Trade terms refer to the division of responsibilities between parties to a contract, by using abbreviation of English letters.^[1] There are 11 trade terms which are divided into four groups. Group C are CFR , CIF, CPT and CIP. Group D are DDP, DAT, and DAP. Group E is EXW. And Group F are FCA, FAS and FOB. In terms of the seller’s obligations, expenses and risks, Group D is the largest, while Group E is the smallest. Therefore, the exporter selects E group is appropriate, and the importer selects Group D.

 

About the trade term FOB, the seller’s obligation is to deliver the goods in compliance with the contract to the ship designated by the buyer at the time and the port of shipment specified in the contract, and notify the buyer in a timely manner. At the same time, the seller should bear all costs and risks before the goods are delivered to the port of shipment. The principle of risk transfer in FOB contract is that the risk is borne by the buyer after the goods are loaded at the port of shipment. According to FOB conditions, the buyer is required to ship the goods to the designated port of shipment at the agreed time limit. For instance, We imports rubber from Brazil on FOB terms, but due to the difficulty of chartering the ship, we are unable to pick up the goods at the port of shipment within the time stipulated in the contract, resulting in a longer period of cargo and other ships. So it's reasonable for the Brazilian side to request the cancellation of the contract and to make a claim for damages to us. Because we failed to send the ship carrying the goods in time, it is a breach of contract.

 

About the trade term CIF, one of the important characteristics of CIF contract is that as long as the documents are complete (including bills of lading, insurance policies and commercial invoices) and meet the requirements of contract, then the seller’s submission of documents is presumed to fulfill the obligation of delivery, the buyer in accordance with the documents to fulfill the payment obligations.

 

About the trade term CFR, the risk demarcation limit of the CFR, the place of delivery and the person responsible for the formalities are the same as FOB and CIF. CFR is transported by the seller and the buyer is responsible for the insurance. The risk is divided on the side of the ship at the port of shipment. Therefore, the seller shall promptly issue a notice of shipment to the buyer after shipment. If the buyer is not able to insure in time due to the seller's failure to send a timely notice of shipment, the loss will be borne by the seller. In terms of the seller's responsibilities and costs, the CIF is larger than CFR and FOB. As an exporter, the choice of FOB is better.

 

The three trade terms of FCA, CPT and CIP are actually the promotions of the above three trade terms. Their scope of application is extended to any mode of transport.

 

In choosing trade terms, if the goods require specific means of transport and the exporting enterprise is unable to complete them, the Group F term may be chosen and placed by the importer to arrange the transport. If the volume is too small and there is no direct liner transport, the cost is too high and the risk is increased. It’s best to choose the term  responsible for arranging transportation by the other party. For example, the exporter can use Group F terms, while the importer can use Group C or Group D terms.

 

The choice of transportation route is not only related to the level of freight but also the size of the risk and the handling of the relevant insurance matters. If the exporter is unwilling to take on too much risk, it may choose Group E, Group F, Group C terms and try not to choose Group D; On the contrary, if the importer is unwilling to bear the risk of the goods in transit, it seeks to use Group D terms.

 

As a result, to choose suitable trade terms, the exporter or the importer should consider the characteristics of the goods, the size of the volume, the appropriate means of transport and some specific situations.

 

Reference:

1: Huang Xiguang , International Trade Affairs(Shanghai: Fudan University Press, 2011), p45.