10 INCO TERMS EXPLANATION CLEARLY PRESENTATION
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- 2. 2 INCO TERMS • International Commercial Terms (INCOTERMS) The INCOTERMS (International Commercial Terms) is a universally recognized set of definitions of international trade terms, such as FOB, CFR and CIF, developed by the International Chamber of Commerce (ICC) in Paris, France. It defines the trade contract responsibilities and liabilities between buyer and seller. It is invaluable and a cost-saving tool. The exporter and the importer need not undergo a lengthy negotiation about the conditions of each transaction. Once they have agreed on a commercial term like FOB, they can sell and buy at FOB without discussing who will be responsible for the freight, cargo insurance, and other costs and risks. The INCOTERMS was first published in 1936---INCOTERMS 1936---and it is revised periodically to keep up with changes in the international trade needs. The complete definition of each term is available from the current publication---INCOTERMS 2000. The publication is available at your local Chamber of Commerce affiliated with the International Chamber of Commerce (ICC). Many importers and exporters worldwide are accustomed to and may still use the INCOTERMS 1980, the predecessor of INCOTERMS 1990 and INCOTERMS 2000. Under the INCOTERMS 2000, the international commercial terms are grouped into E, F, C and D, designated by the first letter of the term (acronym), as follows:
- 4. 4 • International Commercial Terms ( INCOTERMS ) GROUP TERM Stands for E EXW- Ex works F • FCAFree Carrier • FASFree Alongside Ship • FOBFree On Board • C • CFRCost and Freight • CIFCost, Insurance and Freight • CPTCarriage Paid To • CIPCarriage and Insurance Paid To • D • DAFDelivered At Frontier • DESDelivered Ex Ship • DEQDelivered Ex Quay • DDUDelivered Duty Unpaid • DDP Delivered duty paid Contd.
- 5. 5 Contd. • In practice, trade terms are written with either all upper case letters (e.g. FOB, CFR, CIF, and FAS) or all lower case letters (e.g. fob, cfr, cif, and fas). They may be written with periods (e.g. F.O.B. and c.i.f.). • In international trade, it would be best for exporters to refrain, wherever possible, from dealing in trade terms that would hold the seller responsible for the import customs clearance and/or payment of import customs duties and taxes and/or other costs and risks at the buyer's end, for example the trade terms DEQ (Delivered Ex Quay) and DDP (Delivered Duty Paid). Quite often, the charges and expenses at the buyer's end may cost more to the seller than anticipated. To overcome losses, hire a reliable customs broker or freight forwarder in the importing country to handle the import routines. • Similarly, it would be best for importers not to deal in EXW (Ex Works), which would hold the buyer responsible for the export customs clearance, payment of export customs charges and taxes, and other costs and risks at the seller's end.
- 6. 6 Contd. • EXW {+ the named place} Ex Works – Ex means from. Works means factory, mill or warehouse, which is the seller's premises. EXW applies to goods available only at the seller's premises. Buyer is responsible for loading the goods on truck or container at the seller's premises, and for the subsequent costs and risks. In practice, it is not uncommon that the seller loads the goods on truck or container at the seller's premises without charging loading fee. – In the quotation, indicate the named place (seller's premises) after the acronym EXW, for example EXW Kobe and EXW San Antonio. – The term EXW is commonly used between the manufacturer (seller) and export-trader (buyer), and the export-trader resells on other trade terms to the foreign buyers. Some manufacturers may use the term Ex Factory, which means the same as Ex Works.
- 7. 7 Contd. • FCA {+ the named point of departure} Free Carrier – The delivery of goods on truck, rail car or container at the specified point (depot) of departure, which is usually the seller's premises, or a named railroad station or a named cargo terminal or into the custody of the carrier, at seller's expense. The point (depot) at origin may or may not be a customs clearance center. Buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks. In the air shipment, technically speaking, goods placed in the custody of an air carrier is considered as delivery on board the plane. In practice, many importers and exporters still use the term FOB in the air shipment. – The term FCA is also used in the RO/RO (roll on/roll off) services. – In the export quotation, indicate the point of departure (loading) after the acronym FCA, for example FCA Hong Kong and FCA Seattle. – Some manufacturers may use the former terms FOT (Free On Truck) and FOR (Free On Rail) in selling to export-traders.
