In international trade, trade terms (Incoterms) play a vital role. These terms provide clear regulations for buyers and sellers in terms of transportation, cost sharing, responsibility and risk transfer, thereby reducing misunderstandings and disputes that may arise in the trade process. Especially in the field of shipping, understanding and correctly using trade terms is essential to ensure smooth delivery of goods and save costs.
In international trade, Incoterms 2020 (International Commercial Terms) contains a total of 11 trade terms. They are: EXW, FCA, FAS, FOB, CFR, CIF, CPT, CIP, DAP, DPU, DDP. These terms clarify the respective responsibilities, costs and risks of buyers and sellers in international trade, and are applicable to various modes of transportation, especially widely used in sea transportation. The following is a detailed analysis of the 11 trade terms.
EXW (Ex Works)
The characteristic of the EXW term is that the seller bears the least responsibility, while the buyer needs to be responsible for all transportation and related costs from the seller’s factory to the destination.
Characteristics and division of responsibilities of EXW:
Seller’s responsibility: The seller only needs to deliver the goods to the buyer at its own factory or warehouse, and the subsequent responsibilities and risks are entirely borne by the buyer.
Buyer’s responsibility: The buyer needs to bear all costs from the factory to the destination, including loading, transportation, customs clearance, sea transportation, etc.
Applicable scenarios of EXW:
The buyer is very familiar with the process of international logistics and has strong transportation and customs clearance capabilities.
Usually used in scenarios where the buyer wants to fully control the freight process.
Advantages of EXW:
The seller is simple to operate and only needs to complete the delivery.
The buyer has greater autonomy and can arrange transportation and customs clearance according to its own needs.
Challenges of EXW:
The buyer’s logistics capabilities and experience are required to be high.
The buyer needs to bear all transportation risks.
FOB (Free On Board)
FOB is one of the most common terms in international trade. According to the FOB terms, the seller is responsible for delivering the goods to the designated port of shipment and loading them on the ship designated by the buyer, and then the responsibility and risk are transferred to the buyer.
Characteristics and division of responsibilities of FOB:
Seller’s responsibilities: The seller needs to bear the costs and risks of transporting the goods from the factory to the port of shipment, export customs clearance and loading the goods.
Buyer’s responsibilities: From the time the goods are loaded on the ship, the buyer bears all costs and risks, including sea transportation, unloading at the port of destination and import customs clearance.
Applicable scenarios of FOB:
FOB is suitable for situations where the buyer has strong shipping resources or is more familiar with the operating procedures of the port of destination.
Commonly used in bulk commodity trade, such as minerals, agricultural products, etc.
Advantages of FOB:
The buyer can choose a sea carrier that he trusts.
The clear division of responsibilities between the two parties reduces the risk of unclear responsibilities during transportation.
CIF (Cost, Insurance and Freight)
CIF is another common trade term that places more responsibility on the seller than FOB. Under CIF terms, the seller is responsible for delivering the goods to the port of destination and paying insurance and freight.
Characteristics and division of responsibilities of CIF:
Seller’s responsibilities: The seller bears all costs from the place of shipment to the port of destination, including ocean freight and cargo insurance.
Buyer’s responsibilities: The buyer is responsible for the costs and risks after the goods arrive at the port of destination, such as unloading fees, import tariffs, etc.
Applicable scenarios of CIF:
CIF is suitable for scenarios where the buyer is not familiar with international transportation or wants the seller to bear more transportation responsibilities.
It is widely used in small and medium-sized enterprise trade or in situations where the operation of the destination port is complex.
Advantages of CIF:
The seller provides an all-inclusive service, which simplifies the buyer’s operation process.
Insurance protection reduces the risk during the transportation of goods.
Notes on CIF:
The seller usually only provides minimum insurance. If the buyer needs higher protection, he should purchase additional insurance on his own.
FAS (Free Alongside Ship)
FAS stipulates that the seller delivers the goods to the shipside at the port of shipment, and the buyer bears the costs and risks starting from the time the goods are loaded on board.
Characteristics and division of responsibilities of FAS:
Seller’s responsibilities: responsible for transporting the goods to the port of shipment and delivering them alongside the ship, and handling export customs clearance at the same time.
