Incoterms in 2023: Comprehensive Guide to Understanding DAP, EXW, FOB, & More

Understanding International Commercial Terms in Asian Sourcing

Understanding Incoterms is crucial in dealing with Asian factories, especially in China. These globally recognized terms define the rights and obligations of parties in international trade, clarifying contractual obligations and protecting business interests.

Incoterms, published by the International Chamber of Commerce, establish responsibilities for buyers and sellers, payment obligations, and risk allocation during transportation. Mastery of Incoterms is essential for effective negotiation and risk management in global trade.

Sphere Resources, a prominent sourcing agency in China, offers extensive expertise in navigating these terms. With our guidance, businesses can ensure seamless and cost-effective sourcing operations from Asia.

Table of Contents

• Definitions of Key Concepts Surrounding Incoterms
• DAP Incoterms (Delivered at Place)
• EXW Incoterms (Ex Works)
• FOB Incoterms (Free On Board)
• CIF Incoterms (Cost, Insurance, And Freight)
• Other Incoterms (FCA, FAS, CFR, CPT, CIP, DPU, and DDP)

Definitions of Key Concepts Surrounding Incoterms

Before diving into the complexities of Incoterms, it’s essential to familiarize yourself with several foundational terms. These terms form the building blocks of international commercial terms and provide the context necessary to understand the broader framework.

Key Participants in International Trade

In any international trade transaction, two primary parties are involved:

• Seller: Typically, this is the manufacturer, trade companies, or wholesaler supplying the goods for sale.
• Buyer: This is the entity purchasing the goods and who will receive them upon final delivery.

Important Concepts in the Delivery Process

Several key concepts describe different stages and aspects of the delivery process:

1. Delivery: This refers to the point in the transaction process where the risk is transferred from the seller to the buyer.
2. Arrival: This denotes the point at which the delivery has been paid for. The location should be specified by the seller.
3. Free: This term refers to how far the seller has an obligation to deliver the goods to be picked up by the buyer.

Logistics Documentation and Responsibilities

A few critical terms pertain to the documentation involved in international trade and the responsibilities of various parties:

• Bill of Lading: This is essentially the receipt for shipping. It’s a detailed list of goods provided to, and signed by, the carrier and sent to the person cosigning or receiving the goods. Note that it’s ‘lading,’ NOT ‘landing.’
• Carrier: This party is obligated to transport the goods, which can be done by any means necessary, such as ship, rail, or truck.
• Freight Forwarder: This is a firm commonly contracted to make shipping arrangements.
• To Clear for Export: This term refers to obtaining permission to export goods.
• Terminal: This is the final destination of the shipment, such as a dock or warehouse. For Fulfilled by Amazon (FBA) sellers, this is most commonly an Amazon fulfillment center.

Each of these terms plays a specific role in international trade transactions, and understanding them is crucial for navigating international transactions successfully.

DAP Incoterms (Delivered At Place)

One of the commonly used Incoterms in international trade is Delivered At Place (DAP). Understanding the responsibilities and potential risks associated with DAP Incoterms can help businesses make informed decisions when negotiating contracts.

What Does DAP Mean?

Under the DAP Incoterms, the seller is responsible for delivering the goods, ready for unloading from the arriving means of transport, at a location named by the buyer. This location is typically the buyer’s premises. The buyer, on the other hand, is responsible for import clearance and any applicable local taxes or import duties. This term requires the seller to handle any export formalities in China, with the buyer taking care of any import formalities. While the seller contracts for carriage, risk transfers only upon delivery at the buyer’s premises.

Responsibilities of Seller and Buyer in DAP Incoterms

The obligations under DAP Incoterms for the seller and buyer are clearly outlined to minimize misunderstandings:

• Seller’s Obligations: Goods, commercial invoice and documentation, export packaging and marking, export licenses and customs formalities, pre-carriage and delivery, loading charges, cost of pre-shipment inspection, main carriage, delivery to named place of destination, and proof of delivery.
• Buyer’s Obligations: Payment for goods as per sales contract, unloading from arriving means of transportation, import formalities and duties, cost of import clearance pre-shipment inspection, and onward carriage and delivery to the buyer (depending on the named place).

The Potential Risks and Benefits of DAP Incoterms

Like all international terms of shipment, DAP Incoterms comes with its own set of potential benefits and risks that businesses need to be aware of:

• Potential Benefits: For the buyer, DAP provides clarity on who is accountable for any additional costs incurred throughout the shipping process, offering a low liability option. It assists with cash flow and inventory management, particularly for expensive goods requiring regular restocking. Also, it facilitates quicker fulfillment of smaller orders.
• Potential Risks: Despite the clear delineation of responsibilities, DAP can sometimes cause delays in practice due to the buyer’s obligation to handle all import duties, local taxes, and customs clearance. The seller bears any additional costs during the shipping process. Disputes can arise, for example, when the carrier incurs demurrage charges.

