INCOTERMS 2000 A Practical Review

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2 INCOTERMS 2000 A Practical Review by Catherine J. Petersen C J Petersen & Associates, LLC In Cooperation with intermart, Inc. Creator of This book is available at a special discount when ordered in volume quantities contact intermart. intermart, Inc ISBN Version Reproduction or translation of any part of this work beyond that permitted by Section 107 and 108 of the 1976 United States Copyright Act without the permission of the copyright owner is unlawful. Request for permission or further information should be addressed to the author or the publisher. Please note: The information in this book has been derived and compiled from a wide variety of sources. While every effort has been made to ensure its accuracy no responsibility can be assumed by the author or the publisher for errors, omissions or misinterpretations. Copyright by Catherine J. Petersen of C J Petersen & Associates, LLC. All rights reserved.

3 About the Author Catherine J. Petersen is International Consultant and Principal of C J Petersen & Associates, LLC. She consults and trains in the area of Incoterms 2000, export and import documentation, NAFTA, international transportation, and letters of credit; she conducts research on freight transportation. Ms. Petersen has been a freight forwarder and an ocean carrier representative; she has served as an educator for a variety of colleges and universities here and abroad. She has been active in the international arena since 1980, which led to her appointment on the Minnesota District Export Council. She holds both graduate and under-graduate degrees from Mankato State University in the area of regional planning. She is a Licensed Customs Broker. Contact at: C J Petersen & Associates, LLC St. Paul, MN Phone: 651/ Website: The author welcomes comments and suggestions for this book at address info@train2export.com. ii

4 ACKNOWLEDGEMENTS This book could not have been written without the assistance and input from a wide range of sources, associations and agencies, firms and professionals who practice the art of exporting. They have provided support, information, and time. It made this book possible. One of those key individuals is George Thompson of Neville Peterson LLP who is owed thanks for his suggestions and comments; other important individuals and their affiliations are: American Institute of Marine Underwriters New York, NY Bureau of National Affairs New York, NY Sherman C. Drew, Jr. ACE USA Philadelphia, PA Gloria Klopfenstein and Global Training Center, Inc. El Paso, TX David Noah intermart, Inc. Burnsville, MN George W. Thompson Neville, Peterson LLP Washington, D. C. gthompso@npwdc.com Bruce Hocum Rubenstein Logistics Services, Inc. Golden Valley, MN The Fabulous Export Team U. S. Department of Commerce International Trade Administration Minneapolis, MN or iii

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6 Table of Contents INCOTERMS 2000 A Practical Review... 3 INTRODUCTION... 3 A. Group E Ex Works or EXW (named place)... 9 B. Group F Free Alongside Ship (named ocean port of shipment) FAS Transport Mode Option: Vessel Free Carrier At: FCA named place C. Group C Cost, Insurance and Freight (named ocean port of destination) CIF Carriage Paid To (named place of destination) CPT D. Group D Delivered Ex Ship (named port of destination) DES Transport Mode Option: Vessel Delivered Ex Quay (named port of destination) DEQ Transport Mode Option: Vessel Delivered Duty Unpaid (named place of destination) DDU Transport Mode Option: Air, Courier, Truck, Rail, Vessel, or Multi-Modal Delivered Duty Paid (named place of destination) DDP Transport Mode Option: Air, Courier, Truck, Rail, Vessel, or Multi-Modal Delivered at Frontier (named place) DAF Transport Mode: Truck, Rail, (Air: See following text.) E. Chapter Summary E. Exercises F. Trade Term Self Assessment G. Case Studies Case Study 1: ABC Cereals Export Programs Case Study 2: Electronics International, Inc H. Legal Cases Involving Incoterms Legal Case Legal Case Bibliography RESOURCES GLOSSARY v

7 Table of Figures Figure 1 U.S. Domestic Terms Compared to International Trade Terms... 4 Figure 2 Incoterms Figure 3 Incoterms 2000 Obligations... 7 Figure 4 EXW Seller s Premises: Seller s Risk / Cost Figure 5 FAS Vessel: Seller s Risk / Cost Figure 6 Oversized Cargo Loading at Ship s Rail Figure 7 FOB Port: Seller s Risk / Cost Figure 8 FCA Seller s Facility: Seller s Risk / Cost Figure 9 FCA Consolidator, Carrier, or Port: Seller s Risk / Cost Figure 10 CFR Vessel or Ocean Port: Seller s Risk / Cost Figure 11 CIF Vessel or Ocean Port: Seller s Risk / Cost Figure 12 CPT Airport, Port, Consolidator or Forwarder: Seller s Risk / Cost Figure 13 CIP Airport, Port, Consolidator or Forwarder: Seller s Risk / Cost Figure 14 DES Ocean Port: Seller s Risk / Cost Figure 15 DEQ Ocean Port: Seller s Risk / Cost Figure 16 DDU Airport, Ocean Port, Consolidator, Buyer s Facility: Seller s Risk / Cost Figure 17 DDP Airport, Ocean Port, Consolidator, Buyer s Facility: Seller s Risk / Cost Figure 18 DAF Border Crossing: Seller s Risk / Cost Figure 19 Internal Quote Profile Terms: E & F Group Terms Figure 20 Sample U.S. Import Commercial Invoice Figure 22 Sample Internal Freight Quote Terms: EXW, FCA, CPT, CIP, DDU, DDP Figure 22 Internal Quote Profile Air Freight Figure 23 Sample Quotation Figure 24 Internal Costs - Quote Information Figure 25 Incoterms 2000 Guide to Cost Division Figure 26 Loading Air Freight Figure 27 Incoterms Exercise: Air Freight Figure 28 Invoice for Exercise Figure 29 Cargo at Vessel Figure 30 Incoterms Exercise: Ocean Freight Figure 31 Invoice for Exercise vi

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9 INCOTERMS 2000 A Practical Review

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11 INCOTERMS 2000 A Practical Review INTRODUCTION Incoterms 2000 defines for the Seller and Buyer: When RISK Transfers Who Pays which COSTS Who is RESPONSIBLE for forwarder & carrier selection Who Prepares DOCUMENTS A factor in calculating your offering price, and negotiating your contract, is the allocation of responsibility and costs between seller and buyer. This includes the transporting and insuring of the merchandise from the time it leaves the plant or warehouse to the time it arrives at your purchaser s premises. There is a generally accepted, readily understandable nomenclature called Incoterms 2000, an acronym for International Commercial Terms 2000, which establishes the trade terms for various transportation options. Incoterms 2000 is one of two commonly-used sets of rules establishing trade terms for commercial sales. Domestic terms are defined by the Uniform Commercial Code (UCC) Article 2 as adopted by each state, the National Motor Freight Classification, and industry practice. The international Incoterms are defined and published by the International Chamber of Commerce (ICC). To be sure you implement the use of the international terms, it is necessary to have in your sale and purchase contracts language such as the terms of sale herein are Incoterms 2000 or governed by Incoterms These trade terms do not identify where the transfer of title or ownership will occur. A separate statement regarding transfer of title should be made in the body of the contract, the quote, pro forma invoice, and commercial invoice. Incoterms 2000 provides international traders with a common reference to establish the point at which risk of loss due to loss or damage transfers from the buyer to the seller and the attendant transportation costs for which each party has responsibility. Knowledge of the Incoterms is essential for exporters and importers, to prepare contracts with terms appropriate for their customers and to make sure those contractual terms are properly fulfilled. 1 3

12 Figure 1 U.S. Domestic Terms Compared to International Trade Terms U.S. Domestic Terms Incoterms 2000 Transfer of title to the goods determined by use of term unless superseded by separate agreement. Risk of loss determined by use of term, unless superseded by separate agreement. Many different terms; FOB origin and FOB Destination are the most commonly used terms with specific locations stated, & qualifiers allowed. Terms are based on uniform commercial code as adopted by each state, the NMFC and industry custom. FOB Origin or FOB Destination determines who pays freight charges unless qualified by use of phrases such as prepaid, prepaid & charged back, prepaid & add, freight allowed, and freight collect. FOB not limited to shipment by vessel; may be used for shipment by any mode or multimodal. The Uniform Commercial Code Article 2 (UCC2) was the legal basis for domestic terms of sale. UCC2 has been adopted by all states except Louisiana. Transfer of Title NOT specified by use of the Incoterms; should be stated separately. Risk transfer based on Incoterm selected; Title transfers based on agreement between Seller and Buyer. 13 different terms are possible with specific locations stated, i.e. ex-works seller s warehouse, Chicago, IL USA. An agreement adopted by the International Chamber of Commerce then incorporated into Seller & Buyer agreements. Incoterms define in the term whether the buyer or seller will pay them. For example, FCA seller s facility automatically means that the Domestic and International Freight will be Collect to the buyer. FCA is a multi-modal term used for shipment by air, truck, rail, ocean or some combination of the modes. FOB is always tied to shipment by vessel. FOB provides for risk & cost transfer at the time goods are loaded on board the vessel. Under Incoterms 2000, FOB requires that Freight will be Collect. Incoterms 2000 are promulgated by the International Chamber of Commerce; they are not law. Incoterms 2000 must be incorporated by use of a phrase such as as per Incoterms 2000 in the Quote, Contract & other Commercial Documents. Incoterms 2000 also determines the location where the seller will deliver the goods into the hands of the buyer for export. Each term is followed by the appropriate delivery location. For example, the contract for goods sold Ex Works would state EXW [seller s facility, city, state, country], while the contract for goods sold Free Alongside Ship would state FAS [named port of shipment, state, country]. The 13 three-letter abbreviations would be used in place of domestic terms for sales outside of the United States. These 13 terms do not require the addition of a statement such as Prepaid & Add or Freight Allowed or Freight Collect. As soon as a seller places the phrase EXW Plant, Houston, TX USA-Incoterms 2000 on their quote, pro forma and commercial invoice; both parties know that the inland or air or ocean freight are collect and freight forwarding fees and customs clearance at destination are for the account of the buyer. It is international shorthand defined by the ICC and updated periodically. 4