Buyer’s responsibilities: responsible for the costs after the goods are loaded on board, including ocean freight, unloading fees at the port of destination, and import customs clearance fees.
Applicable scenarios of FAS:
Applicable to bulk cargo transportation (such as grain, ore, etc.), especially when the buyer needs to load directly from the shipside.
Notes on FAS:
The buyer needs to arrange the ship in advance and inform the seller of the specific loading arrangements.
CFR (Cost and Freight)
CFR is an extension of FOB, which stipulates that the seller is responsible for shipping the goods and paying the shipping costs before the destination port in addition to loading the goods.
Characteristics and division of responsibilities of CFR:
Seller’s responsibilities: responsible for shipping the goods to the port of shipment for loading and paying the shipping costs before the destination port.
Buyer’s responsibilities: from the time the goods are loaded, bear all risks, including unloading fees and import customs clearance fees.
Applicable scenarios of CFR:
When the buyer wants to pass the transportation costs to the seller, but has a certain understanding of the operations at the destination port.
Notes on CFR:
Although the seller pays the shipping costs, the risk of loss of goods during transportation is still borne by the buyer.
DAP (Delivered At Place)
DAP is a more flexible trade term. The seller is responsible for transporting the goods to the destination specified by the buyer, and the buyer is only responsible for import customs clearance and related costs.
Features and responsibilities of DAP:
Seller’s responsibilities: The seller is responsible for all costs and risks of transporting the goods to the designated destination, including sea transportation, unloading at the destination port and inland transportation.
Buyer’s responsibilities: The buyer is responsible for import customs clearance, tariffs and all costs after arriving at the destination.
Applicable scenarios of DAP:
The buyer wants the seller to bear more transportation responsibilities, but is still willing to handle import customs clearance.
Widely used in international trade scenarios that require door-to-door services.
Advantages of DAP:
The buyer can reduce the degree of involvement in the transportation process, saving time and energy.
The full transportation service provided by the seller makes the buyer more worry-free.
Notes on DAP:
The buyer needs to ensure that he is able to handle customs clearance and tariffs at the destination.
DDP (Delivered Duty Paid)
DDP is one of the trade terms with the greatest seller responsibility. Under the DDP terms, the seller is responsible for delivering the goods to the buyer’s designated location and bears all costs and responsibilities, including transportation, insurance, import customs clearance and tariffs.
Characteristics and division of responsibilities of DDP:
Seller’s responsibilities: The seller is responsible for the entire transportation process, including export and import customs clearance, tariff payment and final delivery.
Buyer’s responsibilities: The buyer only needs to receive the goods and does not need to participate in the transportation and customs clearance process.
Applicable scenarios of DDP:
The buyer is not familiar with customs clearance and import regulations, or wants to simplify the transaction process.
Commonly used for high-value goods or countries and regions with complex customs clearance at the destination.
Advantages of DDP:
The seller provides one-stop service, and the buyer only needs to wait for receipt.
Reduces the risk of delays and fines that may be caused by the buyer’s unfamiliarity with import customs clearance.
Challenges of DDP:
The seller’s logistics capabilities and understanding of destination regulations are required to be high.
The seller needs to bear greater costs and risks.
FCA (Free Carrier)
FCA is a highly flexible trade term. The seller is responsible for delivering the goods to the carrier designated by the buyer, and then the responsibility is transferred to the buyer.
Characteristics and division of responsibilities of FCA:
Seller’s responsibility: The seller is responsible for delivering the goods to the designated location and handling export customs clearance procedures.
Buyer’s responsibility: The buyer bears all costs and risks from the designated location, including international transportation and import customs clearance.
Applicable scenarios of FCA:
Buyers and sellers need to flexibly arrange the delivery location.
Commonly used in air transportation or scenarios that require special transportation arrangements.
Advantages of FCA:
Applicable to multiple modes of transportation and strong flexibility.
Clear division of responsibilities between the two parties reduces disputes.
CPT (Carriage Paid To)
CPT terms apply to all modes of transport. The seller needs to pay for the transportation of the goods to the designated destination, but the risk is transferred to the buyer when the goods are delivered by the carrier.
Characteristics and division of responsibilities of CPT:
Seller’s responsibilities: responsible for transportation to the carrier and paying the freight to the destination designated by the buyer.
