Chapter 9  International Logistics

9.4 International Trade Terminology I

    The purpose of Incoterms is to provide a set of international rules for the interpretation of the most commonly used trade terms in international trade. Therefore, the uncertainties of different in-terpretations on such terms in different countries can be avoided or at least reduced to a consider-able degree. The International Chamber of Commerce（ICC）first published a set of international rules for the interpretation of trade terms in 1936. These rules were known as Incoterms 1936. Amen-dments and additions were later made in 1953, 1967, 1976, 1980, 1990, 2000, and prese-ntly 2010 in order to bring the rules in accordance with current international trade practices. Incoterms 2010,were launched in September 2010 and became effective on January 1, 2011.

    The two main categories of Incoterms 2010 are now organized by transport modes. Used in intern-ational as well as in domestic contracts for the first time, the new groups aim to simplify the drafting of contracts and help avoid misunderstandings by clearly stipulating the obligations of buyers and sellers.

    Group 1. Incoterms that apply to any mode of transport are:

    （1）Ex Works（EXW）. Seller fulfills his obligations by having the cargoes available for the buyer to pick up at his premises or another named place（i.e., plant, warehouse, etc.）. Buyer undertakes all risks and costs starting when he picks up the products at the seller’s location until the products are delivered to his place. Seller has no obligation to load the cargoes or clear them for export.

    （2）Free Carrier（FCA）. Seller delivers the cargoes cleared for export to the carrier stipulated by the buyer or another party authorized to pick up cargoes at the seller’s premises or another named place. Buyer bears all risks and costs associated with delivery of cargoes to final destination includ-ing transportation after delivery to carrier and any customs fees to import the products into a forei-gn country.

    （3）Carriage Paid to（CPT）. Seller clears the cargoes for export and delivers them to the carrier and pay for the carrier to the named place of destination. Seller is responsible for the transportation costs associated with delivering cargoes to the named place of destination but is not responsible for buying insurance.

    （4）Carriage and Insurance Paid to（CIP）. Seller clears the cargoes for export and delivers them to the carrier or another person stipulated by the seller at a named place of shipment. Seller is resp-onsible for the transportation costs associated with delivering cargoes and procuring minimum insu-rance coverage to the named place of destination.

    （5）Delivered at Terminal（DAT）. Seller clears the cargoes for export and bears all risks and costs associated with delivering the cargoes and unloading them at the terminal at the named port or place of destination. Buyer bears all costs and risks from this point forward including clearing the cargoes for import at the named country of destination.

    （6）Delivered at Place（DAP）. Seller clears the cargoes for export and bears all risks and costs associated with delivering the cargoes to the named place of destination not unloaded. Buyer bears all costs and risks associated with unloading the goods and clearing customs to import the cargoes into the named country of destination.

    （7）Delivered Duty Paid（DDP）. Seller bears all risks and costs associated with delivering the cargoes to the named place of destination ready for unloading and cleared for import.

    Group 2. Incoterms that apply to sea and inland waterway transport only:

    （1）Free Alongside Ship（FAS）. Seller clears the cargoes for export and delivers them when they are placed alongside the ship at the named port of shipment. Buyer bears all risks/costs for cargoes from this point forward.

    （2）Free on Board（FOB）. Seller clears the cargoes for export and delivers them when they are onboard the ship at the named port of shipment. Buyer bears all risks/costs for goods from this moment forward.

    （3）Cost and Freight（CFR）. Seller clears the cargoes for export and delivers them when they are onboard the ship at the port of shipment. Seller bears the cost of freight to the named port of desti-nation. Buyer is responsible for all risks for cargoes from the time cargoes have been delivered on board the ship at the port of shipment.

    （4）Cost, Insurance, and Freight（CIF）. Seller clears the cargoes for export and delivers them when they are onboard the ship at the port of shipment. Seller is responsible for the cost of freight and insurance to the named port of destination. Seller’s insurance requirement is only for mini-mum cover. Buyer bears all costs associated with unloading the cargoes at the named port of desti-nation and clearing them for import. Risks are passed from seller to buyer once the cargoes are on-board the ship at the port of shipment. 

    It can be readily seen from the above Incoterm grouping that the obligations of the seller with regard to costs and delivery risks escalate from the minimum EXW to the maximum DDP.

    When applying an Incoterm in the sales contract, the parties should ensure that the term selected is appropriate to the agreed point of delivery and the mode of transportation to be used. For exam-ple, CFR, CIF, FAS, and FOB apply only if a vessel is used for delivery, i.e. for transportation by sea or inland waterway. All of the other terms may be used as applicable for any mode of transportation.

    Sometimes, it is required to quote in different prices based on Incoterm terminology. The follow-ings are the formula used to convert between different terms.

    FOB price is converted into CFR or CIF price:

    CFR=FOB + Freight

    CIF=（FOB + Freight）/［1 – Insurance premium rate×（1 + Mark – up percentage ）］

    CIF price is converted into FOB or CFR price:

    FOB=CIF – Insurance premium – Freight

    CFR=CIF – Insurance premium

    CFR price is converted into FOB or CIF price:

    FOB=CFR – Freight

    CIF=CFR/[1 – Insurance premium rate×（1 + Mark – up percentage ）]