China shipping advice: Standard trade terms

China shipping advice: CIF shipping terms explained

Tuesday, 04 December 2007

FOB...CIF...EXW... Those are just a few examples of the alphabet soup of common trade terms importers need to be familiar with when shipping from China. Formally known as Incoterms, they are a series of standard trade definitions used in international sales contracts to define the handover of risk and transportation costs from supplier to buyer.

Buyers who have not imported directly will find suppliers' price quotes accompanied by a term such as "FOB Shanghai", "CIF Hong Kong" or similar three-letter code and place name. These and other so-called Incoterms are maintained by the International Chamber of Commerce to let buyers, sellers and their service providers know the exact arrangement for delivery of the goods. Each term describes when and where in the delivery process responsibility for insurance and freight passes from supplier to buyer.

The very useful diagram below was provided by Schenker, a leading global logistics service provider. It pinpoints the point of transfer for each Incoterm, from the greatest burden on the buyer (EXW) to the least (DDP). Descriptions of the terms follow.

Incoterms -- handover of risks and transport costs

Schenker adds the following usage notes:

Most contracts made after 1 January 2000 will refer to the latest edition of Incoterms, which came into force on that date. The correct reference is to "Incoterms 2000".

Correct use of Incoterms goes a long way to providing the legal certainty upon which mutual confidence between business partners must be based.

Incoterms are copyrighted by the International Chamber of Commerce; follow the link for the full explanation of each term.

EXW -- Ex Works (named place)
The supplier merely has to make the goods available at the factory.

FCA -- Free Carrier (named place)
The supplier must provide the goods ready and cleared for export.

FAS -- Free Alongside Ship (named port of shipment)
The supplier's obligation is fulfilled when the goods are placed alongside the ship at the named port.

FOB -- Free On Board (named port of shipment)
The supplier must deliver the goods on board the carrier at the named port and provide the export license, export taxes and fees.

CFR -- Cost and Freight (named port of destination)
The supplier agrees to contract the freight and pay the shipping company or its agent the "cost and freight". The buyer bears the risks of the goods from the time they pass the ship's rail at the port of shipment and pays for the insurance coverage.

CIF -- Cost, Insurance and Freight (named port of destination)
Almost identical to CFR terms, except that the supplier also provides insurance coverage for the shipment.

CPT -- Carriage Paid To (named place of destination)
The supplier pays the freight to the named place.

CIP -- Carriage And Insurance Paid To (named place of destination)
Similar to CIF terms, but while only goods shipped by sea can be sent CIF, CIP can be used with multimodal transport, including air freight.

DAF -- Delivered At Frontier (named place)
The supplier delivers the goods for cleared for export but not cleared for import at an agreed customs border.

DES -- Delivered Ex Ship (named port of destination)
The supplier will deliver the goods on board the vessel at the named port and provide the necessary documents so that the buyer can take possession. The supplier pays the freight and bears the risk of sea carriage.

DEQ -- Delivered Ex Quay (named port of destination)
The supplier will make the goods available on the quay or wharf at the destination named. Either the supplier or buyer pays any import duties as previously agreed.

DDU -- Delivered Duty Unpaid (named place of destination)
The supplier is responsible for delivering the products to the named place, not cleared for import, and typically bears all expenses except, as the name indicates, duties, taxes and fees related to customs clearance.

DDP -- Delivered Duty Paid (named place of destination)
The supplier is responsible for delivering the products to the named place and typically bears all expenses.