international sale, it is important to determine, who —
the exporter or the importer — is responsible for:
•
•
•
•
•
Domestic transportation in the exporting country
International transportation
Domestic transportation in the importing country
The risks involved in international transportation
Customs clearance in the importing country
In 1936, the International Chamber of Commerce developed the
International Commerce Terms (or Incoterms) that formalize
these responsibilities. Incoterms were revised in 1953, 1967,
1980, and 1990.
The latest version of Incoterms is dated 2000. A new set is due to
be implemented in 2011.
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Understanding Incoterms
Incoterms formally define the following aspects of an
international sale:
•
•
•
•
•
Which tasks will be performed by the exporter
Which tasks will be performed by the importer
Which activities will be paid by the exporter
Which activities will be paid by the importer
When the transfer of responsibilities takes place
There are 13 different Incoterms, all abbreviated with a 3-letter
acronym, such as EXW, DEQ, FOB, and so on.
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Understanding Incoterms
Choosing the correct Incoterm depends on which export
strategy a company is following. The following factors are
particularly important:
• The type of product being sold (weight, volume,
perishability, value, sensitivity to temperature changes,
and so on)
• The method of shipment
• The ability and willingness of either of the exporter and
importer to perform the tasks involved
• The amount of trust placed by either of the parties toward
the other
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Thirteen Incoterms
EXW
FCA
FAS
FOB
CFR
CIF
CPT
CIP
DES
DEQ
DAF
DDU
DDP
• Ex-Works
• Free Carrier
• Free Alongside Ship
• Free on Board
• Cost and Freight
• Cost, Insurance, and Freight
• Carriage Paid To
• Carriage and Insurance Paid To
• Delivered Ex-Ship
• Delivered Ex-Quay
• Delivered at Frontier
• Delivered Duty Unpaid
• Delivered Duty Paid
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Thirteen Incoterms
Every Incoterm has:
• A scope — The type of products for which it can be used
• A modality — The mode of transport for which it can be used
• A syntax — The way it has to be stated on invoices and
paperwork
Every Incoterm defines:
• The responsibilities of the exporter
• The responsibilities of the importer
• A specific transfer point at which the responsibilities for the
goods shifts from the exporter to the importer
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Ex-Works (EXW)
The exporter has to make the goods available to the importer at a
point located in the exporting country, at a mutually-convenient time.
Scope
EXW can be used for any type of goods
Modality
EXW can be used for all modes of transportation
Syntax
EXW [City where goods are made available]
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Ex-Works (EXW)
Exporter
• packages the goods for the international voyage
• provides the importer with the documents necessary to clear
Customs
Importer
• does everything else
Transfer Point
• when the exporter makes the goods available to the importer
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Free Carrier (FCA)
FCA was created for goods shipped through multi-modal
transportation. The exporter/seller delivers the goods to a carrier
specified by the importer.
Scope
FCA can be used for any type of goods
Modality
FCA can be used for all modes of transportation
Syntax
FCA [City where goods are delivered to the carrier]
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Free Carrier (FCA)
Exporter
• packages the goods for the international voyage
• provides the documents necessary to clear Customs
• clears the goods for export
Importer
• does everything else
Transfer Point
• when the exporter delivers the goods to the carrier
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Free Alongside Ship (FAS)
FAS was created for goods shipped by ocean transportation. The
exporter/seller delivers the goods to a port of departure specified by
the importer.
Scope
FAS can be used for any type of goods
Modality
FAS can only be used for ocean transportation
Syntax
FAS [Port of Departure]
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Free Alongside Ship (FAS)
Exporter
• packages the goods for the international voyage
• provides the documents necessary to clear Customs
• clears the goods for export
• delivers the goods to the port of departure
Importer
• does everything else
Transfer Point
• when the exporter delivers the goods to the carrier
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Free on Board (FOB)
FOB was created for goods shipped by ocean transportation. The
exporter/seller delivers the goods to the port of departure and pays
to have them loaded on a ship specified by the importer.
Scope
FOB can be used for any type of goods
Modality
FOB can only be used for ocean transportation
Syntax
FOB [Port of Departure]
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Free on Board (FOB)
Exporter
•
•
•
•
packages the goods for the international voyage
provides the documents necessary to clear Customs
clears the goods for export
delivers the goods to the port of departure and pays to have
them loaded on board
Importer
• does everything else
Transfer Point
• when the goods cross the ship’s rail
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Cost and Freight (CFR)
CFR is for goods shipped by ocean transportation. The exporter
arranges the international transportation of the goods and pays to
have them shipped to a port of destination specified by the importer.
