The term Incoterms refers to a concept used in international trade. These are acronyms that indicate who is responsible for specific transportation expenses and other hazards. Of these, EXW, FOB, and CIF are the most frequent ones you will encounter.
The important thing for most importers to know about these terms is that they can drastically change the amount you pay for your shipment, even though they come with certain legalities. FOB is in the middle of CIF and EXW, which are typically the most and least expensive, respectively.
The second quote will be substantially less expensive if two suppliers quote you FOB and one quotes EXW shipping terms while the other quotes almost identical prices. Many new importers get burned because they are unaware of the cost implications of different shipment methods and Incoterms. We’ll explain every definition of each of these terms in this article.
In this article you will learn:
- Why Do We Use Incoterms?
- EXW (Ex Works: Supplier’s Location)
- FOB: Chinese port of shipment (Free on Board)
- CFR and CIF stand for Cost and Freight: Your Home Port and Cost Insurance and Freight
- Drawbacks with EXW Freight
- An Increase in Suppliers Offering EXW Shipment Terms
- Do Freight Forwarders Give a Damn About Incoterms for Shipping?
- CONCLUSIONS
Why Do We Use Incoterms?
The abbreviation “Incoterms” stands for “international commercial terms,” which are internationally accepted terms disseminated by the International Chamber of Commerce. Their primary purpose is to specify the responsibilities of buyers and sellers.
For instance, FOB, the most widely used trade term, denotes that you will be in charge of your goods once they arrive at the designated port, at which point your supplier will be accountable. For this reason, FOB is always quoted as FOB Some Port, i.e. FOB Shanghai. Your supplier is liable if the products all catch fire while being transported from their factory to the port of Shanghai. On the other hand, you are in charge if the cargo falls off the boat while it is sailing from Shanghai to your port.
Depending on the governing body, the Incoterms and their definitions may change. In 2020, the list was updated to include the following Incoterms:
Source: www.ecomcrew.com
The three Incoterms that importers use the most frequently are FOB, CIF, and EXW.
EXW (Ex Works: Supplier’s Location)
EXW denotes that all other costs associated with transporting your goods to your destination and making arrangements for their pickup at your supplier’s factory fall under your purview as the buyer. Depending on the distance, your supplier’s factory could be hundreds of miles from the seaport where their ship will be loaded. This implies that the overland freight will be your responsibility. You will also be in charge of any export documentation that your supplier does not have. In your destination country, you will also be responsible for paying all sea freight and other import/transportation fees.
EXW shipment terms will typically cost you hundreds of dollars more than FOB shipment terms.
FOB: Chinese port of shipment (Free on Board)
The most used shipping term is this one. Your supplier covers the cost of loading your goods onto a ship in China, as well as the cost of local transportation within China and the cost of obtaining export clearance. The cost of importing your goods into your nation (including customs, taxes, domestic transport, etc.) and sea freight is your responsibility.
CFR and CIF stand for Cost and Freight: Your Home Port and Cost Insurance and Freight
With the exception of the fact that CFR does not include the cost of insurance, CIF and CFR are nearly identical. In the case of CFR and CIF freight, your supplier will cover all expenses associated with moving your shipment from their location to the preferred port in your country of destination. You will stay pay for any import fees and overland transportation in your destination country.
An Actual Example
Here is an illustration of a quote I was given for EXW shipping terms from the Chinese province of Fujian to Vancouver for a few pallets of goods:
Source: www.ecomcrew.com
Sea freight only comes with a total cost of $98. But notice all the other fees—a grand total of $300. The majority is for the truck freight to transport the items from the factory of my supplier to the port. In China, as in any other country, overland freight is costly.
Drawbacks with EXW Freight
The fact that the shipment terms were EXW Fuzhou is a major factor in the high costs mentioned above. This implies, as previously indicated, that the factory will produce every item, and I will need to travel there to pick them up. They will not handle much freight at all. It would be like purchasing a bed on Craigslist with the note, “Must pick up.”
Compare this to the more widely used term, FOB xyz Port. The supplier will drive the goods from their factory to the local port, load them onto the ship, and pay all of the document fees for a FOB shipment, such as FOB Ningbo, a major port in China. When the shipment reaches my port, I’ll cover all shipping costs, including sea freight. It would be similar to purchasing a bed with the condition, “Will drop off at your house, but I won’t help move it up your stairs and into your bedroom,” on Craigslist, to use the same example.
An Increase in Suppliers Offering EXW Shipment Terms
An increasing number of suppliers are quoting prices with EXW shipment terms as profit margins in China are being squeezed. Your first point of negotiation should be to request FOB shipment terms if you are quoted EXW shipment terms. Make sure you are consistently comparing comparable shipment terms when comparing supplier prices. You can easily request the FOB price from a supplier if they quote you EXW.
Do Freight Forwarders Give a Damn About Incoterms for Shipping?
Almost any freight forwarder can easily handle the delivery of your shipment, regardless of your shipment terms (including the pickup of your shipment from your supplier’s factory if you have EXW shipment terms). Nevertheless, the amount they charge you will vary based on the terms of your shipment.
CONCLUSIONS
How have you dealt with shipment terms in the past? Do you typically get quotes in FOB or EXW? Are there any questions you have about Incoterms? If so, please share and leave a comment below.