INCOTERMS (International Commercial Terms), also known as shipping terms, freight terms, or trade terms, are the global standard terminology and definitions used in international trade to determine which parties are responsible for the shipment at varying times during transit.
These days, ordering goods from China via shipping is an excellent way to get resellable items at a discount.
Chinese imports and exports both heavily rely on Incoterms. Learn the most crucial shipping from China terms by continuing to read.
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What Are Incoterms?
International Commercial Terms, also known as Incoterms rules, are a set of pre-defined commercial terms that are frequently used in international commercial transactions or procurement procedures. They were published by the International Chamber of Commerce (ICC).
a group of three-letter acronyms for standard contractual sales procedures. We’ve seen FOB, CIF/CFR, and DAP as the most typical ones in an import and export process.
The guidelines are recognized by governments, judicial bodies, and professionals all over the world for the interpretation of the majority of terms used in international trade.
They are intended to lessen or entirely eliminate uncertainties brought on by various ways that different countries interpret the laws. As a result, they are frequently incorporated into sales contracts all over the world.
Most Commonly Used Incoterms
FOB
When importing from China, this is typically the phrase that is used the most. With FOB, the seller’s obligations end when the goods are loaded onto the ship that will take them to the location of your choice. As soon as the goods are across the ship’s rail, the seller has delivered the item.
EXW
When the buyer picks up the products from the seller at the designated location, such as a warehouse or factory, delivery is considered complete. As soon as the goods are available for you to transport, the buyer assumes ownership and responsibility. Both air freight and freight on ships are referred to by this phrase.
When selecting EXW, we advise you to think carefully. There may be a lot of work that needs to be managed due to the hassle of dealing with inland transportation in China, customs clearance in Chinese ports, and other related issues.
CIF
Only at the destination port does the buyer acquire ownership of the goods under CIF. The freight is under the sellers’ control. This phrase only refers to ocean freight; it does not refer to air freight. As time went on, importing products from a Chinese supplier became less and less advised.
Read More: CIF Vs. FOB
CFR
An Incoterm® that applies only to ocean freight is CFR, or Cost and Freight. The distinction between a CFR and CIF agreement is minimal, as was already stated. The difference between CFR and CIF is that under CIF, sellers are required to provide insurance. Insurance is not required under CFR, though.
We STRONGLY RECOMMEND that, if you decide to operate under CFR, the buyer specifically defines and specifies the insurance terms in the sales contract.
FCA
A trade term known as “free carrier” states that the seller of goods is in charge of delivering those goods to the buyer’s specified location. Under FCA shipping terms, the seller is in charge of managing the export details and licenses; the buyer is not required to deal with them.
DDP
For sellers, this phrase seems quite difficult. DDP requires that the seller pay for all freight expenses. Only the final destination’s unloading is required by the buyer.
4 Parts Of Incoterms
1. Departure
EXW = Ex Works + a named place
The seller has the lowest costs, risks, and obligations under this term. His work is finished once the goods are prepared in the seller’s factory or warehouse. Even the seller is not accountable for placing the items onto the first carrier (typically a truck) sent by the buyer to pick them up.
Some importers have opted for EXW in order to have the most control. It is not at all necessary in our opinion. So it is not advisable to use EXW.
2. Main Carriage Not Paid By Seller
- FCA = Free Carrier + a named place
- FAS = Free Alongside Ship + a named port of loading
- FOB = Free On Board + a named port of loading
To bulk cargo, FAS is applied.
The term “FCA” allows for the delivery of the goods both on the seller’s premises and at a variety of locations, including ports, airports, container terminals, etc., which are located in the country of the seller.
While FOB is the oldest Incoterm and, along with CIF, the most commonly used with sea transport only, FCA is applicable to all freight shipping via air, sea, rail, and road.
