Incoterms in more detail
Incoterms (International Commercial Terms) have been developed to ensure that each party involved in an international commercial transaction completely understands their roles, responsibilities and risks. Incoterms cover such critical things as: where the merchandise will be made available by the seller for collection, who is responsible for shipping and insuring, and where the passing of risk occurs.
There are currently 11 incoterms.
Comparing incoterms using a hypothetical example
I’m going to compare the incoterms EXW (ex-works) and DDP (delivered duty paid).
EXW means that the seller fulfils his obligation to deliver when he has made the goods available at his premises (“works”) for collection; and DDP means that the seller fulfils his obligation to deliver when the goods have been made available at the named place in the country of importation.
To help understand these terms better, let’s use a hypothetical example. John is a soloist based in Canberra who has an online clothes store called GearWear. He imports t-shirts from a lady called Li-Min from Zen Exporting in China.
Under an EXW arrangement (which places maximum obligation on John), Li-Min’s sole responsibility is to make the t-shirts available at her premises. John is responsible for the cost, risk and management of collecting the merchandise and everything from that point onwards including: clearing export customs, international shipping, insurance, clearing home customs, and delivery to his premises.
In contrast, under a DDP arrangement (which places maximum obligation on Zen Exporting), Li-Min is responsible for all the tasks and risk involved in moving the t-shirts from her premises to John’s door, including the payment of customs duties and fees in Australia. DDP is rarely used outside of courier-type arrangements.
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Costly consequences when incoterms are misunderstood
Failure to understand incoterms can be extremely costly, as a friend discovered recently when he imported merchandise from a manufacturer in China.
My friend assumed that since the manufacturer’s quoted cost for the merchandise included shipping “to Adelaide”, this meant that the quoted amount would be all he would have to pay to get the merchandise all the way to his warehouse, which (unbeknownst to him), would be known by the incoterm DAP or “delivery at place”.
Being inexperienced, he did not examine the commercial documents for the specific applicable incoterm, which in this case was in fact C & F or “cost and freight”. Under a C & F agreement, the seller is indeed responsible for all shipping expenses up to the named port of destination, but not all the way to the buyer’s warehouse. Consequently, all the local fees and charges that applied to his consignment, totalling over $1300, were not covered by the quoted cost and nor was the $257 cost for carting the merchandise from the port to his premises. As a result of these unexpected costs, he paid not much less than if he’d bought locally!
As you can see, having a solid understanding of all 11 incoterms will help you to avoid costly mistakes.
What has been your experience with incoterms?