Understanding the nuances of DAP Incoterms can help businesses effectively manage their supply chain, reduce risks, and ensure smooth international transactions. As with all Incoterms, it’s crucial to consider your specific circumstances and requirements when deciding whether DAP is the right term for your business.

Real-World Example of Delivered At Place (DAP Incoterms)

This Incoterm is particularly common for land transport within Europe and Central Asia. However, potential issues can arise when there is a change in the mode of transport. For instance, suppose a shipment is delivered by air and requires import clearance formalities in the destination country. In that case, the buyer must take responsibility for these formalities while the goods sit at the airport.

The seller’s carrier must then be given the necessary paperwork to move the cargo from the airport to its final destination. The same holds for cross-ocean container shipments, where the seller must return the empty container at its own expense.

If the goods are damaged or lost before reaching the final destination, the seller might breach the contract, and the buyer may bear additional costs and risks if the goods are held in customs control. This is one of the common situations in DAP shipments. That’s why it’s beneficial for businesses to use a quality sourcing agency like Sphere Resources to arrange and handle all their hassles for them.

EXW Incoterms (Ex Works)

The term “Ex Works” or EXW Incoterms is widely recognized and commonly used in international trade, This term places the bulk of responsibility on the buyer, while minimizing the obligations of the seller.

What Does Ex Works Mean?

Ex Works Incoterms is one of the simplest terms of shipment that a supplier can provide. Under EXW Incoterms, the seller’s obligation is to make the item available for pickup at their factory or depot, adequately packaged. Beyond this point, the seller bears no responsibility for the product.

All costs associated with transporting the goods from the factory, export and import clearances, as well as insurance, fall under the buyer’s purview. The seller is not obligated to load the goods, but if they do, it’s at the buyer’s risk.

Responsibilities of Seller and Buyer in EXW Incoterms

The responsibilities under EXW Incoterms for the seller and buyer are clearly laid out:

• Seller’s Responsibilities: The seller’s obligations are minimal under EXW. Their main task is to ensure that the cargo is properly packaged for export and made available for collection at their location.
• Buyer’s Responsibilities: The buyer assumes all risks and costs once the goods are collected from the seller. These responsibilities include loading charges, delivery to port, export duty, taxes, customs clearance, terminal charges, loading on carriage, carriage charges, insurance, destination terminal charges, delivery to destination, unloading at destination, and import duty, taxes, and customs clearance.

The Potential Risks and Benefits of EXW Incoterms

Like all international terms of shipment, EXW Incoterms come with its unique set of potential benefits and risks:

• Potential Benefits: EXW allows buyers to consolidate multiple purchases and offers the possibility to anonymize a supplier. It is generally the least expensive option and enables buyers to purchase in the domestic market.
• Potential Risks: Under EXW Incoterms, the buyer assumes all risks and costs. It requires having a trusted representative in the country from which the goods are purchased. This is one of the many pros of using a sourcing company to represent your business and handle the complexities for you. Unfamiliarity with the process and costs could result in the buyer paying more than intended.

Businesses need to understand the intricacies of the EXW Incoterms to manage their supply chain effectively, minimize risks, and ensure smooth international transactions. Considering the specifics of your business needs and situation is crucial when deciding if Ex Works Incoterms is the suitable term for you.

Real-World Example Of Ex Works (EXW Incoterms)

Let’s consider a real-world example of EXW shipping terms for a couple of pallets of goods from Fujian province in China to Vancouver. The sea freight cost was just $98, but the miscellaneous fees totaled $300. The bulk of these costs were for overland freight to move the goods from the factory to the port, while the rest were mostly document-related fees.

Ultimately, the total cost of freight was around $631, with only $98 of that cost being for sea freight. This example illustrates how different types of costs can add up and why it’s important to account for all potential expenses when planning international shipments.

FOB Incoterms (Free On Board)

Free On Board (FOB) is another essential Incoterm used in international trade that balances the responsibilities between the buyer and the seller.

What Does FOB Mean?

The FOB Incoterms dictates that the goods are deemed delivered by the seller to the buyer when they are loaded on board the ship nominated by the buyer at the named port of shipment. The term ‘free’ implies the seller’s obligation to deliver goods to a specific location, ready for export. ‘On board’ indicates that the goods are on the ship. Hence, under FOB, the seller retains ownership and responsibility for the goods until they are loaded ‘on board’ a shipping vessel, at which point all liability transfers to the buyer. The seller clears the goods for export, but not import.