13 Under Group E, the seller is required to make the goods available at its own facilities to the buyer. Once the seller has done this, the buyer is then responsible for the shipment. The Group F terms require the seller to deliver the merchandise to the next carrier at the named facility, airport or port, where the buyer assumes responsibility for main or transnational carriage. Group C places the responsibility for main carriage on the seller, while under Group D the seller is responsible for transporting the goods to the country of importation and incurring risk to destination. These relative responsibilities divide the costs of arranging transportation, and in some cases insurance between the parties. It also divides the risk of loss between them. Incoterms are not shipping terms; instead, they are part of the sales contract and help the seller and buyer define the roles and the costs that each will have in the transaction. The choice of terms appropriate to your transaction will depend on a number of factors, such as: (1) Does your buyer have facilities in the United States to take possession of the goods and arrange transportation? If so, Group E or Group F may be appropriate, because then the buyer can readily arrange carriage. (2) Does your company regularly ship under Group F, and receive inland freight rate discounts for truck or rail transportation to the port of loading? In that case, you probably could arrange transportation from your facility to the port more cheaply than could the buyer, and thereby lower the overall cost of the transaction. (3) Is your buyer new to international trade, without knowledge of how to arrange transportation? In that case, Group C or, perhaps, Group D would be appropriate, because your customer has neither the experience nor the contacts to arrange export clearance and transportation. Whatever term you choose, the attendant costs should be reflected in your final quote or contract price. For example, if you are selling the goods Free on Board or FOB an ocean port of loading, Incoterms 2000 can help identify the costs of transporting the goods to the vessel and loading them on board. These costs can then be entered into your final quote or contract price calculation. The determination of which party may be able to obtain cost advantage will often depend on the shipment volume that the buyer or seller controls in a year, when negotiating with air or ocean carriers or consolidators. There may not be any cost advantage for one or the other, but by utilizing a quotation that is prepared with costs itemized by Incoterm, the seller and the buyer are able to determine whether that is the case. Figure 2 provides a thumbnail sketch of each term; it is critical to the complete understanding of Incoterms to refer back to the ICC s publications. 5

14 Figure 2 Incoterms 2000 Group Term Risk Code Mode of Transport Group E Pre-Carriage and Main Carriage: Freight Collect Group F Pre-Carriage: Determined by Incoterm & Delivery Point Main Carriage: Freight Collect Group C Pre-Carriage and Main Carriage: Freight Prepaid or Freight Paid Group D Pre-Carriage and Main Carriage: Freight Prepaid or Freight Paid Exporter Meets Delivery Date as Specified Ex Works Free Alongside Ship Free On Board Free Carrier At Cost & Freight Cost, Insurance & Freight Carriage Paid To Carriage & Insurance Paid To Delivered at Frontier Delivered Ex Ship Delivered Ex Quay Delivered Duty Unpaid Delivered Duty Paid Risk Transfers when shipper makes goods available to buyer at seller s facility. Risk Transfers to Buyer upon Delivery Alongside Vessel. Risk Transfers to Buyer upon Crossing Ship s Rail. Risk Transfers to Buyer upon Delivery as agreed by seller & buyer. 2 Risk Transfers to Buyer upon Crossing Ship s Rail. Risk Transfers to Buyer upon Crossing Ship s Rail. Risk Transfers to Buyer upon Delivery to the first carrier. Risk Transfers to Buyer upon Delivery to the first carrier. Risk transfers on arrival at the named place at the frontier on the date or in the timeframe agreed, consistent with delivering carrier practice & buyer/seller agreement. 3 Risk transfers at named EXW FAS FOB FCA CFR CIF CPT CIP DAF Any mode: Air, Ocean, Surface such as Rail or Motor Carrier Vessel: Ocean port to port Vessel: Ocean port to port Any mode: Air, Ocean, Surface Vessel: Ocean port to port Vessel: Ocean port to port Any mode: Air, Ocean, Surface Any mode: Air, Ocean, Surface Rail is the preferred mode; truck and air are secondary choices. Delivery directly to a border crossing. destination onboard vessel. 4 Ocean port to port DES Vessel: Risk transfers at named DEQ Vessel: destination on the pier. 5 Ocean port to port Risk transfers at named DDU Any mode: destination consistent with Air, Ocean, Surface delivering carrier practices & buyer/seller agreement. 6 Risk transfers at named destination consistent with delivering carrier practices & buyer/seller agreement. 7 DDP Any mode: Air, Ocean, Surface 6

15 Figure 3 Incoterms 2000 Obligations Obligation Proof of Completion 8 1. Product in compliance with the contract or quote 2. Licenses and authorizations 3. Contract of carriage and insurance Usually a commercial invoice provides proof of compliance; however there are times the buyer will ask that the seller provide a certificate of origin. Alternatively, an inspection is conducted by an independent authority or agency that provides a certificate. All of the trade terms except EXW require the seller to clear the goods for export. The seller will be responsible for preparing the Shipper s Export Declaration/Automated Export System record or obtaining permission under the export controls of the various controlling agencies, including the Department of Commerce, State Department, Department of Defense, Bureau of Census, and/or Customs & Border Protection. Transportation documents that have been signed by the truck, rail, air, or ocean carrier(s) are the seller s proof goods have shipped in good order and indicate clean receipt. It is proof of good order receipt by the carrier. Domestic and international carriers limit their liability through terms on the reverse of the bill of lading, in their tariffs or in contracts with shippers. Consequently, the seller or the buyer will usually arrange to insure the goods, for a fee, with a third party, who then provides an insurance certificate. 4. Delivery The seller is obligated to complete delivery to the point or place specified in the contract or quotation. The signed bill of lading often acts as proof of delivery into the hands of the buyer s surrogate, such as the carrier, a freight forwarder or customs house broker. 5. Transfer of Risks Specified by selection of an Incoterm. 6. Costs The transportation, forwarding fees, and other related costs are incurred based on Incoterm selection. The costs end at a named point, such as Ex Works Chicago, IL USA. If the seller is paying those fees, then it is prudent to obtain a quote from the carrier and use the quote to audit the transportation bills. 7. Notice to Buyer The seller must provide notice when goods are available. 8. Proof of Delivery Signed bills of lading, dock receipts and warehouse receipts are the seller s 9. Checkingpackagingmarking proof that goods have been delivered. The seller pays the costs of checking, such as quality, measuring, weighing, and counting. If the buyer requires additional external inspection that expense may very well be borne by the buyer. According to The Guide to Incoterms 2000: The seller must pack the goods as required for the mode of transport, but only to the extent that the circumstances of the transport are known to him before the contract of sales is concluded. It is wise to mark the goods with labels that both the seller and buyer have agreed will be effective in assuring the goods will be delivered to the buyer. 10. Other Obligations The seller can charge the buyer for assistance in obtaining documents if the trade term selected does not require the seller to prepare and submit documentation. 7