Scope
CFR can be used for any type of goods
Modality
CFR can only be used for ocean transportation
Syntax
CFR [Port of Destination]
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Cost and Freight (CFR)
Exporter
• packages the goods for the international voyage
• provides the documents necessary to clear Customs
• clears the goods for export
• delivers the goods to the port of destination
Importer
• does everything else
Transfer Point
• when the goods cross the ship’s rail in the port of departure
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Cost, Insurance, and Freight (CIF)
CIF applies to goods shipped by ocean transportation. The exporter
arranges and pays for the international ocean transportation of the
goods, as well as for international insurance.
Scope
CIF can be used for any type of goods
Modality
CIF can only be used for ocean transportation
Syntax
CIF [Port of Destination]
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Cost, Insurance, and Freight (CIF)
Exporter
• packages the goods for the international voyage
• provides the documents necessary to clear Customs
• clears the goods for export
• delivers the goods to the port of destination
• pays for international insurance (always 110 percent of value)
Importer
• does everything else
Transfer Point
• when the goods cross the ship’s rail in the port of departure
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Carriage Paid To (CPT)
CPT is similar to CFR, except that it applies to goods shipped by
non-ocean means of transportation, or shipped on a multi-modal bill
of lading that may include ocean transportation.
Scope
CPT can be used for any type of goods
Modality
CPT is used for non-ocean modes of transportation
Syntax
CPT [City of Destination]
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Carriage Paid To (CPT)
Exporter
• packages the goods for the international voyage
• provides the documents necessary to clear Customs
• clears the goods for export
• arranges and pays to transport the goods to the city of destination
Importer
• does everything else
Transfer Point
• when the goods are delivered to the carrier in the city of departure
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Carriage & Insurance Paid To (CIP)
CIP is similar to CIF, except that it applies to goods shipped by nonocean means of transportation, or shipped on a multi-modal bill of
lading that may include ocean transportation.
Scope
CIP can be used for any type of goods
Modality
CIP is used for non-ocean modes of transportation
Syntax
CIP [City of Destination]
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Carriage & Insurance Paid To (CIP)
Exporter
• packages the goods for the international voyage
• provides the documents necessary to clear Customs
• clears the goods for export
• arranges and pays to transport the goods to the city of destination
• pays for international insurance (always 110 percent of value)
Importer
• does everything else
Transfer Point
• when the goods are delivered to the carrier in the city of departure
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Delivered Ex-Ship (DES)
DES applies to bulk goods shipped by ocean transportation. The
goods are unloaded at the expense of the importer in the port of
destination.
Scope
DES is generally used for bulk goods only
Modality
DES can only be used for ocean transportation
Syntax
DES [Port of Destination]
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Delivered Ex-Ship (DES)
Exporter
• provides the documents necessary to clear Customs
• clears the goods for export
• arranges and pays to transport the goods to the port of destination
Importer
• does everything else
Transfer Point
• when the goods are delivered to the port of destination
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Delivered Ex-Quay (DEQ)
DEQ applies to bulk goods shipped by ocean transportation. The
goods are unloaded at the expense of the exporter in the port of
destination.
Scope
DEQ is generally used for bulk goods only
Modality
DEQ can only be used for ocean transportation
Syntax
DEQ [Port of Destination]
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Delivered Ex-Quay (DEQ)
Exporter
• provides the documents necessary to clear Customs
• clears the goods for export
• arranges and pays to transport the goods to the port of destination
• pays for unloading the goods in the port of destination
Importer
• does everything else
Transfer Point
• when the goods are delivered to the importer
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Delivered at Frontier (DAF)
DAF applies to goods shipped by land transportation. The goods
are delivered to the importer at the border between two countries.
Scope
DAF can be used for any type of goods
Modality
DAF can only be used for land-based transportation
Syntax
DAF [City/Location of Border Crossing]
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Delivered at Frontier (DAF)
Exporter
• provides the documents necessary to clear Customs
• clears the goods for export
• arranges and pays to transport the goods to the border city
Importer
• does everything else
Transfer Point
• when the goods are delivered to the border city
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Delivered Duty Unpaid (DDU)
Under DDU, the exporter agrees to deliver the goods to a location in
the importing country. The only thing that the importer has to do is to
clear Customs in the importing country.
Scope
DDU can be used for any type of goods
Modality
DDU can only be used for any mode of transportation
Syntax
DDU [City in the importing country]
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Delivered Duty Unpaid (DDU)
Exporter
• provides the documents necessary to clear Customs
• clears the goods for export
• arranges and pays to transport the goods to the city in the
importing country
Importer
• clears Customs in the importing country
Transfer Point
• when the goods are delivered to the city in the importing country
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Delivered Duty Paid (DDP)
Under DDP, the exporter agrees to deliver the goods to a location in
the importing country, after having cleared Customs.
