The Selection of Trade Terms
Trade terms refer to the division of responsibilities between parties to a contract, by using abbreviation of letters, between a buyer and a seller in a sale including selling prices, the payment of costs such as shipping, insurance and customs; the arrangement of the performance of these activities; and the determination of the transfer of title and goods.
There are six main International Trade Terms in INCOTERMS 2000. They are Free On Board (FOB... named port of shipment), Cost, Insurance and Freight (CIF... named port of destination), Cost and Freight (CFR... named port of destination), Free Carrier (FCA... named place), Carriage Paid To (CPT... named port of destination) and Carriage and Insurance Paid To (CIP... named port of destination).
No matter in FOB, CFR or CIF, the importer or the exporter assumes the same risks. When the goods have passed over the ship’s rail at the port of shipment, all risks of loss or damage to the goods will be transferred from the exporter to the importer. In terms of costs, the FOB term requires the exporter to pay all costs until the goods have passed the ship’s rail on the named vessel as well as all costs relating to export including duties, taxes and customs formalities. After passing the ship’s rail, the importer should bear all costs. But in CIF and CFR contract, the exporter pays all costs of carriage and insurance until the goods have been delivered to the named port of shipment and passed over the ship’s rail, plus costs of loading, carriage to the port of destination and normal unloading. In terms of insurance, the CIF term requires the exporter to pay the insurance for 110 percent of the value of the contract to the named port of destination. While in FOB and CFR contract, the exporter has no obligation to the importer for insurance, but he usually arranges for cargo insurance for himself.
Here are some factors that the importer or the exporter should take into consideration when they select the trade terms. The first one is the port condition. Different ports around the world have different loading and unloading conditions and different costs. When we select the trade terms, we must consider the port condition. Supposed we are exporters, and the loading and unloading condition at the destination port are very poor, we will choose the FOB term. While we are importers, we would prefer CIF or CFR. For example, a Chinese trading company is going to export a batch of goods to Canada. The importer asks to unload the goods at the port of Quebec, Canada no later than November. We all know that Quebec has a four-month freeze every year and the port has frozen in November. In order to reduce the loss, the company would better select the FOB term.
The second one is the type of transportation. Each trade term has its own mode of transportation. FOB, CIF and CFR are only applicable to inland river transportation and ocean transportation. If the importer or the exporter uses the air transportation, railway transportation or road transportation, they’d better select FCA, CPI or CIP. For example, an importer of television sets in Mumbai, India, is talking over the buying and selling of TV sets with manufacturers in Kyoto, Japan. The goods are loaded into containers at a container depot in Kyoto, 5km from the manufacturer, and then trucked by commercial lorries to Yokohama, where they are then shipped to Mumbai. In this case, since the goods are transported in containers and multimodal transportation, it is better to use FCA, CPT or CIP at this time.
In a word, whether you are an exporter or importer, you have to bear different levels of responsibility depending on the trade term you choose. According to the information about the port condition and the transportation you will use, you can select a suitable trade term for you.