16 The ICC Committee s position in the The Guide to Incoterms 2000 is in direct opposition of what was recommended in its book The Guide to Incoterms of The Guide advises that if the buyer wishes to avoid the obligation to clear the goods for export to add the words EXW, cleared for export. This has been discouraged under Incoterms Instead sellers and buyers are encouraged to modify this position in their underlying agreement or contract so the seller will be the responsible party in obtaining an export license. This modification may reflect the seller s experience with export compliance or to make it consistent with other terms and conditions. (1) Ex Works and FOB have been the two most prevalent trade terms for firms that export. 9 Exporters often prefer to use this term since it seems to be the closest in definition to the domestic term FOB Warehouse or Factory. The advantages to using this trade term are limited responsibility for risks and costs of shipping the goods to an international destination, and seem to outweigh the use of any other Incoterm until consideration is given to other factors. In spite of the advantages to using EXW, some exporters have found that it does not work as well for them as they had originally thought. A 2003 survey by IOMA of 40 small, medium and large exporters indicates that there is some movement to the use of other trade terms such as Carriage Insurance Paid to (CIP) and Cost Insurance and Freight (CIF). Exporters have shifted to Carriage Paid to (CPT), CIP, Cost and Freight to (CFR) and CIF because under EXW : a. They have little or no control over when the buyer picks up the goods. Those exporters with limited storage space may find their dock area becoming crowded with international freight. b. They do not have control over the inland carrier selected to pick up the goods. The inland carrier chosen by the buyer s forwarder may not have the capability to handle the goods even if you had provided special handling instructions to the freight forwarder and/or the buyer. c. They do not have firsthand knowledge of the destination of the goods once it leaves their facility. How does the exporter know it has been exported? If the goods have not been exported, the seller may be liable for sales tax. d. The buyer has control over the goods since they select the carriers and the forwarder and pay for the freight charges. The buyer also has control over the date when the goods are loaded on board either a vessel or a plane. When the buyer is to pay the seller through a letter of credit, the buyer controls whether or not the deadlines stated in the letter of credit are met. (2) Don t be tempted to modify the Incoterm! Modification may invalidate understanding of the terms devised under Incoterms Instead, members of the committee revising Incoterms recommend that modifications be explicitly stated in the sales contract. (3) According to Incoterms 2000, the seller is not required to clear the goods for export under Ex Works. In the U.S., this generally would mandate that the buyer is responsible for arranging for the preparation of the Electronic Export Information (EEI) in the Automated Export System (AES), obtaining an export license as needed, and providing a power of attorney to the freight forwarder to file the EEI. However, regulations adopted by the Census Bureau and Bureau of Industry and Security may require the seller to perform this task, thus creating an inconsistency between the commercial and regulatory requirements governing the contract. 8

17 (4) Under the Foreign Trade Regulations (F.T.R.) adopted by the Census Bureau, routed transactions occur when the buyer controls selection of an agent who chooses the routing with the international carrier. 10 Incoterms are independent of the regulations; however, Incoterms that may result in a routed export transaction are EXW, Free Carrier At (FCA), Free Along Side (FAS), and Free On Board (FOB). Such transactions may entail a foreign principal (or buyer) designating a U.S. forwarding agent to act on its behalf in preparing and filing the AES record. The U.S. principal party in interest (typically, the seller) must provide the forwarding agent with information to complete the EEI. 11 If the U.S. principal party in interest (or the seller) wishes to file the AES Record, then the seller must obtain a writing or power of attorney from the buyer to file the export clearance documentation. A. Group E 1. Ex Works or EXW (named place) Transport Mode Option: Air, Courier, Truck, Rail, Vessel, or Multi-Modal Figure 4 indicates the seller s and buyer s responsibilities under this term in the agreement by inclusion of the phrase EXW Seller s Premises, City, Country, Subject to Incoterms (1) Establish an agreement that includes identification of who will insure the shipment; typically, it is the buyer under this term. Seller s Responsibilities: (2) Seller export packs to extent shipping particulars as made known by the buyer. Seller must have the goods ready when promised, notify the buyer they are ready, and place the goods at the buyer s disposal, at its premises. The seller also is responsible for paying the costs of checking operations (i.e., checking quality, quantity, measurement and weight). (3) Seller is to provide the commercial invoice or electronic equivalent, as required by the contract of sale and proof of delivery. Buyer s Responsibilities: (4) Buyer is responsible for loading the goods onto a truck or other means of transportation at the seller s premises. (5) Export clearance is considered the buyer s responsibility through their agent in the seller s country under this Incoterm. (6) (14) Buyer assumes both the cost of transportation and risk of loss when the seller makes the goods available. The buyer is obligated to arrange for transportation from the seller s facility; typically, the buyer is to hire a freight forwarder who invoices the buyer for pre-carriage in the seller s country. The carrier invoices the buyer international freight charges under the freight term freight collect. The buyer is responsible for arranging the import clearance, duties and taxes and final delivery to their foreign facility. 9

18 Figure 4 EXW Seller s Premises: Seller s Risk / Cost (4) (5) (3) (6) (2) (7) (1) (8) (9) (14) (13) (12) (11) (10) B. Group F 1. Free Alongside Ship: FAS named ocean port 2. Free on Board: FOB named ocean port 3. Free Carrier At: FCA named inland point, port or airport 1. Free Alongside Ship (named ocean port of shipment) FAS Transport Mode Option: Vessel This term is preferred for oversized or bulk commodity cargo that is tendered to the carrier at the ocean or inland waterway port of loading. Figure 5 indicates the seller s and buyer s responsibilities under this term with reference to FAS Port, Country Subject to Incoterms (1) Establish an agreement that includes identification of who will insure the shipment; typically, it is the buyer under this term. The point of transfer is named in the contract, for example FAS vessel, Ocean Port Newark, NJ USA. If the seller is located in Japan, then it might be FAS vessel, Tokyo, Japan port. 10

19 Seller s Responsibilities: (2) Seller must provide the commercial invoice or electronic equivalent, as required by the contract of sale. (3) Seller must pack the goods and load the goods at their expense. The seller also is responsible for paying the costs of checking operations (i.e., checking quality, quantity, measurement and weight). (4) Seller is responsible for arranging transportation to the port by truck or other means of transportation from the seller s premises. (5) Seller has responsibility for securing export clearance. 12 (6) Seller bears the cost and risk of transporting the goods alongside the vessel, on the dock or in lighters, typically coordinated with the buyer s freight forwarder. (7) Seller provides proof of delivery at the named inland waterway or ocean port of shipment in the exporting country; the document should be specified in the contract. Figure 5 FAS Vessel: Seller s Risk / Cost (3) (4) (5) (6) (2) (7) (1) (8) (9) (13) (11) (10) (12) Buyer s Responsibilities: (8) Typically, the buyer will hire a freight forwarder who invoices the buyer for their fees, applicable port fees and loading charges at the port in the seller s country. (9) Buyer assumes both the cost of transportation and risk of loss when the seller makes the goods available, including loading the vessel. The buyer is obligated to arrange for transportation from the ocean port including loading the vessel. The carrier invoices the buyer international freight charges under the freight term freight collect. (10) (13) Buyer is responsible for arranging the unloading of the cargo from the vessel, obtaining the cargo from the port, import clearance, duties and taxes and final delivery to their foreign facility. 11

20 2. Free on Board (named ocean port of shipment) FOB Transport Mode Option: Vessel FOB is restricted for use under the Incoterms to shipments that will move from ocean or river port to ocean or river port by vessel. It is preferred for shipments that are oversized or shipments that cannot be containerized. For example, if an exporter were to ship products such as cranes, heavy machinery, or industrial air conditioning equipment, then the trade term FOB Houston, TX USA would be an appropriate trade term. Keep in mind that the term FOB originated in pre-container days, when there was a ship s rail and cargo was delivered directly to the vessel by the shipper and loaded on board over the rail. Figure 6 Oversized Cargo Loading at Ship s Rail Figure 7 indicates the seller s and buyer s responsibilities under this term and their agreement with inclusion of the phrase FOB Named Port, Country Subject to Incoterms (1) Establish an agreement that includes identification of who will insure the shipment, typically it is the buyer under this term. The point of transfer is named in the contract, for example FOB (Incoterms 2000) vessel, Miami, FL USA. Seller s Responsibilities: (2) Seller must provide the commercial invoice or electronic equivalent, as required by the contract of sale. (3) Seller must pack the goods and load the goods at their expense. The seller also is responsible for paying the costs of checking operations (i.e., checking quality, quantity, measurement and weight). (4) Seller is responsible for arranging transportation to the port by truck or other means of transportation from the seller s premises. (5) Seller has responsibility for securing export clearance. 13 (6) Seller must provide proof of delivery at the named port of shipment, typically the inland waterway or ocean bill of lading. (7) Seller bears the cost and risk of transferring the goods from the pier over the rail of the vessel in the exporting country. 12

21 Figure 7 FOB Port: Seller s Risk / Cost (3) (4) (5) (6) (2) (1) (9) (7) (8) (13) (12) (11) (10) Buyer s Responsibilities: (8) Buyer names the vessel. (9) Buyer assumes costs and risks after transfer of the cargo has occurred over the rail of the vessel. (10) Typically, the buyer will hire a customs broker who has a partner freight forwarder in the seller s country who invoices the buyer for their fees in the seller s country. Whoever chooses the forwarder is the party who pays the associated documentation and freight forwarding fees. (11) The carrier invoices the buyer international freight charges under the freight term freight collect. The buyer also bears risks incurred if the vessel does not arrive on time or the carrier does not accept the goods. (12) (13) Buyer is responsible for arranging the import clearance, duties and taxes and final delivery to their foreign facility. 13

