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Incoterms explained for first-time exporters in Asia

Incoterms explained simply: they are short codes that set who pays for shipping and who bears the risk, stage by stage, in a sale. The International Chamber of Commerce (ICC) publishes them. Use the same code as your buyer, and you avoid most fights about cost and damage.

This guide covers the current edition, Incoterms 2010. It has been in force since January 1, 2011. It lists eleven rules. Here is what a first-time exporter needs to know.

Sources: ICC, Incoterms 2010 page (iccwbo.org/resources-for-business/incoterms-rules/incoterms-2010/); Massachusetts Export Center, Incoterms 2010 Reference Chart, summarising the ICC rules.

What an Incoterm actually decides

An Incoterm answers three questions. Who books and pays for transport? Who pays for export and import paperwork and duty? And at what exact point does the risk of loss or damage move from seller to buyer?

Cost and risk are not always handed over at the same point. That is the part that surprises new exporters. You can pay for the freight and still have no risk once the goods are on the ship.

An Incoterm does not cover everything. It also leaves out when the buyer must pay and who owns the goods. Those points belong in your sales contract. Also write the edition in the contract, for example "FOB Singapore, Incoterms 2010." That way both sides read the same rulebook.

Sources: ICC, Incoterms 2010 page; Massachusetts Export Center, Incoterms 2010 Reference Chart.

Two groups of rules

The eleven rules fall into two sets. One set fits every kind of transport: truck, rail, air, sea, or a mix. It holds seven rules: EXW, FCA, CPT, CIP, DAT, DAP and DDP.

The other set is meant for sea and inland waterway transport only. It holds four rules: FAS, FOB, CFR and CIF.

A common mistake is to use a sea rule for a container that goes by truck to a terminal first. If the goods are handed to a carrier before they are loaded on a ship, the any-mode rules fit better. For example, many guides suggest FCA instead of FOB, and CIP instead of CIF, in that case.

Sources: Massachusetts Export Center, Incoterms 2010 Reference Chart; ICC, Incoterms 2010 page.

EXW: the buyer does almost everything

Under EXW, short for Ex Works, the goods are ready for the buyer to collect at the seller's own premises, such as a factory or warehouse. The seller does not load the truck. The Massachusetts Export Center chart, which summarises the ICC rules, says EXW is the minimum obligation for a seller.

From that moment, the buyer arranges transport and carries the risk. The buyer also handles export clearance, which many buyers abroad find hard to do from another country.

EXW looks easy for a new exporter, because your job ends at the factory door. The price is simple to quote. But the buyer may struggle with local paperwork, and that can delay your payment or your next order. Many exporters prefer FCA, where the seller clears the goods for export and hands them to the buyer's carrier.

Sources: Massachusetts Export Center, Incoterms 2010 Reference Chart.

FOB: the seller loads the ship

FOB means Free On Board. Here the seller puts the goods onto the ship that the buyer names, at the named port of shipment. The risk of loss or damage moves to the buyer when the goods sit on the vessel.

Under Incoterms 2010, the point is "on board the vessel." Older versions spoke of the ship's rail. If a buyer or a bank still uses the old wording, check what they mean.

With FOB, the seller pays to get the goods to the port and onto the ship, and pays for export clearance. The buyer books the ship, pays the sea freight, and takes the risk from the moment of loading. Example: a Vietnamese furniture maker sells "FOB Ho Chi Minh City." The maker loads the container at that port. After loading, the buyer carries the risk and pays the freight.

Sources: Massachusetts Export Center, Incoterms 2010 Reference Chart; ICC, Incoterms 2010 page.

CIF: the seller pays freight and insurance

CIF means Cost, Insurance and Freight. The seller delivers the goods on board the vessel and pays the freight to the named port of destination. The seller also buys insurance for the buyer's benefit against loss or damage during the voyage.

Here is the key point. Under CIF the buyer still takes over the risk as soon as the goods are loaded at the port of shipment. The seller covers the freight, yet the buyer holds the risk during the voyage. That is why the insurance is there. If the ship is damaged at sea, the buyer claims on the policy.

CFR is the same as CIF without the insurance. The seller pays the freight, and the buyer insures the goods if it wants cover.

For a new exporter, CIF can help win a sale. The buyer sees one landed shipping price. But you must price the freight and insurance correctly before the ship sails. Freight rates move, so check a current quote before you commit to a fixed price.

Sources: Massachusetts Export Center, Incoterms 2010 Reference Chart.

How to choose and what to do next

Start with how much control you want. EXW gives the least duty and the least control. DDP gives the most: the seller delivers to the buyer's door, cleared for import, and pays all duty and costs. Most first-time exporters sit between these two, with FCA, FOB or CIF.

Follow these steps before you quote:

  • Pick the rule that fits how the goods will really travel.
  • Name the exact port or place, not just the country.
  • State "Incoterms 2010" in the quote and the contract.
  • Ask your freight forwarder to check the cost of each option.
  • Ask your insurer what cover you need if you sell on CIF.

The Massachusetts Export Center chart advises that you check an official ICC copy of Incoterms 2010 before you quote or use a rule. This guide is general information only, not a legal opinion. Before you sign a big or odd export deal, have a trade lawyer or your freight forwarder read the contract.

Sources: Massachusetts Export Center, Incoterms 2010 Reference Chart; ICC, Incoterms 2010 page.

Sources

  • International Chamber of Commerce, Incoterms 2010: iccwbo.org/resources-for-business/incoterms-rules/incoterms-2010/
  • Massachusetts Export Center, Incoterms 2010 Reference Chart: msbdc.org/export/ResourceCenter/logistics/Incoterms%202010%20Flyer.pdf