Incoterms 2020, Shipping, and Trade Terms defined // What Does EXW, FOB, DDP, DPU, FCA, CIP Mean?
Incoterms are established by the International Chamber of Commerce (ICC) to specify when and how a shipment will be transferred between a buyer and a supplier. The ICC updated the terms into what is known as Incoterms 2020. Incoterms also define who is expected to pay the insurance and when the risk transfer happens between the buyer and the seller. This is the first time that the Incoterms drafting group has included representatives from China.
This guide is part of our series on shipping; for more articles on shipping, check out Sourcing Hub’s Ultimate Guide to Freight Shipping.
On January 1, 2020, the new Incoterms 2020 went into effect. These new terms were released by the International Chamber of Commerce in Sept of 2019 and set guidelines for handling shipments between sellers and buyers in different countries. The ICC has released new Incoterms every decade, with the last change in 2010. Incoterms also define who is expected to pay the insurance and when the risk transfer happens between the buyer and the seller. However, this is the first time that the Incoterms 2020 drafting group has included representatives from China.
One key point to note is that the Incoterms 2020 are voluntary and must be explicitly included in the contract. Incoterms are defined and recognized globally, so it is essential to reference them when drafting a contract. Regardless, you can choose not to use the Incoterms when creating a shipping contract if you define which parties are responsible for delivering goods, insurance, shipment, risk, customs clearance, etc.
Click Here to Access the full Incoterms 2020 infographic.
What are the differences between Incoterms 2010 and Incoterms 2020?
Overall, the difference between 2010 and the Incoterms of 2020 is relatively small compared to the changes of previous decades. There is only one new term, and most changes are minor. We wrote an abbreviated guide to Incoterms 2020 vs. 2010
DAT is now DPU
DPU (Delivery Place Unloaded) replaces DAT (Delivery at Terminal) in the Incoterms 2020. This is the only newly named term in the guide, which is the same, with clearer language and rules. The obligations of the Buyer and Seller are the same in both DP and DAT.
The ICC viewed the change as necessary, as it is not possible to unload goods at the dock, port, or airport. Therefore, they needed to clarify that someone could only unload the goods after they had been cleared by customs and had arrived at their final destination, such as a warehouse.
FCA option for On-Board notation for Bill of Lading
In the Incoterms 2010 rules, the responsibility for the On Board Bill of Lading was not defined and had to be clarified in the contract if both parties chose the FCA option. As this leads to confusion, the new 2020 rules clarify that the Buyer should instruct the carrier or its agent to release the Bill of Lading(B/L) on the seller’s behalf. The bill of lading (B/L) will have an annotation on board stating that the goods have been loaded onto the vessel. The Bill of Lading is one of the most common documents used to release payment when paying by letter of credit.
New Insurance Rules For CIF and CIP
There are changes to the Cost, Insurance, and Freight (CIF) and Carriage and Insurance Paid to (CIP) Incoterms, which are the only Incoterms that define who is responsible for paying insurance. For both CIF and CIP, the seller pays the insurance. Previously, the seller was only responsible for meeting the minimum insurance requirements; however, under the new rules, the seller must purchase insurance for the shipment to at least 110% of the goods' value.
Greater clarity on who is responsible for what
The new 2020 clarified which party, the Buyer or seller, is responsible for Customs Clearance, which party is responsible for the payments, and who will assume the risk and insurance cost. The new rules were rewritten to use less technical jargon and to be more easily understood. It attempted to make the rules as straightforward as possible while ensuring they were legally enforceable in a multinational legal contract.
DIY Transport Options
For the first time, the new Incoterms 2020 acknowledges that buyers and sellers can transport goods using their vehicles. In the previous version, the rules assumed that a third-party shipping service would exclusively handle the transportation. This means they recognize buyers can now pick up goods using their vehicle from a port or terminal destination.
This update only affects Free Carrier (FCA), Delivered at Place (DAP), Delivered at Place Unloaded (DPU), and Delivered Duty Paid (DDP)
New Security Requirements
The new rules clarify which party is liable at two key points: Transport from the country of origin and customs clearance into the destination country.
For transportation out of the country, the seller is liable for CPT, CFR, CIP, CIF, DAP, DPU, and DDP, while the Buyer is liable for EXW, FCA, FAS, and FOB. Customs clearance falls on the party defined in the terms.
What are Incoterms and trade terms?