22 3. Free Carrier At: FCA named place Transport Mode Option: Air, Courier, Truck, Rail, Vessel, or Multi-Modal FCA Seller s Premises under Incoterms 2000 states that delivery is complete when the goods have been loaded on the means of transport provided by the carrier nominated by the buyer or their agent. Figure 8 indicate responsibilities of the seller s and the buyer under this term. (1) Establish an agreement that includes identification of who will insure the shipment, typically it is the buyer under this term. The point of transfer is named in the contract, for example FCA (Incoterms 2000) seller s facility, Eden, NC USA. Seller s Responsibilities: (2) Seller must provide the commercial invoice or electronic equivalent, as required by the contract of sale. (3) Seller must make the goods ready when promised, export packed to extent shipping particulars made known by buyer and load the goods at their expense to a carrier named by the buyer. The seller also is responsible for paying the costs of checking operations (i.e., checking quality, quantity, measurement and weight). (4) Seller must provide proof of delivery at the named place of shipment, typically a signed inland bill of lading. (5) Seller has responsibility for securing export clearance. 14 Figure 8 FCA Seller s Facility: Seller s Risk / Cost (5) (4) (3) (6) (7) (2) (8) (1) (9) (10) (13) (12) (11) 14

23 Buyer s Responsibilities: (6) Buyer is responsible for arranging transportation to the carrier by truck or other means of transportation from the seller s premises. (7) Typically, the buyer will hire a freight forwarder who invoices them for their fees in the seller s country. Whoever chooses the forwarder is the party who pays the associated documentation and freight forwarding fees. (8) Buyer bears the cost and risk of transferring the goods from the collecting carrier to the consolidator, freight forwarder, or carrier. (9) Buyer names the carrier. (10) Buyer s forwarder or carrier invoices the buyer international freight charges under the freight term freight collect. (11) Buyer also bears risks incurred if the carrier does not arrive on time or the carrier does not accept the goods. (12) (13) Buyer is responsible for arranging the import clearance, duties and taxes and final delivery to their foreign facility. FCA Named Carrier Selected by Buyer The seller must provide the goods to a carrier named by the buyer. Incoterms 2000 states that delivery is complete if the named place is anywhere other than the seller s facility, when the goods are placed at the disposal of the carrier or another person nominated by the buyer, or chosen by the seller in accordance with the buyer s agreement or as customary in the trade. Figure 9 indicates the seller s and buyer s responsibilities under this term. Another person nominated by the buyer can include a freight forwarder who is taking control of the goods on behalf of the carrier. For example, freight forwarder designation as carrier occurs when the freight forwarder is acting as an airfreight consolidator or non-vesselowning common carrier. The forwarder does not own vessels or planes, but is issuing an air waybill or ocean bill of lading as designated agent on behalf of the carrier. As in Free on Board, the selection of the freight forwarder and the payment of the forwarding fees will be left up to the seller and buyer to decide based on their relationship and current trade practices. (1) Establish an agreement that includes identification of who will insure the shipment, typically it is the buyer under this term. The point of transfer is named in the contract may be a warehouse, rail or truck terminal, or port facility, for example FCA (Incoterms 2000) Minneapolis-St. Paul Airport, MN USA if the seller or exporter was in the USA. If the seller or exporter was in Thailand, then the phrase would be worded FCA (Incoterms 2000) Bangkok Airport, Thailand. 15

24 Seller s Responsibilities: (2) Seller must provide the commercial invoice or electronic equivalent, as required by the contract of sale. (3) Seller must pack the goods and load the goods at their expense. The seller also is responsible for paying the costs of checking operations (i.e., checking quality, quantity, measurement and weight). (4) Seller is responsible for arranging transportation to the buyer s named carrier by truck or other means of transportation from the seller s premises in the exporter s country. (5) Seller is to provide proof of delivery at the named place or point of delivery. (6) Seller has responsibility for securing export clearance. 15 Figure 9 FCA Consolidator, Carrier, or Port: Seller s Risk / Cost (3) (4) (5) (6) (2) (7) (1) (8) (9) (12) (11) (10) Buyer s Responsibilities: (7) Typically, the buyer will hire a freight forwarder who invoices them for their fees in the seller s country. Whoever chooses the forwarder is the party who pays the associated documentation and freight forwarding fees. (8) Buyer bears the cost and risk of transferring the goods from the collecting carrier to the consolidator, freight forwarder, or carrier. The buyer names the carrier. (9) Buyer s forwarder or carrier invoices the buyer international freight charges under the freight term freight collect. The buyer also bears risks incurred if the carrier does not arrive on time or the carrier does not accept the goods. (10) (12) Buyer is responsible for arranging the import clearance, duties and taxes and final delivery to their foreign facility. 16

25 C. Group C 1. Cost & Freight : CFR named ocean port of destination 2. Cost, Insurance & Freight: CIF named ocean port of destination 3. Carriage Paid To: CPT named place, ocean or airport of destination 4. Carriage & Insurance Paid: CIP named place, ocean or airport of destination Unlike the other groups in the Incoterms 2000, the C Group divides the responsibility for transportation and risk for the same leg of the voyage between two points. 1. Cost and Freight (named ocean port of destination) CFR Transport Mode Option: Vessel The seller pays costs and freight necessary to bring the goods to the specified port of destination (that is, foreign portion after ocean carriage is completed). Figure 10 indicates the seller s and buyer s responsibilities under this term. (1) Establish an agreement that includes identification of who will insure the shipment, typically it is the buyer under this term. The trade term is named in the contract, for example in the USA an exporter might quote (Incoterms 2000) CFR Shanghai, China, and for a seller in Bangkok, Thailand it might be (Incoterms 2000) CFR Long Beach, CA USA. Seller s Responsibilities: (2) Seller must provide the commercial invoice or electronic equivalent, as required by the contract of sale. (3) Seller must pack the goods and load the goods at their expense. The seller also is responsible for paying the costs of checking operations (i.e., checking quality, quantity, measurement and weight) which are necessary to deliver the goods under the ocean carriage contract. (4) Seller is responsible for arranging transportation to the port by truck or other means of transportation from the seller s premises. (5) Seller contracts with a freight forwarder who invoices them for their fees and the associated documentation fees in the seller s country. (6) Seller must provide the usual transport document (e.g., ocean bill of lading or sea waybill) for the port of destination. This document must cover the goods, indicate a date for shipment within the date range specified in the contract of sale for shipment, and enable the buyer to claim the goods from the carrier at the port of destination. If called for in the contract of sale, the transport document must be negotiable to allow the buyer to sell the goods in transit, if the buyer chooses, by transfer of the document. (7) Seller has responsibility for securing export clearance. 16 (8) Seller bears the cost and risk of transferring the goods from the pier over the rail of the vessel in the exporting country, while the buyer assumes risks after transfer has occurred. Seller names the vessel. (9) Seller is invoiced by the carrier for the international freight charges under the freight term freight prepaid. 17

26 (3) Figure 10 CFR Vessel or Ocean Port: Seller s Risk / Cost (4) (5) (6) (2) (7) (8) (1) (9) (11) (10) (13) (12) Buyer s Responsibilities: (10) Buyer assumes risk of loss when the seller makes the goods available over the rail of the vessel. The buyer also bears risks incurred if the vessel does not arrive on time. The buyer is responsible for any damages to the goods after loading aboard the vessel. (11) Buyer is responsible for the costs of unloading the vessel in the foreign port of destination if not included in the freight charges under the contract of carriage. (12) Buyer is responsible for arranging the import clearance, duties and taxes. (13) Buyer is responsible for final delivery to their foreign facility. 18

27 2. Cost, Insurance and Freight (named ocean port of destination) CIF Transport Mode Option: Vessel Although the seller is responsible for arranging ocean carriage and obtaining insurance, the seller s responsibility for risk of damage or loss concludes when the goods have crossed the rail of the vessel at the port of loading. Unlike other Incoterms group, the C Group divides the responsibility for transportation and risk for the same leg of the voyage at separate points. Liability for risk shifts to the buyer after the goods have been placed aboard the vessel in the exporting country. The seller pays costs and freight necessary to bring the goods to the specified port of destination (that is, the foreign portion after ocean carriage is completed). Figure 11 indicates the seller s and buyer s responsibilities under this term. (1) Establish an agreement. The trade term is named in the contract, for example in the USA an exporter might quote (Incoterms 2000) CIF Bangkok, Thailand, and for a seller in Kuala Lumpur, Malaysia it might be (Incoterms 2000) CIF Long Beach, CA USA. Seller s Responsibilities: (2) Seller must provide the commercial invoice or electronic equivalent, as required by the contract of sale. (3) Seller must pack the goods and load the goods at their expense. The seller also is responsible for paying the costs of checking operations (i.e., checking quality, quantity, measurement and weight) which are necessary to deliver the goods under the ocean carriage contract. (4) Seller is responsible for arranging transportation to the port by truck or other means of transportation from the seller s premises. (5) Seller must obtain an insurance contract covering the goods and permitting the buyer, or any other person with an insurable interest in the goods, to file damage or loss claims directly with the insurer. Incoterms 2000 indicates that unless otherwise called for in the contract of sale, the insurance policy should be in accordance with minimum cover of the Institute Cargo Clauses (Institute of London Underwriters) Clause C. As a commercial consideration, sellers will be wise to consider paying the additional premium for all-risk insurance. In addition, Incoterms 2000 advises the seller and buyer that insurance should remain in duration until the carrier delivers the goods to the foreign port of destination, and at a minimum shall cover 110 percent of the contract price of the goods in the currency of the contract. The seller may consider extending insurance coverage by use of the phrase warehouse to warehouse, to avoid interruption in the coverage and possible conflicts about the effective date and place of insurance coverage. Incoterms advise the seller to provide the buyer with the insurance policy or other proof of insurance. (6) Seller typically contracts with a freight forwarder who invoices them for their fees and the associated documentation fees in the seller s country. 19