- 8. 8 Contd. • FAS {+ the named port of origin} Free Alongside Ship – Goods are placed in the dock shed or at the side of the ship, on the dock or lighter, within reach of its loading equipment so that they can be loaded aboard the ship, at seller's expense. Buyer is responsible for the loading fee, main carriage/freight, cargo insurance, and other costs and risks. In the export quotation, indicate the port of origin (loading) after the acronym FAS, for example FAS New York and FAS Bremen. – The FAS term is popular in the break-bulk shipments and with the importing countries using their own vessels.
- 9. 9 Contd. • FOB {+ the named port of origin} Free On Board The delivery of goods on board the vessel at the named port of origin (loading), at seller's expense. Buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks. In the export quotation, indicate the port of origin (loading) after the acronym FOB, for example FOB Vancouver and FOB Shanghai. – Under the rules of the INCOTERMS 1990, the term FOB is used for ocean freight only. However, in practice, many importers and exporters still use the term FOB in the air freight. – In North America, the term FOB has other applications. Many buyers and sellers in Canada and the U.S.A. dealing on the open account and consignment basis are accustomed to using the shipping terms FOB Origin and FOB Destination. – FOB Origin means the buyer is responsible for the freight and other costs and risks. FOB Destination means the seller is responsible for the freight and other costs and risks until the goods are delivered to the buyer's premises, which may include the import customs clearance and payment of import customs duties and taxes at the buyer's country, depending on the agreement between the buyer and seller. – In international trade, avoid using the shipping terms FOB Origin and FOB Destination, which are not part of the INCOTERMS (International Commercial Terms).
- 10. 10 Contd. • CFR {+ the named port of destination} Cost and Freight The delivery of goods to the named port of destination (discharge) at the seller's expense. Buyer is responsible for the cargo insurance and other costs and risks. The term CFR was formerly written as C&F. Many importers and exporters worldwide still use the term C&F. In the export quotation, indicate the port of destination (discharge) after the acronym CFR, for example CFR Karachi and CFR Alexandria. – Under the rules of the INCOTERMS 1990, the term Cost and Freight is used for ocean freight only. However, in practice, the term Cost and Freight (C&F) is still commonly used in the air freight. •
- 11. 11 Contd. • CIF {+ the named port of destination} Cost, Insurance and Freight The cargo insurance and delivery of goods to the named port of destination (discharge) at the seller's expense. Buyer is responsible for the import customs clearance and other costs and risks. In the export quotation, indicate the port of destination (discharge) after the acronym CIF, for example CIF Pusan and CIF Singapore. – Under the rules of the INCOTERMS 1990, the term CIF is used for ocean freight only. However, in practice, many importers and exporters still use the term CIF in the air freight. – CPT {+ the named place of destination} Carriage Paid To The delivery of goods to the named place of destination (discharge) at seller's expense. Buyer assumes the cargo insurance, import customs clearance, payment of customs duties and taxes, and other costs and risks. In the export quotation, indicate the place of destination (discharge) after the acronym CPT, for example CPT Los Angeles and CPT Osaka
- 12. 12 Contd. • CIP {+ the named place of destination} Carriage and Insurance Paid To The delivery of goods and the cargo insurance to the named place of destination (discharge) at seller's expense. Buyer assumes the import customs clearance, payment of customs duties and taxes, and other costs and risks. In the export quotation, indicate the place of destination (discharge) after the acronym CIP, for example CIP Paris and CIP Athens • DAF {+ the named point at frontier} Delivered At Frontier The delivery of goods to the specified point at the frontier at seller's expense. Buyer is responsible for the import customs clearance, payment of customs duties and taxes, and other costs and risks. In the export quotation, indicate the point at frontier (discharge) after the acronym DAF, for example DAF Buffalo and DAF Welland.