What are the Trade Terms on Alibaba? Do you need clarification about what the three letters that came with your quote mean? Cosmo defines the Incoterms 2020 abbreviations, such as FOB, CFR, and DAP, for international trade!
When you obtain quotes from suppliers, they typically provide three pieces of information: the price per unit, the Minimum Order Quantity (MOQ), and the shipping terms. The shipping terms, Incoterms, are typically denoted by three letters at the end of the term.
For instance, I recently received a quote: “Thank you, Jim, and please see below 1000-1.75/pc, 2000-1.65/pc, 10000-1.50/pc, EXW”. In this case, EXW stands for Ex-Works, which defines the shipping terms and the obligations of both the Buyer and the seller to deliver the product to its final destination. I often get asked, “Do Alibaba prices include shipping?” The answer is no; they always quote prices in EXW on the website.
Incoterms are sometimes referred to as trade terms and are international contracts of sale. EXW and FOB are far and away from the two most common Incoterms. Incoterms have two parties, ‘the Seller,’ typically a factory, manufacturer, trading company, or wholesaler. The Buyer is the person who purchases the goods from overseas and imports them for final sale. If you run an FBA business, you will be classified as the Buyer in these examples. This guide is for the most recent Incoterms 2020, which was updated in 2020. There are now 11 recognized terms, the same as in 2010, and down from 13 in 2000. Incoterms are published by the International Chamber of Commerce, which holds the copyright to these terms.
The Buyer, seller, or agent must complete ten steps in the shipping process to transport a product from the factory to its final destination.
Transport to the Export Port
Unloading the carriage at the export port
Loading onto the vessel
Export Customs Clearance (To Clear for Export)
Shipping on the vessel (such as Ocean Shipping or plane)
Unloading the vessel at the import port
Import Customs and Clearance
Import Duties and Taxes
Loading of Carriage in the Import Port
Unloading at destination (Terminal)
The Buyer defines the final destination, and if you are an FBA seller, that would typically be either Amazon’s warehouse or a prep and ship center. The Incoterms explain who is responsible for doing each action. For example, it’s common for a buyer to hire a freight forwarder to do the shipping for them.
Before we get into the Incoterms 2020, there are a few terms that need to be defined:
Seller: Typically, the manufacturer, trade companies, or wholesaler who is supplying the goods for sale
Buyer: The person who is purchasing the goods and will receive them upon final delivery
Delivery: The point at which the risk is transferred from the seller to the Buyer
Arrival: The point at which the delivery has been paid for. The seller should name the place.
Free: How far must the seller deliver the goods for the Buyer to pick them up?
Bill of Lading: This is the shipping receipt. This is a detailed list of goods provided to and signed by the carrier, which is then sent to the person cosigning or receiving the goods. Note that it’s ‘landing,’ NOT ‘landing.’
Carrier: the party obligated to transport the goods. This can be done by any means, such as ship, rail, or truck.
Freight Forwarder: A firm that is commonly contracted to make shipping arrangements.
To Clear for export: Getting permission to export
Terminal: The final destination of the shipment. Such as a dock or warehouse. For FBA sellers, this is most commonly an Amazon fulfillment center.
Incoterms 2020 defined
As EXW and FOB are the most common, we’ll start with those two. When we request initial quotes from manufacturers in our RFQs, we ask that they provide prices in both EXW (Ex Works) and FOB (Free On Board) terms. We would like to know the EXW price, which is the price of the product. The FOB is used to gauge shipping prices because the port is a convenient location for our freight forwarder to pick up an item. Most of our projects are FOB; we contract with a freight forwarder to complete the remaining shipping.
EXW- Ex Works
This is the most basic shipping information that a supplier can provide. The seller makes the item available for pickup at the factory and is not responsible for the product once it leaves the factory premises. Instead, the Buyer is responsible for transporting it from the factory, covering all export and import clearances and insurance costs.
If you receive initial quotes from a factory for the first time, they will almost always quote you for EXW unless you explicitly request a different term. This is because factories and suppliers quote EXW prices as the lowest available, which appears favorable when comparing quotes, and you need to obtain the lowest price.
FOB – Free On Board
FOB means that the seller ships the goods to the nearest port, and the seller is responsible for everything after that. The seller will drop this off at the port of shipment, and the Buyer will either pick it up themselves or, more commonly, work with a freight forwarder to ship it for them. The seller is responsible for clearing the goods for export, and the Buyer is responsible for the goods from the port onwards. Therefore, it’s crucial when obtaining FOB quotes to ensure you obtain the port's name where the goods are dropped off.