28 (7) Seller must provide the usual transport document (e.g., ocean bill of lading or sea waybill) for the port of destination. This document must cover the goods, indicate a date for shipment within the date range specified in the contract of sale for shipment, and enable the buyer to claim the goods from the carrier at the port of destination. If called for in the contract of sale, the transport document must be negotiable to allow the buyer to sell the goods in transit, if the buyer chooses, by transfer of the document. (8) Seller has responsibility for securing export clearance. 17 (9) Seller bears the cost and risk of transferring the goods from the pier over the rail of the vessel in the exporting country, while the buyer assumes risks after transfer has occurred. Seller names the vessel. The carrier invoices the seller for the international freight charges under the freight term freight prepaid. (10) The seller is responsible for the costs of unloading the vessel in the foreign port of destination if included in the freight charges under the contract of carriage. (3) Figure 11 CIF Vessel or Ocean Port: Seller s Risk / Cost (4) (5) (6) (7) (2) (1) (8) (9) (10) (11) (12) (14) (13) Buyer s Responsibilities: (11) Buyer assumes risk of loss when the seller makes the goods available over the rail of the vessel. The buyer also bears risks incurred if the vessel does not arrive on time. The buyer is responsible for any damages to the goods after loading aboard the vessel. (12) Buyer is responsible for the costs of unloading the vessel in the foreign port of destination if not included in the freight charges under the contract of carriage. (13) Buyer is responsible for arranging the import clearance, duties and taxes. (14) Buyer is responsible for final delivery to their foreign facility. 20

29 3. Carriage Paid To (named place of destination) CPT Transport Mode Option: Air, Courier, Truck, Rail, Vessel, or Multi-Modal Figure 12 indicates the seller s and buyer s responsibilities under this term. (1) Establish an agreement that includes identification of who will insure the shipment, typically it is the buyer under this term. The trade term is named in the contract, for example in the USA an exporter might quote (Incoterms 2000) CPT Shanghai, China, and for a seller in Hong Kong, PRC it might be (Incoterms 2000) CPT Long Beach, CA USA. Seller s Responsibilities: (2) Seller must provide the commercial invoice or electronic equivalent, as required by the contract of sale. (3) Seller must pack the goods and load the goods at their expense. The seller also is responsible for paying the costs of checking operations (i.e., checking quality, quantity, measurement and weight). (4) Seller bears the risk of loss until the goods are delivered to the first carrier in the exporter s country. According to Frank Reynolds, the United State s representative to the ICC s Incoterms Drafting Committee, it was clarified at an October 2002 ICC Incoterms 2000 Masterclass. These two examples are based on the outcome of their discussion that was reported. (a) For-hire Carriage: Your company hires Bob Martin Trucking (an independent carrier) to deliver the goods to the carrier s warehouse at Chicago O Hare Airport under CPT Amsterdam, Netherlands. In this example, risk passes to the buyer at the time the goods are laden on the truck operated by the carrier at your premises. (b) Door-to-door Rate: The steamship line has hired a trucker to bring a 20 container to your warehouse and the same carrier will deliver the container into the steamships care at the ocean port of loading in Newark, NJ. The risk transfers to the buyer at your premises once the goods are loaded into the container. (5) Seller contracts with a freight forwarder who invoices them for their fees and the associated documentation fees in the seller s country. (6) Seller must provide the transport document (e.g., ocean bill of lading or air waybill) showing the place of destination. (7) Seller has responsibility for securing export clearance. 18 (8) Seller names the carrier. (9) Seller is invoiced by the carrier for the international freight charges under the freight term freight prepaid. 21

30 Figure 12 CPT Airport, Port, Consolidator or Forwarder: Seller s Risk / Cost (3) (4) / (10) (5) (2) (6) (1) (7) (8) (12) (9) (11) Buyer s Responsibilities: (10) Buyer bears the risk of loss begins when the goods are delivered to the first carrier in the exporter s country. The buyer also bears risks incurred if the carrier does not arrive on time. The buyer is responsible for any damages to the goods after delivered to the first carrier in the exporter s country. (11) Buyer is responsible for arranging import clearance, duties and taxes. (12) Buyer is responsible for final delivery, as applicable. 22

31 4. Carriage and Insurance Paid To (named place of destination) CIP Transport Mode Option: Air, Courier, Truck, Rail, Vessel, or Multi-Modal Figure 13 indicates the seller s and buyer s responsibilities under this term. (1) Establish an agreement. The trade term is named in the contract, for example in the USA an exporter might quote (Incoterms 2000) CIP Bangkok, Thailand, and for a seller in Hong Kong, PRC it might be (Incoterms 2000) CIP Long Beach, CA USA. Seller s Responsibilities: (2) Seller must provide the commercial invoice or electronic equivalent, as required by the contract of sale. (3) Seller must pack the goods and load the goods at their expense. The seller also is responsible for paying the costs of checking operations (i.e., checking quality, quantity, measurement and weight). (4) Seller is responsible for arranging transportation to the port by truck or other means of transportation from the seller s premises. The seller bears the risk of loss until the goods are delivered to the carrier in the exporter s country; the buyer s risk of loss commences at that point. As in CPT, the division of risk of loss is incomplete without examples to clarify where risk transfers from seller to buyer under CIP. (5) Two scenarios have been developed to expand on the concept of division of risk of loss under Incoterms: (a) For-hire Carriage: Your company hires FreightMasters, Inc. (an independent carrier) to deliver the goods to the forwarder s warehouse Seattle, WA under CIP Taipei, Taiwan. In this example, risk passes to the buyer at the time the goods are (b) laden on the truck operated by the carrier at your warehouse. Door-to-door Rate: The steamship line has hired a trucker to bring a 20 container to your warehouse and the same carrier will deliver the container into the steamships care at the ocean port of loading in Miami, FL. The risk transfers to the buyer at your warehouse once the goods are loaded into the container. (6) Seller must obtain an insurance contract covering the goods and permitting the buyer, or any other person with an insurable interest in the goods, to file damage or loss claims directly with the insurer. Incoterms 2000 indicates that unless otherwise called for in the contract of sale, the insurance policy should be in accordance with minimum cover of the Institute Cargo Clauses (Institute of London Underwriters) Clause C. As a commercial consideration, sellers will be wise to consider paying the additional premium for all-risk insurance. In addition, Incoterms 2000 advises the seller and buyer that insurance should remain in duration until the carrier delivers the goods to the foreign port of destination, and at a minimum shall cover 110 percent of the contract price of the goods in the currency of the contract. The seller may consider extending insurance coverage by use of the phrase warehouse to warehouse, to avoid interruption in the coverage and possible conflicts about the effective date and place of insurance coverage. Incoterms advise the seller must provide the buyer with the insurance policy or other proof of insurance. (7) Seller typically contracts with a freight forwarder who invoices them for their fees and the associated documentation fees in the seller s country. (8) Seller has responsibility for securing export clearance

32 (9) Seller names the carrier. (10) Seller would be invoiced by the carrier for the international freight charges under the freight term freight prepaid. Figure 13 CIP Airport, Port, Consolidator or Forwarder: Seller s Risk / Cost (3) (4) (5) / (11) (6) (7) (2) (8) (1) (9) (9) (10) (13) (12) Buyer s Responsibilities: (11) Buyer bears the risk of loss begins when the goods are delivered to the first carrier in the exporter s country. The buyer also bears risks incurred if the carrier does not arrive on time. The buyer is responsible for any damages to the goods after delivered to the first carrier in the exporter s country. (12) Buyer is responsible for arranging import clearance, duties and taxes. (13) Buyer is responsible for final delivery, as applicable. 24

33 D. Group D 1. Delivered Ex Ship: DES a named ocean port of destination 2. Delivered Ex Quay: DEQ a named ocean port of destination 3. Delivered Duty Unpaid: DDU a named place, ocean or airport of destination 4. Delivered Duty Paid: DDP a named place, ocean or airport of destination 5. Delivered at Frontier: DAF named frontier 1. Delivered Ex Ship (named port of destination) DES Transport Mode Option: Vessel The seller pays costs and freight necessary to bring the goods to the specified port of destination (that is, foreign portion after ocean carriage is completed). Figure 14 indicates the seller s and buyer s responsibilities under this term. (1) Establish an agreement that includes identification of who will insure the shipment, typically the seller under this term. The trade term is named in the contract, for example, in the USA an exporter might quote (Incoterms 2000) DES Algeciras, Spain, and for a seller in San Jose, Costa Rica it might be (Incoterms 2000) DES Houston, TX USA. Seller s Responsibilities: (2) Seller must provide the commercial invoice or electronic equivalent, as required by the contract of sale. (3) Seller must pack the goods and load the goods at their expense. The seller also is responsible for paying the costs of checking operations (i.e., checking quality, quantity, measurement and weight) which are necessary to deliver the goods under the ocean carriage contract. (4) Seller is responsible for arranging transportation to the port by truck or other means of transportation from the seller s premises. (5) Seller contracts with a freight forwarder who invoices them for their fees and the associated documentation fees in the seller s country. (6) Seller must provide the usual transport document (e.g., ocean bill of lading or sea waybill) for the port of destination. This document must cover the goods, indicate a date for shipment within the date range specified in the contract of sale for shipment, and enable the buyer to claim the goods from the carrier at the port of destination. If called for in the contract of sale, the transport document must be negotiable to allow the buyer to sell the goods in transit, if the buyer chooses, by transfer of the document. (7) Seller has responsibility for securing export clearance. 20 (8) Seller names the vessel. Carrier or their agent invoices the seller for the international freight charges under the freight term freight prepaid. (9) Seller bears risks incurred if the vessel does not arrive on time. The seller is responsible for any damages to the goods after loading aboard the vessel. 25

