Selection of trade terms
Trade terms, briefly, are the special terms for partitioning the obligation about risk, responsibilities and costs between the seller and buyer in the international trade. In the international trade, the most important thing that we must give priority to is to select the most suitable trade terms, which enable us to buy the commodities at a favorable price and take the least risk. When we select the trade terms, we must thoroughly take all the factors into consideration that closely relative with our interests including the costs of shipment, insurance, customs duties, the risks during transportation and formalities to be carried out in transit. All these decide what responsibilities should be bear in the trade. Consequently, after comparing the obligations with another party, we would find out the most appropriate trade term that could minimize the cost and the risk.
From the book, we can know that there are 13 different trade terms in the international trade. They differ from the respects of delivery, risk transfer, arrangement and payment for carriage insurance, import and export formalities and duties, as well as applicable mode of transportation. So it is different when you are the exporter or the importer in that the obligation to be shouldered is different in each trade term.
Since these different obligations to be shoulder are extremely different trade terms, both exporters and importers should take seriously to choose the best suitable trade term. Costs, risk and insurance are three factors that should be paid strong attention in the trade. Both side should deeply consider how many risks to be bear and how many costs and insurance to pay in the contract by using adoptive trade term. Being an exporter, you would better hope that the risk will end after the goods transferred in the front of warehouse or the factory and that the insurance and costs is none business of you on the way to the port of destination. But obviously this can’t be often possible because it means the importer will undertake so more obligation in the trade that he will unwilling to agree the contract. And contrarily, the importer also racks their brains to persuade us to choose DDP which benefits them a lot but does harm to the exporter.
So how to choose a suitable trade term? Here are some factors we should draw attention to:
1) mode of transport When you are choosing a trade term, the prior thing you should think is to choose a suitable mode of transport. If the goods are high weight, you would probably choose see transport. Faced with such situation, we can only choose to the trade terms that permit us to adopt see transport such as FOB, CFR, CIF and so on. While the goods are fit to be carried on the ground, we can choose the trade terms that permits us to adopt to all modes.
2) Fraud problem For the importer, there are so many frauds who disguise them to defraud the payment for goods that the importer should choose FOB and FCA. In this way, the importer himself can cooperate with a reliable carrier and know well the proceeding of the ship, which can prevent the seller in colluding with carrier. For the exporter, they themselves can also cooperate with their reliable carriers in the way of adopting CIF and CIP, because it can protect them in the dilemma that they lose both of their goods and the payment of goods.
3) The feature and trade volume of the good If the means of conveyance is quite difficult to satisfy, it is time for the exporter to choose the trade terms that don’t need to consider how to transport the goods.
4) Geographical conditions Especially when the buyer is located in the countries of the high latitude, we should take serious consideration to choose the trade terms in that the port of destination may be a frozen harbor.
Taken all these factors into consideration, we can conclude that if you are the exporter, you should choose CIF and CIP, while you are the importer, you should choose FOB and FCA. Only in this way can both of them farthest protect themselves in being defrauded and make largest profit.
1. 黄锡光、吴宝康. 国际贸易实务[M]. 复旦大学出版社，2011.9（2018.7 重印）