- 13. 13 Contd. • DES {+ the named port of destination} Delivered Ex Ship – The delivery of goods on board the vessel at the named port of destination (discharge), at seller's expense. Buyer assumes the unloading fee, import customs clearance, payment of customs duties and taxes, cargo insurance, and other costs and risks. In the export quotation, indicate the port of destination (discharge) after the acronym DES, for example DES Helsinki and DES Stockholm. – DEQ {+ the named port of destination} Delivered Ex Quay The delivery of goods to the quay (the port) at destination at seller's expense. Seller is responsible for the import customs clearance and payment of customs duties and taxes at the buyer's end. Buyer assumes the cargo insurance and other costs and risks. In the export quotation, indicate the port of destination (discharge) after the acronym DEQ, for example DEQ Libreville and DEQ Maputo
- 14. 14 Contd. • DDU {+ the named point of destination} Delivered Duty Unpaid The delivery of goods and the cargo insurance to the final point at destination, which is often the project site or buyer's premises, at seller's expense. Buyer assumes the import customs clearance and payment of customs duties and taxes. The seller may opt not to insure the goods at his/her own risks. In the export quotation, indicate the point of destination (discharge) after the acronym DDU, for example DDU La Paz and DDU Ndjamena. • DDP {+ the named point of destination} Delivered Duty Paid The seller is responsible for most of the expenses, which include the cargo insurance, import customs clearance, and payment of customs duties and taxes at the buyer's end, and the delivery of goods to the final point at destination, which is often the project site or buyer's premises. The seller may opt not to insure the goods at his/her own risks. In the export quotation, indicate the point of destination (discharge) after the acronym DDP, for example DDP Bujumbura and DDP Mbabane.
- 15. 15 TRADE TERMS USED SPECIFICALLY IN CHARTER SHIPPING • RO/RO Vessels and LASH Besides the full container ship, the RO/RO (roll on/roll off) vessel and the LASH are other systems of water transport used in international trade. • RO/RO (Role On/Role Off ) Vessels The RO/RO vessel (RO/RO or RORO) derived from the traditional car ferry, where motor vehicles are driven on and off by their drivers. RO/RO is popular within the European trade routes. It is also used in other trade routes like the U.S.A.-Central America route and Europe- West Africa route. The RO/RO is equipped with ramp(s) that makes loading and unloading from the side and/or bow (front of vessel) and/or stern (rear of vessel) possible. Some modern RO/ROs are designed as a trailer/break-bulk/container carrier suitable for the deep-sea voyage (long haul), making loading and unloading of containers from the top, like a full container ship, possible using the crane. The type of cargo that can be carried on a RO/RO is flexible, including large objects.
- 16. 16 CONTD. • The full RO/RO has low stowage factors, as a result of wasted space around the underside of the trailers and other motor vehicles. Therefore, the full RO/RO is not ideal for deep-sea trade. The low stowage factors, however, are compensated for by the quickness of the "turn around' time in ports in the short-sea voyage (short haul). • In general, the capital cost for a full RO/RO is lower than the full container ship or the LASH. When the cargo availability is insufficient in a port in the short-sea trade, investment in sophisticated container handling installations can be uneconomical. Therefore, the full RO/RO offers a solution to short- sea transport needs. A large area of land for parking trailers and other motor vehicles is necessary while they await loading. LASH (Lighter Aboard Ship) The lighter aboard ship or LASH---barge-carrier or barge-carrying vessel--- is designed to carry lighters (barges), where they are lifted by crane over the stern (rear) of the vessel. The LASH and barge come in different configurations. Some LASHes can accommodate over 24 barges. Each barge may carry 600 to 1,000 metric tons of cargo, which is much bigger than the ocean freight container, and can float and be towed up and down a river or canal, thus the barge is often referred to as the floating container.