34 Figure 14 DES Ocean Port: Seller s Risk / Cost (3) (4) (5) (6) (2) (7) (1) (10) (9) (8) (12) (11) Buyer s Responsibilities: (10) Buyer assumes risk of loss when the seller makes the goods available on the vessel at the port of destination. Buyer is responsible for the costs of unloading the vessel in the foreign port of destination if not included in the freight charges under the contract of carriage. (11) Buyer is responsible for arranging the import clearance, duties and taxes. (12) Buyer is responsible for final delivery to their foreign facility. 26

35 2. Delivered Ex Quay (named port of destination) DEQ Transport Mode Option: Vessel According to Frank Reynolds, the United State representative to the ICC s Incoterms Drafting Committee, the definition of Quay was clarified at an October 2002 ICC Incoterms 2000 Masterclass. 21 The Quay is defined as an area that is considered a part of the Quay at the local port according to the Customs of the Port. Thus, it is Mr. Reynolds s advice that the parties to a contract understand the practices of the ports where their cargo will be laden off the vessel. The seller pays costs and freight necessary to bring the goods to the specified port of destination (that is, foreign portion after ocean carriage is completed). Figure 15 indicates the seller s and buyer s responsibilities under this term. (1) Establish an agreement that includes identification of who will insure the shipment, typically the seller. The trade term is named in the contract, for example, in the USA, an exporter might quote (Incoterms 2000) DEQ Lagos, Nigeria, and for a seller in Santos, Brazil it might be (Incoterms 2000) DEQ New Orleans, LA USA. Seller s Responsibilities: (2) Seller must provide the commercial invoice or electronic equivalent, as required by the contract of sale. (3) Seller must pack the goods and load the goods at their expense. The seller also is responsible for paying the costs of checking operations (i.e., checking quality, quantity, measurement and weight) which are necessary to deliver the goods under the ocean carriage contract. (4) Seller is responsible for arranging transportation to the port by truck or other means of transportation from the seller s premises. (5) Seller contracts with a freight forwarder who invoices them for their fees and the associated documentation fees in the seller s country. (6) Seller must provide the usual transport document (e.g., ocean bill of lading or sea waybill) for the port of destination. This document must cover the goods, indicate a date for shipment within the date range specified in the contract of sale for shipment, and enable the buyer to claim the goods from the carrier at the port of destination. If called for in the contract of sale, the transport document must be negotiable to allow the buyer to sell the goods in transit, if the buyer chooses, by transfer of the document. (7) Seller has responsibility for securing export clearance. 22 (8) Seller names the vessel. (9) Seller is invoiced by the carrier for the international freight charges under the freight term freight prepaid. (10) Seller s responsibility is met when the goods are placed at buyer s disposal at the quay (wharf) in the specified port. 27

36 Figure 15 DEQ Ocean Port: Seller s Risk / Cost (3) (4) (5) (2) (6) (7) (1) (8) (9) (12) (10) (11) Buyer s Responsibilities: (11) Buyer is responsible for arranging the import clearance, duties and taxes. (12) Buyer is responsible for final delivery to their foreign facility. 28

37 3. Delivered Duty Unpaid (named place of destination) DDU Transport Mode Option: Air, Courier, Truck, Rail, Vessel, or Multi-Modal Figure 16 indicates the seller s and buyer s responsibilities under this term. (1) Establish an agreement that includes identification of who will insure the shipment, typically it is the seller under this term. The trade term is named in the contract, for example, in the USA an exporter might quote (Incoterms 2000) DDU Santos, Brazil, and for a seller in Genoa, Italy it might be (Incoterms 2000) DDU Charleston, SC USA. Seller s Responsibilities: (2) Seller must provide the commercial invoice or electronic equivalent, as required by the contract of sale. (3) Seller must pack the goods and load the goods at their expense. The seller also is responsible for paying the costs of checking operations (i.e., checking quality, quantity, measurement and weight). (4) Seller contracts with a freight forwarder who invoices them for their fees and the associated documentation fees in the seller s country. (5) Seller must provide the transport document (e.g., ocean bill of lading or air waybill) showing the place of destination. (6) Seller has responsibility for securing export clearance. 23 (7) Seller names the carrier. (8) Seller is invoiced by the carrier for the international freight charges under the freight term freight prepaid. (9) Seller bears risks incurred if the carrier does not arrive on time. (10) Seller bears the risk of loss until the goods are delivered to the agreed foreign destination. 29

38 Figure 16 DDU Airport, Ocean Port, Consolidator, Buyer s Facility: Seller s Risk / Cost (3) (4) (5) (2) (6) (1) (7) (8) (9) (13) (10) (11) (12) Buyer s Responsibilities: (11) Buyer is responsible for any damages to the goods after delivery to the agreed destination. (12) Buyer is responsible for arranging import clearance, duties and taxes. 30

39 4. Delivered Duty Paid (named place of destination) DDP Transport Mode Option: Air, Courier, Truck, Rail, Vessel, or Multi-Modal The seller is responsible for costs of transporting the goods to the named place in the country of importation, including duties, taxes and other charges imposed by the country of importation. They must provide the buyer with the commercial invoice or electronic equivalent, as required by the contract of sale, and with the delivery order and/or transport document-enabling buyer to take possession of the goods. The seller s responsibility is met when the goods are made available to buyer in the country of importation, with import duties and taxes paid. 24 (1) Establish an agreement that includes identification of who will insure the shipment; typically it is the buyer under this term. The trade term is named in the contract, for example in the USA an exporter might quote (Incoterms 2000) DDP Shanghai, China, and for a seller in Hong Kong, PRC it might be (Incoterms 2000) DDP Long Beach, CA USA. Seller s Responsibilities: (2) Seller must provide the commercial invoice or electronic equivalent, as required by the contract of sale. (3) Seller must pack the goods and load the goods at their expense. The seller also is responsible for paying the costs of checking operations (i.e., checking quality, quantity, measurement and weight). (4) Seller contracts with a freight forwarder who invoices them for their fees and the associated documentation fees in the seller s country. (5) Seller must provide the transport document (e.g., ocean bill of lading or air waybill) showing the place of destination. (6) Seller has responsibility for securing export clearance. 25 (7) Seller names the carrier. (8) Seller is invoiced by the carrier for the international freight charges under the freight term freight prepaid. (9) Seller bears risks incurred if the carrier does not arrive on time. (10) Seller bears the risk of loss until the goods are delivered to the agreed foreign destination. (11) Seller is responsible for arranging import clearance, duties and taxes. 31

40 Figure 17 DDP Airport, Ocean Port, Consolidator, Buyer s Facility: Seller s Risk / Cost (3) (4) (5) (2) (6) (1) (7) (8) (12) (9) (11) Buyer s Responsibilities: (12) Buyer is responsible for any damages to the goods after delivery to the agreed destination. If the parties desire a modification to DDP, they can agree that the buyer is responsible for certain import duties or value added taxes imposed by the country of importation under the sales contract, yet retain the trade term such as Delivered Duty Paid Felixstowe, England. 26 (10) 32

41 5. Delivered at Frontier (named place) DAF Transport Mode: Truck, Rail, (Air: See following text.) Frontier is described, but not specifically defined, in Incoterms Webster s dictionary defines it as that part of a country which faces or borders on another country. Frontier is commonly used when customs of trade in the adjoining country requires the carrier to halt the transport of the goods, allow customs inspection and clearance, possibly reload the goods to another form of transport, and then continue to final delivery at the customer s facility. The specified frontier can be that of the countries of exportation and importation, but also could be the frontier between the country of importation and a third country through which the goods transited. DAF is primarily suitable for carriage by rail if it is to a land frontier according to Incoterms 2000, although truck and air shipments are acceptable. The frontier that U.S. sellers and buyers contend with is the U.S. border with Mexico, which is readily accessible by truck and rail carriage, but not airfreight. (1) Establish an agreement that includes identification of who will insure the shipment, typically it is the buyer under this term. An example of use of the trade term for a shipment from the U.S. might be DAF Laredo, TX USA or from Mexico, it might be DAF Nuevo Laredo, Mexico. Seller s Responsibilities: (2) Seller must provide the commercial invoice or electronic equivalent, as required by the contract of sale. (3) Seller must pack the goods and load the goods at their expense. The seller also is responsible for paying the costs of checking operations (i.e., checking quality, quantity, measurement and weight) which are necessary to deliver the goods. (4) Seller must provide the transport document (e.g., inland, rail or air waybill) showing the place of destination. The seller is responsible for costs of transporting the goods to the specified place on the frontier between the two countries, and provides documentation that the goods were delivered to the specified place. (5) Seller names the carrier. (6) Seller is invoiced by the carrier for freight charges to the Frontier under the freight term freight prepaid. (7) Seller has responsibility for securing export clearance. 27 (8) Seller s responsibility is met when the goods are placed at buyer s disposal at the frontier. The seller does not have responsibility for clearing the goods through customs in the adjacent country. 33