As per Incoterms 2010 regulations, FCA should be used rather than FOB because containers are frequently delivered to the port’s container terminal rather than being loaded onto ships. However, almost all Chinese suppliers will use FOB rather than FCA in actual operations.
3. Main Carriage Paid By Seller
- CFR = Cost and Freight + a named port of destination
- CIF = Cost, Insurance and Freight + a named port of destination
- CPT = Carried Paid To + a named place of destination
- CIP = Carriage And Insurance Paid To + a named place of destination
The seller also pays the insurance under CIF, which operates similarly to CFR. While CFR and CIF are only appropriate for shipments by sea, CPT and CIP can be used for all modes of transportation.
4. Arrival
- DAT = Delivered at Terminal + a named place of destination
- DAP = Delivered at Place + a named place of destination
- DDP = Delivered Duty Paid + a named place of destination
A location other than a transport terminal in the country of destination may be chosen for the place of delivery, such as the buyer’s property or a location nearby.
In some ways, DDP is the opposite of Incoterms EXW; it imposes the highest level of responsibility on the seller because he bears all risks and costs associated with the operation, including those associated with importation, in order to deliver the goods to the buyer’s country at the specified location.
The only distinction between Incoterms DDP and DAP is that in DDP, all fees and taxes associated with import clearance are covered by the seller, whereas in DAP, the buyer is responsible for these costs.
When Importing From China, Which Incoterm Is The Best?
Even industry insiders are unable to determine which Incoterm is ideal for importing from China. Both FOB and EXW have their supporters. To new importers: Unless you are familiar with the seller’s procedures, we advise you not to commit to the CIF Incoterm®. To prevent any unpleasant surprises when the cargo arrives, choose FOB Incoterm if the circumstances allow.
Usually, whoever is in charge of the freight determines the price. While having more control over transportation increases your ability to bargain for lower prices and reduces the possibility of unanticipated costs. Your trade can run smoothly if you and your Chinese supplier both have a thorough understanding of Incoterms® and engage in careful negotiation.
When Exporting To China, Which Incoterm Is The Best?
There may be differences in how importers and exporters view this issue. No Incoterm® can apply in all circumstances, as was stated above. Whatever Incoterm you choose, make sure that the sellers and the buyers are in a position where they can both gain.
As an exporter with little knowledge of Chinese customs clearance or other relevant importing regulations, FOB could greatly reduce your transportation obligations and risk. DDP could also be a good option if you are an experienced seller and your Chinese buyer is unable to manage the transportation. The transport will be entirely under your control at that point, giving you more advantages to increase your profit.
Incoterms Examples
An incoterm essentially consists of two parts: a city name and a three-letter code. You have no idea how far the supplier will ship your cargo without an Incoterm.
You can find that a supplier in China will always base their price on an incoterm and a city when it comes to importing from China. Let’s use two common incoterms as examples.
Fob Shenzhen Port
- You book shipping space loading at Shenzhen Port
- Your supplier handles the inland delivery to Shenzhen Port
- Your supplier handles Customs export declaration
- Your supplier pays all cost at the Shenzhen Port until departure
- You pay the shipping cost to get the B/L
- You pay all cost after the cargo leaves
Inland transportation to your door or warehouse is paid for, along with sea freight charges, destination port fees, Customs, VAT, tariffs, and duties.
To transport your cargo from the facility of your supplier to your destination, you can select a shipping agent.
Cif Sydney Port
- Your supplier book shipping space from a nearer loading port
- Your supplier handles the inland delivery to the port
- Your supplier handles Customs export declaration
- Your supplier pays all cost until the cargo arrives at Sydney Port
- You pay all cost after the cargo arrives at Sydney Port
You pay inland transportation to your door or warehouse, destination port fees, Customs, VAT, tariffs, and duties.
Final Words
Saving money on your freight management costs is insufficient in the market of today. Finding a logistics provider that can provide a wide range of value-added services and reduce transportation costs will help businesses ensure they are getting the best value for their money.
