China shipping advice: Master shipping incoterms

This is a very short course in the language of purchasing and an overview of some of the paperwork you will need to do business. You do not need to spend money buying or printing the various business forms. There are several software packages, selling for as little as $19.95 that provide hundreds of business forms, including all of those mentioned below. The forms can be customized with the name and address of your business and simply filled out and printed from your computer. Many of these forms (such as purchase orders) are also sold individually and in packages at office supply stores.

Much of the import terminology and forms have common abbreviations which I have placed next to the explanation. In some cases, the abbreviations are more common than the term so I have reversed the order on these.

Purchase order (PO)
A purchase order is simply that, your order to purchase goods or services. A purchase order is a binding contract. It contains the name and/or description of the goods you are buying, as well as the quantity, price, payment, and delivery terms. Many wholesale distributors and vendors will insist on a purchase order before they sell to you.

Commercial invoice (CI)
A commercial invoice is a bill for goods delivered or about to be delivered. It should specify exactly the product, quantity, value, and a list of any special charges such as handling, packing, one-time set-up fees, etc. If you are importing products, the invoice must also provide the eight-digit sub-heading code from the Harmonized Tariff Schedule of the United States. (This is usually provided by the exporter, or your customs broker can determine this for you).

Pro-forma invoice (PFI)
A pro-forma invoice is essentially a quote from a seller to a buyer. It shows you what the invoice will look like and sets out the seller's terms. If you are buying a large quantity of products, or products you want financing for, you should request a pro-forma invoice. This will allow you to see the seller's terms, as well as the pricing and delivery data.

FOB
FOB means "free on board" which is an archaic term for: "This is my price at my shipping dock, packed ready for shipment. You pay insurance, freight, duties and so on." If you are buying from a supplier in China and you get a quote that says FOB Hong Kong, then that is the price before shipping. You would figure the shipping cost from Hong Kong to your location. Sometimes you will see a seller in Asia who pays for the shipping to a US port and then you pay the shipping from the port to your location. So you may see a supplier in Taipei who quotes you a price FOB Seattle. In this case your customs broker would clear the item from Seattle and arrange shipping to you. You would be responsible for the customs duties, the customs broker's fee and the cost of shipping from Seattle to your location.

CIF
CIF stand for "cost, insurance and freight." If a supplier quotes you a CIF price, that is the price delivered to your door. This method is not used very often.

LOC or L/C
LOC and L/C stand for letter of credit. A letter of credit is a form of escrow that ensures goods are delivered. If you are importing products from a supplier in another country you have never met, you can request to pay by letter of credit.

Say you were importing coffee beans from Costa Rica and you wanted to be sure they arrived at your location and were not full of insects, so the agricultural authorities wouldn't destroy them. You would deposit the amount of money owed for the beans with your bank. Your bank would correspond with the sellers' bank and confirm the money was on deposit. Your shipping terms would specify the beans must successfully clear customs and agricultural inspection. Once this was done, your bank would "release" the funds to your seller's bank. The seller could then collect his money.

Letters of credit are usually only used in large transactions, but I have seen them used in small transactions when dealing with developing countries where the buyer and seller are unknown to each other.

Force majeure
A French term literally translated as "greater force." This is a clause included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and restrict participants from fulfilling obligations.

This term is also often referred to as an "act of God." A force majeure clause in a purchase order or contract is designed to protect both parties. Some examples of force majeure are ship that sinks, plane crash, earthquake, hurricane, union strike and other unforeseen events that are beyond the control of either the buyer or the seller.

Tare
Tare refers to the weight of an empty shipping container. The tare weight is subtracted when a filled container is weighed to calculate the weight of the shipping contents alone.

Metric weights and dimensions
Most countries use the metric system for weights and measures. Suppliers will often describe their products and state shipping size and weights in metric terms. Here is a link to a handy online converter that will convert metric to US measurements and weights.

Customs broker
A customs broker is a company that clears imported goods through customs services. This involves the preparation of documents or electronic submissions, the calculation and payment (on behalf of the client) of taxes, duties and tariffs, and facilitating communication between the importer/exporter and governmental authorities. Customs brokers in the United States will often prepare and submit documentation to notify or obtain the clearance from other government agencies.

Freight forwarder
Think of a freight forwarder as a travel agent for freight. A freight forwarder dispatches shipments via air and sea carriers and books or arranges space for those shipments. International Freight forwarders typically arrange cargo movement to an international destination. They prepare and process documentation and perform related activities pertaining to international shipments. Some of the typical information reviewed by a freight forwarder is the commercial invoice, shipper's export declaration, and other documents required by the carrier or country exported from or imported to. In the past few years a lot of this information has gone from paper to electronic forms. Some freight forwarders are also customs brokers.

Other wholesale terms
Here are some other common terms used by wholesale suppliers both in the United States and abroad.

Keystone - This is a term that means you can double the wholesale price to sell at retail.

To-the-trade - This is a term that means a dealer will only sell wholesale to other dealers and retailers.

MOO - Minimum opening order. Besides being the sound a cow makes, a MOO is also the amount of the first order. Some suppliers require your first order to be of a certain minimum and then will let you buy subsequent orders (called ROs or reorders) in smaller amounts. For example you might see this on a price quote or catalog: MOO $1,000, RO $250

MAP - Minimum advertised price. It is illegal under Fair Trade policies and regulations in the US, Canada and the UK and other countries for a supplier to set the minimum price a reseller can sell at. However, a supplier can insist that you not advertise an item for sale below a certain set or minimum advertised price.

3 Net, 2/30, 1/60 - These are credit terms. The numbers could be different but it means a seller will discount his price by 1% if you pay within 60 days, 2% if you pay within 30 days and 3% if you pay upon ordering (net).

As I said at the beginning of this article, this is only a brief overview of the importing terminology and paperwork you will need in the import/export trade. If you decide to go heavily into importing, the US Government Printing Office and The Department of Commerce produce plenty of free booklets, videos and various manuals related to importing and exporting. If you are in Canada or Europe, check your government web sites for links to the organizations that provide information for importers.

If you are new to importing one of the first people you should contact is a registered customs broker. Besides helping you with the paperwork and clearing your goods through customs, a good customs broker will help educate you about importing. Just type "customs broker" and the name of the nearest large city into a search engine and you will find several companies that can fulfill this service.

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Readers have left 4 comments.

 1. Untitled
katslys, Unregistered

Obviously, you don't know your INCO terms. FOB means exactly that. Free on Board a named point, a port or airport. Your example of FOB Seattle & the shipper clearing is totally incorrect. Once a shipment arrives a U.S. port, the importer is responsible for any destination charges, customs clearance, duty & customs fees unless the shipment is DDP to Seattle. I think you'd better study up.

 Posted 2008-12-14 23:22:22

 2. I agree with katslys
Dan, Unregistered

I have to agree with katslys. FOB generally means the goods must be loaded onto the ship the buyer specifies.
Your FOB Seattle example is actually DAF (Delivered at Frontier).
If anybody would like to see the correct terms and their literall meaning visit
http://en.wikipedia.org/wiki/Incoterms

 Posted 2009-07-16 02:52:49

 3. Contracts Manager
Larry Sales, Unregistered

There are two definitions floating around for FOB. The right one means Free on Board a ship as per the Incoterms. The second which is wrong and is called appropriately the 'American' Half Assed' definition is used wrongly to indicate the point whereby the ownership of the goods changes hands.

 Posted 2010-07-06 07:20:46

 4. ada
asdas, Unregistered

Have you know about LDP as a part of incoterms too. and what is the definitions of LDP?

 Posted 2010-07-22 05:03:54

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