42 Figure 18 DAF Border Crossing: Seller s Risk / Cost (3) (4) (5) (2) (6) (7) (8) (1) (9) (10) (11) Buyer s Responsibilities: (9) Buyer s responsibility for costs and risk commences when seller has placed the goods at buyer s disposal. (10) Buyer is responsible for arranging the import clearance, duties and taxes. (11) Buyer is responsible for final delivery to their foreign facility. Exports from the U.S. to Mexico are typically routed by truck for delivery to the buyer s border broker or their consolidator. The cargo is then unloaded at the broker or consolidator s warehouse for reloading on a truck or container at the direction of the buyer. Upon customs clearance, the motor carrier will then transport the truck or container into Mexico. This practice would prompt the seller or buyer to consider the multi-modal terms, such as FCA Laredo, TX USA or CPT Monterrey, NL, MX. 34

43 E. Chapter Summary Incoterms 2000 provide a common reference for parties in different countries to use in determining their contractual obligations and, in particular, the price at which merchandise will be exchanged and the responsibilities of each party to assure its transportation. A contract should reflect an Incoterm consistent with the transportation mode most suitable for the transaction at hand. The calculation of your sales price should take account of the costs that your company is contractually bound to bear under the option chosen. Be careful that, if the contract is being formed through an exchange of correspondence, both parties have agreed to the same Incoterm provision for the transaction. Inconsistent terms in the offer and acceptance can easily be overlooked, leaving ambiguity in place of certainty. Although such crossed signals do not happen very often, they do happen often enough to require careful attention on the part of the persons negotiating the contract, as well as those charged with fulfilling its terms. The terms of transportation in the bill of lading should be the same as those in the underlying contract for sale of the goods AND subject to Incoterms If the terms of the underlying contract were not the same as the actions your firm took, or the contract is not subject to Incoterms 2000, your firm may encounter some difficulties. Incoterms 2000 indicates that the buyer will select the carrier and pay the freight charges when it is an Ex Works or F term, and under C and D terms that the seller will select the carrier and pay the freight charges. Consider the following. If the contract calls for your company to sell goods FOB New York, you are responsible for transportation to and loading on board the vessel. As a courtesy to your buyer, your company arranged and paid for ocean transport to the foreign port of unlading. Your firm paid for an additional cost beyond that specified in the agreement and the TRADE TERM FOB. The buyer now views this transaction as a CFR shipment to their country and contends that the freight charges are for the seller s responsibility and not the buyer s as was obligated under FOB New York. The seller also found that the offer or quote, purchase order, and commercial invoice did not support the seller s intention of prepaying the freight and billing to the buyer through a written explanation of the now modified FOB New York. The seller s mistake is compounded if the goods were lost by the carrier and not delivered to the buyer. This could give rise to two disputes that you could have avoided being involved in or associated with altogether. One between you and the buyer regarding payment of ocean freight charges, and the other between the carrier you selected and the buyer. 35

44 Such incidents are rare, but the harmful consequences when they do occur warrant vigilance on your company s part to be sure that the transportation terms of the contract of sale are fulfilled. The intent of Incoterms is to provide the seller and the buyer with a common language and set of terms to understand who is paying for what. If the seller itemizes those costs in a formal way on the quotation, pro forma and commercial invoice, it can reduce confusion. As reflected in the previous discussion, you should make certain that the terms of transport provided in the bill of lading for the merchandise reflect the terms of the contract. A bill of lading is a contract between a shipper (typically, the seller) and a transportation company under which freight is to be moved between specified points for a specified charge. The shipper or freight forwarder submits the information for the bill of lading in formats acceptable to the carrier. The carrier or their representative then issues the bill of lading. It may serve as a document of title (for example, an original ocean bill of lading), and a receipt for goods. It is also considered to be a contract for carriage unless superseded by a separate agreement with the carrier. The quotation form allows itemization of the charges that exporters may incur when shipping their products; it prevents them from overlooking expenses related to the shipment; and it provides them with more information to pass onto their customers. The buyer may then choose to have the exporter handle the transportation arrangements, and it allows the buyer to see the costs and compare them to shipping costs they may have obtained from their freight forwarders and carriers at destination. Figure 19 is an example of an internal quotation form that can be used for developing either export or import quotations. It allows an accounting of the anticipated cost items that will be incurred in the transaction for the F Group Terms. Figure 22 is an example of a completed internal quotation; the internal quote is a way to estimate the costs that will occur in the transaction; someone is to pay the costs. Figure 23 is a formal quotation for a shipment to the United Kingdom. The two forms were developed using Incoterms 2000 as a guide for identifying the costs that the seller will bill the buyer on their commercial invoice based on CIP London, England. The ICC announced Incoterms 2000 will be replaced by Incoterms 2010 effective January Upon reading the revised trade terms and after adjusting internal policy, parties to international contracts will be advised to begin incorporating reference Incoterms 2010 into contracts effective from January 2011 or any date thereafter. The revision to the Incoterms was prompted by developments in technology and in response to an increased use of Incoterms in commercial practice worldwide. 36

45 Figure 19 Internal Quote Profile Terms: E & F Group Terms EXW or FAS or FOB or FCA Freight Quote Quote Reference Quote Date: Quote To: Customer Ref. : Country of Origin: Quote Validity: Est. Ship Date From Factory: Est. Delivery Date to Main Carrier: Est. Ship Date From Port: Ship To: Frequency of Sailing: Trade Term, Check One: EXW FAS FOB FCA Customer Requested: Terms of Payment, check ( ) one: Open Account Cash In Advance Credit Card Documentary Collection: choose a. Time at days or b. Sight Draft Unconfirmed Letter of Credit: choose: a. Time at days or b. Sight Draft Confirmed Letter of Credit: choose: a. Time at days or b. Sight Draft Unit Number Description/HS Number Unit Price Extended Price in USD HS Banking Fees $ Packing Fees $ Subtotal $ Total EXW $ Drayage by: Origin: To: Cost at $ $ Inland Freight to Pier: $ $ Pier Charges as Named Here: $ Unloading Charges at Pier: $ Subtotal $ (Exporter s Cargo Risk Ends When Exporter Delivers Goods to Vessel) FAS Ocean Port $ Document Fees (Certificate of Origin) $ Other Courier to Bank/Phone Calls $ Other Bank Draft Preparation $ Subtotal $ (Exporter s Cargo Risk Ends once Goods are IN RECEIPT OF FIRST CARRIER, proof is a signed inland bill of lading or delivery receipt.) FCA Place of Receipt 28 $ Or Loading Charges onto Vessel: $ (Exporter s Cargo Risk Ends Once Goods are ON-BOARD THE VESSEL, proof is a signed on-board ocean bill of lading.) FOB Port of Loading $ Expected Export PACKING INFORMATION: Gross Weight: kgs. ( lbs.) Dims Each: = CUFT/ CBM Net Weight: kgs. ( lbs.) Total Cubic Ft: Cubic Meters Completed by: DATE: Export Clearance Authorization: I Foreign Consignee (Foreign Principal Party in Interest (FPPI)), authorize (U.S. Principal Party in Interest (USPPI) or Seller), to act on our behalf for export control and customs purposes and to prepare and transmit such export information electronically (Electronic Export Information (EEI)), which may be required by law or regulation in connection with the exportation or transportation of any merchandise on behalf of said FPPI. Signed: Dated: 37