Buyer’s responsibilities: bear all risks and costs starting from the carrier.
Applicable scenarios of CPT:
Applicable to air, land and multimodal transport, especially door-to-door transport.
Advantages of CPT:
Clear division of responsibilities and costs during transportation.
CIP (Carriage and Insurance Paid To)
CIP adds insurance requirements on the basis of CPT. The seller needs to purchase minimum insurance for the transportation process.
Characteristics and division of responsibilities of CIP:
Seller’s responsibilities: pay transportation costs and insurance premiums to the destination designated by the buyer.
Buyer’s responsibilities: bear all risks after the goods are handed over to the carrier, but with minimum insurance coverage.
Applicable scenarios of CIP:
Applicable to transactions with high-value goods or requiring higher transportation security.
Notes on CIP:
If the buyer needs additional insurance protection, he should negotiate with the seller in advance.
DPU (Delivered At Place Unloaded)
DPU is a new trade term added by Incoterms 2020, which stipulates that the seller is responsible for transporting the goods to the place designated by the buyer and completing the unloading.
Characteristics and division of responsibilities of DPU:
Seller’s responsibility: pay the transportation costs to the destination and complete the unloading.
Buyer’s responsibility: bear the costs and risks from the time of unloading, including import customs clearance costs.
Applicable scenarios of DPU:
When the buyer does not have the ability to unload, or the seller needs to provide full transportation and unloading services.
Advantages of DPU:
The buyer does not need to arrange unloading, saving operating costs.
Notes on DPU:
The seller needs to ensure that the means of transport and the destination facilities are suitable for unloading.
The differences between 11 trade terms
The following is a comparison table of 11 trade terms:
| Term | Point of Transfer (Costs & Risks) | Seller’s Responsibility | Buyer’s Responsibility | Applicable Transport Mode |
|---|---|---|---|---|
| EXW | At seller’s premises | Minimal | Maximal | All modes |
| FCA | At the named place | Until delivery to the carrier | After delivery to the carrier | All modes |
| FAS | Alongside the ship at the port | Until alongside the ship | From loading onto the ship | Sea transport |
| FOB | Onboard the ship at the port | Until goods are onboard | From sea freight onwards | Sea transport |
| CFR | Destination port (before unloading) | Freight charges | Risks after loading | Sea transport |
| CIF | Destination port (before unloading) | Freight & insurance charges | Risks after loading | Sea transport |
| CPT | At the carrier | Freight charges | Risks after delivery to carrier | All modes |
| CIP | At the carrier | Freight & insurance charges | Risks after delivery to carrier | All modes |
| DAP | At the destination (unloaded) | Freight charges | From unloading onwards | All modes |
| DPU | At the destination (unloaded) | Freight charges & unloading | From unloading onwards | All modes |
| DDP | At the buyer’s location | All costs & duties | Minimal | All modes |
Differences between Incoterms® 2010 and 2020:
- Incoterms® FCA (Free Carrier) now offers the additional option of adding a shipped notation to the bill of lading before loading the goods on board the vessel.
- Costs are now centrally stated in A9/B9 of each Incoterms® rule.
- CIP now requires at least one insurance policy, with at least Institute Cargo Clauses (A) (all risks, except as provided in the exclusions).
- CIF now requires at least one insurance policy, with at least Institute Cargo Clauses (C) (listed number of risks, except as provided in the exclusions).
- Incoterms® rules for FCA, DAP, DPU and DDP now take into account the possibility that goods may be transported without contacting any third-party carrier, i.e. by using own transport.
- The Delivered at Terminal (DAT) rule has been changed to Delivered at Place Unloaded (DPU) to clarify that the destination is not just a “terminal” but can be anywhere.
- Incoterms® 2020 now explicitly shifts the responsibility for security-related requirements and additional costs to the seller.
In shipping trade, different trade terms are applicable to different business scenarios and needs. Buyers and sellers should choose appropriate terms based on their respective capabilities, resources and control over the transportation process. For example, if the buyer is familiar with the transportation process and has resources, he can choose FOB or EXW; if the buyer wants to simplify the operation, he can choose CIF, DAP or DDP.
Being familiar with and correctly using these trade terms can help companies conduct international trade more efficiently and avoid disputes caused by unclear responsibilities or risk sharing.