The Selection of Trade Terms

20160120108   宋晓芬

 

Trade terms refer to the division of responsibilities between parties to a contract, by using abbreviation of English 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 to goods. During the process of international transaction, there are six main international trade terms in INCOTERMS 2000, including Free on Board (FOB), Cost, Insurance and Freight (CIF), Cost and Freight (CFR), Free Carrier (FCA), Carriage Paid To (CPT), Carriage and Insurance Paid To (CIP). All of them are selected to stipulate in detail for both parties’ responsibilities and obligations to contract, thereby avoiding the trigger for the dispute and promoting the development of international trade.

 

As for the exporter and importer, There are various responsibilities and obligations in regard to different trade terms. Take Free on Board, Insurance and Freight and Cost and Freight as typical examples. In terms of FOB, seller completes delivery when the goods pass the ship’s rail at the named port of shipment and buyer has to bear all costs and risks of loss of or damage to the goods from the point of delivery.  Different to FOB, in terms of CIF, seller completes delivery when the goods pass the ship’s rail at the port of shipment. The seller must pay the costs and freight necessary to bring to the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any additional costs occurring after the time of delivery, are transferred from the seller to the buyer. However, in terms of CFR, seller delivers when the goods pass the ship’s rail at the port of shipment. The seller must pay the costs and freight necessary to bring to the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer at that point. From the meanings above, we can conclude that both parties entail different responsibilities and expenses in the whole transaction. First, both parties assume different responsibilities and costs of transport. Under FOB terms, the transportation responsibility and the expense are borne by the buyer. Under CFR and CIF terms, both the transportation responsibility and the expense are borne by the seller. Second, both sides assume different risk liability and charge. Under the terms of FOB and CFR, neither the buyer nor the seller is obliged to provide insurance. If necessary, the buyer should take care of the insurance. On the basis of CIF, the seller bears the responsibility and expense of insurance. Finally, there are differences in the relationship between risk transfer point and cost transfer point. For FOB, the risk transfer point and expense transfer point are in the same place, both at the loading port. For CFR and CIF, the risk transfer point and expense transfer point are two different places, among which the risk transfer point is at the loading port and the expense transfer point is at the destination port.

 

In foreign trade practice, on account of the lack of further understanding of trade terms and actual situation, many enterprises and personnel involved in foreign trade are likely to choose improper trade terms, causing the losses to enterprises that should not occur. Therefore, it is is crucial for both parties to use appropriate trade terms in the process of signing a contract. In May 2017, Murong Furniture received an order from a Spanish customer for five 40-foot containers of sofas, which were delivered on CIF BARCELONA before the end of September 2017. At that time, the salesman who signed the order did not consider the difficulty of booking shipping space and the freight increase that might happen due to the coming of the National Day holiday. As a result, the freight increased to 9000 dollars when shipping, and at the same time, there was an extra 100 dollars of insurance fee. Murong either delayed the delivery and compensated the customers, or it took on the losses caused by the freight increase and the insurance fee. Therefore, in order to avoid the additional losses brought by wrong choice of trade terms, for export enterprises, it is necessary to choose appropriate trade terms according to the actual trade situation.

 

To sum up, the selection of trade terms is of great importance in the international trade of goods. Proper selection of trade terms is conducive to the realization of vital interests of both parties, the settlement of trade disputes and the overall development of international trade. Along with the tide of economic globalization and the development of China's import and export trade, inland enterprises must keep pace with The Times, seek truth from facts, and choose appropriate trade terms according to local conditions when carrying out import and export trade.

(843 words)

Reference：

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[2] 胡月秀. 出口企业贸易术语选择问题探讨[J]. 国际经贸, 2014

[3] 黎孝先. 国际贸易实务[M]. 对外经济贸易大学出版社, 2011