The selection of trade terms
As international transaction inevitably involves who is responsible for the shipment, insurance, risks and customs duties, ect. It is difficult to stipulate in detail for both the buyers’ or sellers’ obligations under contracts, hence the necessity of trade terms. Trade terms, are abbreviations of English letters, prescribing specific certain responsibilities, costs and risks between the two parties. In a word, the use of trade terms considerably save time and cost of the dispute and promotes the development of international trade. There are some influential trade conventions. The newest version, INCOTERNS2010 clarifies 11 types of trade terms. FOB, CIF, CFR are seen most often. Besides, the others are CPT, EXW, CIP, DAT, FCA, DAP, DDP and FAS.
With so many trade terms, the selection of different trade terms should base on well distinction of them. To identify the similarities and differences of different trade terms, we traditionally focus on several aspects as follows:
First, the place of delivery of goods for both the buyer and the seller. Second, applicable mode of transport. Third, the boundary of risk transfer between two parties. Forth, division of major expenses and obligations(to deal with transport, insurance, import and export duties and documents). Take FOB and CIF for example, both of them can be used only for sea or inland waterway transport. The place of delivery is both on board named vessel at the named port. CIF and FOB are the same in terms of the risks borne by the buyer or the seller, because their risk divisions are the same. The seller assumes all the risks or damage to the goods until they have passed over the ship’s rail at the port of shipment. However, the obligation of carriage and insurance is quite different between CIF and FOB. When use CIF, it is the seller who contracts for and pays costs of carriage and insurance, and FOB is the opposite.
In the international trade, optional trade terms directly related to the interests of exporter and importer. Thus, in negotiating the transaction, the two parties both consider things from their own advantages and disadvantages, all of their wish is to adopt favorable trade terms, in order to successfully execute the contract and increase benefits. So different trade terms make big differences to the importer and exporter. As for importers and exporters, the choice of trade terms should consider several following factors:
First, characteristics and conditions of goods. In international trade, there are various kinds of goods with different characteristics, such as size, volume, shelf life and so on. Therefore, they have different deeds in packing and transport. The selection of means of transportation would greatly affect the party responsible for arranging transportation due to the different freight expenses. In a word, when choosing a trade term, the characteristics and conditions of goods should be taken into consideration to select the appropriate packing and transportation mode, ensuring the best protection of goods and reduce the cost as much as possible.
Second, consider the transportation. Different mode of transport has their different uses in international trade. For example, FOB, CFR, CIF is only suitable for sea and inland waterway transport while FCA, CPT, CIP can be applied to various modes of transport. Any blind choice of mode of transport will bring a lot of inconvenience and even serious losses.
Third, the level of risk at sea. International trade generally requires long-distance transport of goods, which means there are all kinds of transportation risks, such as natural disasters, accidents and other risks that would happen at any time. Therefore, the negotiation between importer and exporter should be based on the risk profile of different period of time in different regions. Make sure the appropriate trade term is used.
Forth, pay attention to the port of destination, especially for exporters. For instance, the famous port of Canada, Quebec has a four-month freeze-up every year. Ships cannot enter the port during this period. When negotiating with the buyer, the exporter should consider the arrival time of the goods at the destination port so as to avoid serious losses cause by the failure of goods to arrive at stipulated time.
In addition, both the importer and exporter should consider whether the trade terms they use are beneficial to the country’s economic development and in line with the principle of equality and mutual benefit.
In summary, all the above factors should be taken into full consideration to choose the suitable trade terms in order to achieve best interests and avoid disputes.
1. 黄锡光 吴宝康.国际贸易实务（第三版）.复旦大学出版社