Scope
DDP can be used for any type of goods
Modality
DDP can only be used for any mode of transportation
Syntax
DDP [City in the importing country]
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Delivered Duty Paid (DDP)
Exporter
• arranges for transportation and pays for transportation from the
country of export to the city of delivery in the importing country
• clears Customs in the importing country
Importer
• takes delivery of the goods in the importing country
Transfer Point
• when the goods are delivered to the city in the importing country
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Incoterm Summary
X = Exporter’s Responsibility
TASK
I = Importer’s Responsibility
EXW
FCA
FAS
FOB
CFR
CIF
CPT
CIP
DES
Export Packing
X
Inland Freight
X
X
X
X
X
X
X
X
X
X
X
X
I
X
X
X
X
X
X
X
X
X
X
X
X
Export Clearance
I
I
X
X
X
X
X
X
X
X
X
X
X
Arrange Carrier
I
I
I
I
X
X
X
X
X
X
X
X
X
Load onto Carrier
I
I
I
X
X
X
X
X
X
X
X
X
X
Pay Carrier
I
I
I
I
X
X
X
X
X
X
X
X
X
Unload Carrier
I
I
I
I
I
I
I
X
I
X
X
X
Pay Insurance
DEQ
DAF
DDU
DDP
X
Import Clearance
I
I
I
I
I
I
I
I
I
I
I
I
X
Pay Duty
I
I
I
I
I
I
I
I
I
I
I
I
X
Pay Inland Freight
I
I
I
I
I
I
I
I
I
I
I
X
X
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Incoterm Summary
Mode of Transport
EXW
FCA
FAS
FOB
CFR
CIF
CPT
CIP
DES
DEQ
DAF
DDU
DDP
Ocean Cargo
YES
NO
YES
YES
YES
YES
NO
NO
YES
YES
NO
YES
YES
Multi-Modal (FCL)
YES
YES
NO
NO
NO
NO
YES
YES
NO
NO
YES
YES
YES
Multi-Modal (LCL)
YES
YES
NO
NO
NO
NO
YES
YES
NO
NO
YES
YES
YES
Rail
YES
YES
NO
NO
NO
NO
YES
YES
NO
NO
YES
YES
YES
Road
YES
YES
NO
NO
NO
NO
YES
YES
NO
NO
YES
YES
YES
Air
YES
YES
NO
NO
NO
NO
YES
YES
NO
NO
NO
YES
YES
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Incoterm Summary
EXW
Yes
BreakBulk
Yes
FAS
Yes
Yes
Yes
Yes
No
FCA
No
Yes
Yes
Yes
Yes
FOB
Yes
Yes
Yes
Yes
No
CIF
Yes
Yes
Yes
Yes
No
CIP
No
Yes
Yes
Yes
Yes
CFR
Yes
Yes
Yes
Yes
No
CPT
No
Yes
Yes
Yes
Yes
DES
Yes
No
No
No
No
DEQ
Yes
No
No
No
No
DDP
Yes
Yes
Yes
Yes
Yes
DDU
DAF
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Bulk
RO-RO
Container
Small Packet
Yes
Yes
Yes
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Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Electronic Data Interchange
For a number of Incoterms, there is no transport document that is
issued at the point where the responsibility shifts from the
exporter to the importer (for example, a Bill of Lading).
Electronic Data Interchange has attempted to solve this problem.
Whenever there is no transport document possible, the exporter
can still send an EDI “notice” to the importer, which acts as a
proof of delivery for both parties. The exporter has a record of the
notification sent, and the importer knows unambiguously when
the goods were delivered to the quay or when they arrived in port.
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Common Errors in Incoterm Usage
Domestic Terms as International Terms of Trade
An inexperienced exporter will use “FOB factory” rather than the
correct corresponding Ex-Works (EXW) Incoterm.
Confusion with Older Incoterm Versions
The International Chamber of Commerce modified the Incoterms
in 1980, 1990, and 2000. It eliminated some Incoterms, modified
others and created some new ones. For a number of reasons,
several exporters have failed to adapt to these changes, and will
use an obsolete Incoterm.
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Common Errors in Incoterm Usage
Improper Use of Correct Incoterms
Incoterms are sometimes specific to certain modes of
transportation and types of cargo, and cannot be used for others.
The most frequent misuse is when FOB is used with an air
shipment: FOB is designed to be used only with an ocean
shipment term.
The correct Incoterm to use for an air shipment should be Free
Carrier (FCA), to clearly outline the responsibilities of the exporter
and of the importer.
© 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved.
Ch. 6: Terms of Trade or Incoterms
International Logistics: The Management of International Trade Operations
Incoterms as a Marketing Tool
A strategic advantage can be gained by an exporter willing to
facilitate the sale of its products by assisting a novice importer in
the handling of a shipment.
On the other hand, an experienced importer may be intent on
performing all or most of the tasks involved in the shipment.
Most exporters would gain by being flexible, offering a quote
where they list several possible Incoterms:
• EXW Cleveland, Ohio, USA $ 245,000
• FOB Miami, Florida, USA
$ 258,000
• CIF Santos, Brazil
$ 285,000
and let the importer decide which Incoterm it would rather use.
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Ch. 6: Terms of Trade or Incoterms