- 17. 17 Contd. – The LASH is useful in moving a relatively large volume of cargo in the short-sea trade and to and from sites on rivers and canals, such as Rhine Canal in Europe, that cannot be used by the larger ocean-going vessels. The LASH keeps the load in the same vessel for the entire trip, thus reduces cargo handling, transport costs and time. – The LASH is popular in Europe, taking advantage of the extensive inland waterway systems which are the cheapest means of inland transport. The export goods from landlocked European countries like Switzerland may move by LASH or other inland waterway transports to the port of Rotterdam (Netherlands) or Antwerp (Belgium), and transfer to the ocean going vessel for the deep-sea voyage.
- 18. 18 Contd. • Conference Shipping Conference shipping is provided by the conference carrier or member of a freight conference. The freight conference--- conference or steamship conference or liner conference---is a group of operators of vessel who operate on the same routes and cooperate on shipping schedules at the standardized freight rates between ports. • Conference shipping has regular sailing schedules, thus is called the liner service. • Most ocean freight is carried by conferences. Conference carriers or their agents issue an ocean bill of lading.
- 19. 19 Contd. • Non-conference Shipping • Non-conference shipping is provided by the independent carrier or operator of vessel who is not a member of a freight conference, sometimes called outside shipping. Independent carriers, which carry about 25% of the ocean freight, operate on selected trade routes in competition with conference carriers. • Non-conference shipping often does not have regular sailing schedules and freight rates between ports. Consequently, it is perceived as less dependable than conference shipping. • Independent carriers or their agents issue an ocean bill of lading.
- 20. 20 Contd. • Charter Shipping Charter shipping is a tramp service. The term tramp, as used in the ocean shipping, refers to a cargo ship not operating on regular routes and schedules, and picking up cargo only when it is chartered (hired) from the ship operator. • While conference and non-conference shipping are for general cargoes, charter shipping usually is for bulk cargoes like oil, coal, ore, and grain. Charter shipping has the lowest freight rate per unit of weight or measure. • A charter party is required in charter shipping. A charter party--- charter party contract---is a written contract between the ship operator and the charterer (shipper). The contract normally includes the ports, freight rate and time involved in the voyage(s). • The ship operator issues a charter party bill of lading. Unless a letter of credit (L/C) permits or calls for a charter party bill of lading, the bank will reject such transport document in the L/C negotiation.
- 21. 21 Contd. • Some trade terms used specifically in charter shipping are as follows: FI Free In • The word "free" as used in the charter shipping term means not including. FI is a pricing term indicating that the charterer of a vessel (i.e., the shipper) is responsible for the cost of loading goods onto the vessel. FO Free Out • FO is a pricing term indicating that the charterer of a vessel (i.e., the shipper) is responsible for the cost of unloading goods from the vessel. FIO Free In and Out • FIO is a pricing term indicating that the charterer of a vessel (i.e., the shipper) is responsible for the costs of loading goods onto the vessel and unloading goods from the vessel. • Please see International Commercial Terms for the different trade terms used in exporting-importing.
- 22. 22 Contd. • Voyage charter The ship is chartered for a single journey and it may involve more than one port of call. The ship operator crews and operates the ship and it is the operator's own ship's master in control of the ship. This type of charter shipping is analogous to the limousine service where the driver, who is in control of the car in a journey, is provided by the car operator. • Time charter The ship is chartered for a period of time. This type of charter shipping is similar to a voyage charter in the crewing and operating of the ship. The contract may call for a specific or unlimited number of voyages within the agreed time. • Bareboat charter The term bareboat means a ship without a crew and ship's master. The charterer (shipper) is in charge of crewing and operating the ship within a period of time, usually a number of years. This type of charter shipping is analogous to a car leasing where the lessor (the car operator) provides the car only and the lessee provides his/her own driver.