One of the primary reasons this is the most popular Incoterms term is that the Export port is an excellent location for a third-party inspection service to inspect the goods. Furthermore, the seller is responsible for all activities in the country of export. At the same time, the Buyer is responsible for all activities once the goods have left the country, making things straightforward. In addition, most freight forwarders will have an office at or near the port, and it’s an easy spot for them to pick up the goods on your behalf.
FCA – Free Carrier
This is one step up from EXW, in which the seller clears the goods for export and delivers them to the port of export. Next, the Buyer must unload the goods at the port and is responsible for them once they arrive. Next, the Buyer arranges the carrier. The most significant difference between EXW and FCA is that the seller must load the goods onto the Buyer’s carrier. It should be noted that this is often confused with FOB (Free on Board). If you think there is confusion, feel free to ask your supplier to elaborate and provide details.
CPT – Carriage paid to
The seller pays for the goods shipped to the Buyer's port of entry. The risk is transferred to the Buyer upon arrival of the goods at the port. The Buyer is responsible for unloading the vessel and arranging further transportation. Even though the seller is responsible for the cost to the Export port, the Buyer assumes the risk and insurance cost once the goods are unloaded at the Export port. The seller is responsible for obtaining export clearance and covering the freight costs associated with the shipment.
CIP – Carriage and Insurance paid to
It is the same as CPT, except the seller must obtain insurance for the goods during transit. CIP also covers all modes of transportation, while CIF specifically covers sea freight. We should note that CIP and CIF are the only ways in which risk and insurance differ. Once the goods are unloaded at the export port, the seller assumes the insurance cost but not the risk until the goods are unloaded at the import port.
DPU – Delivery Place Unloaded
The seller delivers the goods (unloaded) to the port of import, and the Buyer is responsible for the cost and risk of the goods from that point onward. The seller assumes all risks and costs associated with the goods until they reach the port of import. The Buyer pays all imports and Customs Fees.
DAP – Delivered at Place
The seller delivers the goods to the Buyer's final destination. The seller assumes all risks associated with shipping and either loads the goods themselves or pays a third party to load the goods for shipment. The Buyer is only responsible for paying customs fees and clearing the goods. The Buyer also pays to unload the goods at the final destination.
DDP – Delivered Duty Paid
In these terms, the seller is responsible for all costs and liabilities associated with the sale. The seller pays all costs and assumes all risks to the final destination. The Buyer is solely responsible for unloading the goods upon arrival at the final destination chosen by the Buyer.
We often ask, Why don’t you get every project DDP? It is easiest for the Buyer, but it will not be the cheapest. The seller is the one who selects the shipping company and will choose the one they prefer, not necessarily the cheapest or most reliable. You are placing a great deal of trust in the shipping company. If you'd like, I suggest obtaining a quote for DDP from your supplier, then requesting a quote for FOB and a quote from a freight forwarder, and comparing the final total prices of the two.
Note: FOB, FAS, CFR, and CIF are specifically applicable to waterway-based shipments (both ocean and inland waterways), whereas the above terms apply to all forms of shipping, including water. Other forms of transportation can include rail, trucking, or air cargo.
FAS – Free Alongside Ship
The seller is responsible for delivering all goods to the vessel’s side at the named port of export. The seller pays for and assumes all risks until the goods are placed in the port and the seller clears the goods for export. The Buyer then assumes all costs and risks from that point forward, including loading the ship. This has one less step than FOB, in which it bears the cost and risk of loading the ship.
CFR – Cost and Freight
The seller is responsible for bearing the cost of shipping until the named import port; however, the risk is transferred to the Buyer once the goods are loaded onto the ship at the export port, and the final delivery of the goods from the destination port. This is similar to CPT, except that CFR is specifically designed for water-based transport.
CIF – Cost Insurance and Freight
This is similar to the one above, except that the Buyer will require the seller to assume the risk or obtain insurance on the goods until they reach the destination port. The seller bears all shipping costs and assumes the risk of the goods until the destination port. The seller is also responsible for clearing customs, but the Buyer is responsible for paying the duty. Again, this is effectively the same as CIP, except CIF is specifically for water.
Conclusion
The changes between Incoterms 2010 and 2020 are relatively minor compared to previous versions. DPU is the new Incoterms introduced this year. As always, you must understand what the new Incoterms 2020 mean in your shipping and manufacturing plan.
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