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What are Terms of Trade? What is its relevance in export-import?

What are Terms of Trade? What is its relevance in export-import?

Export Sector

GlobalLinker Staff

GlobalLinker Staff

29 Sep 2021, 11:43 — 7 min read

Terms of Trade are a series of predefined commercial terms that become at the time of export/ import. These are rules that define the responsibility between buyer and seller as to who will handle customs clearance/ duties, carriage arrangement, and payment, risk of loss/damage, insurance, permits, permissions, etc. 

 

Terms of Trade come under the purview of the International Chamber of Commerce. The Terms of Trade rules are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of most commonly used terms in international trade. They are intended to reduce or remove altogether uncertainties arising from the differing interpretations of the rules in different countries. As such they are regularly incorporated into sales contracts worldwide.

 

Terms of Trade include a set of 11 International standard trade terms, that are divided into two broad groups:

 

Group 1 Terms of Trade: Apply to Sea and Inland Waterway Transport

 

  • FAS - Free Alongside Ship: Free alongside ship (FAS) is a contractual term used in the international export business that stipulates that the seller must arrange for the goods to be delivered in a designated port and next to a specific vessel for easier transfer to the waiting ship. Free alongside ship is one of a number of internationally recognized commercial terms used by export and import businesses.

  • FOB - Free on Board: The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the products are on board the vessel.  The buyer bears all costs from that moment onwards.

  • CFR - Cost and Freight: The seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the products are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

  • CIF - Cost, Insurance, and Freight: The seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the products are on the ship. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.

 

Group 2 Terms of Trade: Apply to Any Mode of Transport

 

  • EXW - Ex Works: EXW means that a buyer incurs the risks of bringing the goods to their final destination. The seller is only required to make the goods available for pickup at the seller's business location or another specified location.

  • FCA - Free Carrier: The seller delivers the goods, cleared for export, at a named place (possibly including the seller's own premises). The goods can be delivered to a carrier nominated by the buyer, or to another party nominated by the buyer. If delivery occurs at the seller's premises, or at any other location that is under the seller's control, the seller is responsible for loading the goods on to the buyer's carrier. However, if delivery occurs at any other place, the seller is deemed to have delivered the goods once their transport has arrived at the named place; the buyer is responsible for both unloading the goods and loading them onto their own carrier.

  • CPT - Carriage Paid To: The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such site is agreed between parties). The seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. However, the goods are considered to be delivered when the goods have been handed over to the first or main carrier, so that the risk transfers to buyer upon handing goods over to that carrier at the place of shipment in the country of Export.

  • CIP - Carriage and Insurance Paid To: The seller has the same responsibilities as CPT, but they also contract for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.

  • DAT - Delivered at Terminal: This term means that the seller delivers the goods to the buyer to the named terminal in the contract of sale, unloaded from the main carriage vehicle. The seller is responsible for making a safe delivery of goods to the named terminal, paying all transportation and export and transit customs clearance expenses. The seller bears the risks and costs associated with supplying the goods to the delivery terminal and unloading them, where the buyer becomes responsible for paying the duty and taxes, as well as any further carriage to a destination.

  • DAP - Delivered at Place: The seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place. After arrival of the goods in the country of destination, the customs clearance in the importing country needs to be completed by the buyer, e.g. import permit, documents required by customs, etc., including all customs duties and taxes.

  • DDP - Delivered Duty Paid: The seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination.  They must clear the products not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.

 

Also read: How to start an export business

 

Image source: shutterstock

 

References

https://www.investopedia.com/terms/i/incoterms.asp
https://en.wikipedia.org/wiki/Incoterms
https://incodocs.com/blog/incoterms-2020-explained-the-complete-guide/

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