Responsibilities of Seller and Buyer in FOB Incoterms

In FOB Incoterms, the responsibilities of the seller and buyer are as follows:

• Seller’s Responsibilities: The seller is responsible for export packaging, loading charges at their warehouse, delivery to the port, export duty, taxes, customs clearance, Origin Terminal Handling Charges (OTHC), and costs to load the cargo onto the carriage.
• Buyer’s Responsibilities: The buyer is in charge of freight charges, insurance (if they choose to purchase it), destination terminal handling charges (DTHC), delivery to destination, unloading at destination, and import duty, taxes, and customs clearance. In case of any dunnage, penalties, or delays, the buyer must cover the charges and associated risks.

The Potential Risks and Benefits of FOB Incoterms

FOB Incoterms bring its own set of potential advantages and risks:

• Potential Benefits: FOB gives both parties control over the cargo and helps the buyer save costs, choose the shipping method, and lower dependence on the supplier. The seller’s responsibility ends once they load the cargo onto the vessel.
• Potential Risks: FOB can be complicated for new buyers, as they have to perform additional functions. There are potential situations where the buyer might have to cover costs before the goods are on board the vessel. For the seller, the disadvantages are minimal but they must still arrange and pay for export permits and transit from the origin point (warehouse) to the shipping vessel.

In conclusion, understanding FOB Incoterms is crucial for businesses involved in international trade, as it balances responsibility and risk between the buyer and seller. Deciding whether FOB is the right term for your business requires careful consideration of the specifics of your operation.

Real-World Example Of Free On Board (FOB Incoterms)

Let’s consider a real-world example of FOB Incoterms. Suppose a buyer from the United States is purchasing a container of auto parts from a seller in China. The seller agrees to FOB Origin terms, meaning they are responsible for costs and risks associated with transporting the goods to the port of departure.

The buyer then covers the cost of freight and insurance, as well as import duties and other taxes associated with bringing the goods into their country. However, if the companies agreed to FOB Destination terms, the buyer would pay for the cost of goods and freight, while the seller bears responsibility for delivering them to the destination.

CIF Incoterms (Cost, Insurance, and Freight)

Cost, Insurance, and Freight (CIF) is a frequently used Incoterm in international trade. This term indicates who is responsible for the costs associated with shipping, freight, and insurance. It’s important to note that CIF only applies to sea and inland waterway transportation.

What Does CIF Mean?

Under the CIF Incoterms, the seller pays for all shipping costs, including insurance and freight, while the buyer is only responsible for the cost of goods and their unloading at the destination port. The risk and responsibility for the goods are transferred from the seller to the buyer when the goods pass the ship’s rail at the port of shipment.

Responsibilities of Seller and Buyer in CIF Incoterms

In a CIF agreement, the responsibilities of the seller and buyer are as follows:

• Seller’s Responsibilities: The seller is responsible for purchasing export licenses for the product, providing inspections of products, handling any charges or fees for shipping and loading the goods, covering packaging costs for exporting the cargo, paying fees for customs clearance, duty, and taxes (for exporting), bearing the cost of shipping the freight via sea or waterway from the seller’s port to the buyer’s port of destination, covering the cost of insuring the shipment up to the buyer’s port of destination, covering the cost of any damage or destruction to the goods, and delivering the goods to the ship within the agreed-upon timeframe and providing proof of delivery and loading.
• Buyer’s Responsibilities: Once the goods have arrived at the buyer’s destination port, the buyer assumes responsibility for the costs associated with importing and delivering the goods. Some of these costs include unloading the product at the port terminal, transferring the product within the terminal and to the delivery site, covering custom duty charges associated with importing the goods, and charges for transporting, unloading, and delivering the goods to the final destination.

The Potential Risks and Benefits of CIF Incoterms

CIF Incoterms has its own set of potential benefits and risks:

• Potential Benefits: One of the main advantages for the sellers is that they often obtain cheap insurance by utilizing CIF. The only advantage for the buyer is that they do not need to declare the freight shipment to their own insurer because it is already covered and paid for by the seller. If an issue occurs at sea, such as piracy or damage caused by bad weather, insurance paid for by the seller can help alleviate some of the losses. If the buyer is unsure of the product’s export requirements, CIF obligates the seller to ensure their products can be correctly exported.
• Potential Risks: A major disadvantage of CIF is that the seller can only use it for specific types of international trade. This means sellers must ensure they obtain the right shipping policy for the entire cargo journey. The disadvantage to the buyer can be that the insurer may well not be too enthusiastic about meeting any claim. Also, some countries do not permit CIF imports, requiring the buyer to insure with an insurer in its own country.

In conclusion, CIF Incoterms more likely favors the buyer as it places most of the responsibilities and risks on the seller. However, it is crucial for both parties to understand the specifics of the agreement to make sure they are making the best decision for their business.

Real-World Example of Cost, Insurance, and Freight (CIF Incoterms)

Suppose that Best Buy orders 1,000 flat-screen televisions from Sony using a CIF agreement to Kobe, a Japanese port. Sony delivers the order to the port and loads the products onto the ship for transport. Once loaded, the risk of loss is transferred from Sony to Best Buy.

Sony has purchased insurance and pays for freight and shipping costs until the goods reach the buyer’s port. During the journey, a fire breaks out in one of the cargo bays, damaging the cargo. Because a CIF agreement is in place, Best Buy can file an insurance claim to cover the cost of the damaged goods. This is one of the real-world examples of CIF Incoterms.

Other Incoterms Explained

In the vast landscape of international trade, we often encounter various Incoterms beyond DAP, EXW, CIF, and FOB. These additional terms play equally critical roles in outlining the responsibilities, costs, and risks involved in the delivery of goods from sellers to buyers. Each term offers a unique set of rules that governs a specific scenario in international shipping.

FCA – Free Carrier

Free Carrier, abbreviated as FCA, refers to the term where the seller fulfills their obligation once the goods are delivered to the carrier or another person selected by the buyer, at the seller’s location or another pre-specified place. The transition of risk occurs at this point. It is crucial for the buyer and seller to explicitly pinpoint the exact location within the delivery place as the risk to the buyer starts from this particular point.

FAS – Free Alongside Ship

In the Free Alongside Ship term (FAS), the seller’s obligation is met when the goods are positioned next to the vessel chosen by the buyer, for instance, on a quay or barge at a predetermined port of shipment. The risk of loss or damage to the goods is transferred to the buyer once the goods are placed alongside the ship. From this point onward, the buyer becomes liable for all ensuing costs.

CFR – Cost and Freight

The term Cost and Freight (CFR) stipulates that the seller delivers the goods on board the vessel or ensures the goods are already delivered. The risk of loss or damage to the goods is transferred to the buyer when the goods are aboard the ship. However, the seller must arrange and bear the costs of freight necessary to transport the goods to the named port of destination.

CPT – Carriage Paid To

Carriage Paid To (CPT) sees the seller delivering the goods to a carrier or another entity nominated by the seller at an agreed-upon location, assuming such a location is agreed upon between the parties. In this arrangement, the seller must arrange and pay the carriage costs required to transport the goods to the predetermined destination.

CIP – Carriage and Insurance Paid To

Under the Carriage and Insurance Paid To (CIP) terms, the seller holds the same responsibilities as with CPT, but also contracts for insurance cover against the buyer’s risk of loss or damage to the goods during carriage. It’s important for buyers to note that under CIP, the seller is obligated to obtain insurance only on minimum cover. If the buyer requires more extensive insurance protection, they must either expressly agree on this with the seller or arrange for additional insurance on their own.

DPU – Delivered at Place Unloaded (Previously DAT (Delivered At Terminal))

Replacing the previous Incoterm DAT (Delivered At Terminal), Delivered At Place Unloaded (DPU) implies that the seller fulfills their obligations when the goods, once unloaded from the arriving means of transport, are available to the buyer at the named destination place. The seller assumes all risks involved in transporting and unloading the goods at the determined destination place.

DDP – Delivered Duty Paid

In the Delivered Duty Paid (DDP) arrangement, the seller’s obligations are fulfilled when the goods are made available to the buyer, cleared for import, and ready for unloading at the named place of destination. The seller takes on all the costs and risks involved in getting the goods to the place of destination. This includes clearing the goods for both export and import, paying any duty for both export and import, and carrying out all customs formalities.

Sourcing & Logistics Guidance from Sphere Resources

Sphere Resources offers various sourcing and trade services, and has the following expert advice for businesses:

• Understand the Incoterms: Knowing the specifics of each term is vital in avoiding disputes and ensuring smooth transactions. Understanding these terms allows businesses to make informed decisions about which term is most suitable for their transactions.
• Negotiate terms with factories: Don’t just accept the first offer. Be clear about what is and isn’t included in the price, and try to negotiate the best possible terms. This might include discussing the cost of freight, insurance, and other charges associated with shipping goods.
• Consider the type of transaction: Some terms work better for certain types of transactions than others. For example, CIF might be more appropriate for larger, less time-sensitive shipments, while DAP might be more suitable for smaller, more urgent deliveries.

Understanding Incoterms is crucial for businesses sourcing from Asia. It’s a complex process that involves many different factors, and it can have a significant impact on the success of your business. Sphere Resources has the expertise and commitment to guide businesses through this process and help them navigate these complexities.

If your business needs assistance with international commercial terms, don’t hesitate to reach out to Sphere Resources. Our team is ready to help you navigate the complexities of international trade and ensure your business’s success. Reach out to us for more assistance.