46 Figure 20 is an example of a completed commercial invoice for an import shipment from Thailand. It itemizes the product price, the anticipated transportation costs that the seller will invoice the buyer in Puerto Rico, and assumes that the buyer will arrange for the transportation and forwarding costs from Thailand to Puerto Rico. If the Puerto Rican buyer chooses to accept the quotation with FCA Port-Bangkok, Thailand, they know that based on Incoterms 2000 they have several responsibilities. SELLER (Name, Full Address, Country) ABC GARMENT COMPANY INTERNATIONAL 1 Thai Way Bangkok, Thailand Phone: 454/ Figure 20 Sample U.S. Import Commercial Invoice Commercial Invoice Date: 17-JUN-20YY Purchase Order No & 7990 Invoice No.: PT9911 & PT9913 Other References: GAR99030 SOLD TO: Shipped via: PUERTO RICAN IMPORTS INTERNATIONAL Anna Maersk V. 41, Marginal Ave., Kennedy Carr. 2KM2.5 Ocean, Freight Collect Pueblo Viejo, San Juan PR USA From: Bangkok, Thailand EIN: Phone: 787/ Delivery: 20-JUN-20YY Phone: 787/ SHIP TO: TERMS AND CONDITIONS OF DELIVERY / PAYMENT: PUERTO RICAN IMPORTS INTERNATIONAL Sight Draft, Documentary Collection C/O Alpa USA TRADE TERM: Incoterms 2000, FCA Bangkok, Thailand San Juan, Puerto Rico USA Phone: 787/ Fax: 787/ CURRENCY OF SALE: USD EIN: NO. AND KIND OF PACKAGES: GROSS WEIGHT NET WEIGHT (KG.) 419 CARTONS, cardboard (KG.) 11, , MARKS AND NUMBERS: PT990401A PO7990 PT MADE IN THAILAND # 1/419 to 419/419 We hereby certify that this invoice is true and correct. Authorized Signature: Date: 17-JUN 20YY DESCRIPTION: SPECIFICATION OF COMMODITIES (IN CODE AND/OR IN FULL) Polyester Tool Bags - H.S. No Cloth and Leather Handbags - H.S. No Pro Sports Nylon Bags - H.S. No QUANTITY 3,960 PACKING INLAND FREIGHT 456 5,640 UNIT PRICE $ 5.63 $ 4.85 $ 7.21 INTERNATIONAL FREIGHT OTHER COSTS (Specify) INSURANCE TOTAL INVOICE AMOUNT: FCA BANGKOK, THAILAND $ 2, $ $ 1, $ AMOUNT $ 27, $ 28, ,

47 Figure 21 Sample Internal Freight Quote Terms: EXW, FCA, CPT, CIP, DDU, DDP Internal Quote SHIPPER NAME: Address: Country: PHONE/FAX Date Issued: Additional Information: Quote Reference Customer Ref. : Quote To: Quote Valid Through: Frequency of Departure: Transit Time Est. Ship Date From Factory: Fax: Est. Delivery Date to Main Carrier: Tel: Est. Ship Date From Airport: Ship To: Trade Terms, Check One: EXW FCA CPT CIP DDU DDP Payment Terms, check ( ) one: Open Account Cash In Advance Credit Card Documentary Collection: choose a. Time at days or b. Sight Draft Unconfirmed Letter of Credit: choose: a. Time at days or b. Sight Draft Confirmed Letter of Credit: choose: a. Time at days or b. Sight Draft Unit Origin Country Description/HS Number Unit Price Price in USD HS Banking Fees, when applicable $ Packing Fees $ Subtotal $ Total EXW USD$ Inland Freight by: Origin: To: Cost at $ / $ Document Fees (Certificate of Origin) $ Other $ Subtotal $ FCA port of loading USD$ Freight Forwarder Fees $ Air Freight by: To POD: a. Quoted Freight Rate: $ x actual kg or lb. = $ b. Quoted Freight Rate: $ x dimensional kg or lb. = $ Note: Air carrier will assess freight rate based on whatever produces greatest amount of revenue. Higher of a. or b. above $ Surcharges: Fuel Surcharge $ Other Charges $ Subtotal $ CPT Port of Discharge USD$ Insurance Rate: $0.15/$100 Value All Risk, Warehouse/Warehouse $0.15 x (110% of CIP Value: $ )/100 = Premium $ CIP Port of Discharge USD$ Inland Freight to Destination $ DDU NAMED PLACE USD$ Duty at Destination (VAT not included) $ Broker s Fees $ DDP Named Place USD$ Estimates: Gross Weight: kgs. ( lbs./2.2046) Dims.: X X = CUFT. OR CBM Dimensional Weight: x x = 366 = kg. Completed by: On: 39

48 Figure 22 Internal Quote Profile Air Freight Air Freight Quote GTC, Inc N. Dixie Drive Dayton, Ohio USA Telephone: Fax: Date Issued: Additional Information: Quote To: Quote Reference 2-YY ABC IMPORT REFRIGERATION & SERVICE Customer Ref : Fax. Dated YY Refrigeration Way Country of Origin: U.S. Bristol BS1 5T H England Quote Valid Through: 30 days Fax: Est. Ship Date From Factory: YY Tel: Est. Delivery Date to Main Carrier: YY Est. Ship Date From Airport: YY Ship To: Frequency of Departure: bi-weekly XYX Refrigeration Distribution Center Est. Transit Time: 2 days 134 London Way Trade Terms, Check One: Heathrow Airport, England EXW FCA CPT CIP DDU DDP Terms of Payment, check ( ) one: Open Account Cash In Advance Credit Card Documentary Collection: choose a. Time at days or b. Sight Draft Unconfirmed Letter of Credit: choose: a. Time at days or b. Sight Draft Confirmed Letter of Credit: choose: a. Time at days or b. Sight Draft Unit Number Description/HS Number Unit Price Price in USD Model A Automatic Remote Thermostats $ $25, HS Banking Fees, when applicable $ 0 Packing Fees $ 0 Subtotal $ Total EXW Dayton, OH $ 25, Inland Freight by: Towne Airfreight Origin: Dayton, OH To: Elk Grove Village, IL Cost at $ 159/ Lump sum $ (EXW + Inland = EEI Value) Document Fees (Certificate of Origin) $ Other $ Subtotal $ FCA Airport: Chicago, Illinois $ 25, Freight Forwarder Fees $ Airfreight by: American/FlightMasters To POD: London/Heathrow a. Quoted Freight Rate: $ 1.30 x 1060 actual kg or lb. = $ 1,378 b. Quoted Freight Rate: $ x dimensional kg or lb. = $ Higher of a. or b. above $ 1378 Surcharges: Fuel Surcharge $ 106 ($.10 x 1060 kg) Security Charge $ Other Charges $ Subtotal $1,499 CPT London, England $ 27, Insurance Rate: $0.15/$100 Value All Risk, Warehouse/Warehouse $0.15 x (110% of CIP Value: $29, )/100 = Premium $44.88 CIP London, England $ 27, Expected PACKING INFORMATION: 1 X Palletized Cardboard Box : Gross Weight: 1060 kgs. (2336 lbs./2.2046) Dims.: 45 X45 X56 = 65.6 CUFT. OR 1.86 CBM Net Weight: 954 kgs. (2102 lbs./2.2046) Dimensional Weight: 45 x45 x56 =113, = kg. Completed by: C Petersen On: 1/13/YY 40

49 Figure 23 Sample Quotation Quotation GTC, Inc N. Dixie Drive Dayton, Ohio USA Tel: Fax: Date Issued: YY Sold To: Additional Information: ABC IMPORT REFRIGERATION & SERVICE QUOTATION Refrigeration Way Buyer Ref. : Fax. Dated YY Bristol BS1 5T H England Quote Validity: 30 calendar days from quote date Fax: Tel: Est. Ship Date From Factory: 15 days from receipt of order Ship To: Est. Ship Date From airport: 20 days from XYX Refrigeration Distribution Center receipt of order 134 London Way Trade Term: CIP INCOTERMS 2000 Heathrow Airport, England Terms of Payment: OPEN ACCOUNT, 30 DAYS FROM AIR WAYBILL DATE Unit Quantity Description/HS Number Unit Price Extended Price in USD Model A Automatic Remote Thermostats $ $25, HS Number Country of Origin: USA Total EXW Plant, Dayton, OH USA $25, Shipping Costs Dayton to Chicago Airport includes Inland freight, export packaging, and export clearance fees $ FCA Chicago Airport, IL USA $25, Shipping Costs Chicago Airport to Heathrow Airport, London includes, Forwarder s fees, insurance, Airfreight and corresponding surcharges $ 1, TOTAL CIP LONDON, ENGLAND $ 27, These commodities, technology or software will be exported from the United States in accordance with the Export Administration Regulations. Diversion contrary to US law prohibited. Title Transfers With: Delivery to International Carrier Frequency of carrier departure: bi-weekly Insurance: All risks, warehouse to warehouse for 110% of invoice value insured under our open cargo policy. Estimated PACKING DETAILS: Export Packaging-1 Cardboard Carton Dimensions: 45 X45 X56 = 65.6 CUFT/1.86 CBM Gross Weight: 1060 kg. (2336 lb.) Net Weight: 954 kg. (2102 lb.) Disputes shall be resolved under the rules of the American Arbitration Association, with arbitration proceedings to take place in New York, New York, USA. The receipt of a Purchase Order will signify acceptance of the Terms and Conditions of this quotation, which are stated here and appended as pages 2 of 3 and 3 of 3. Please mention GTC, Inc. s Quotation number when placing your order. If changes to this offer are needed, please request a revised Quotation. We hereby certify this Quotation true and correct. C. Soprano Global Training Center, Inc. If this Quotation meets your requirements, please countersign below. This will indicate your acceptance of our offer. Signature, Title, On behalf of Date: Please note, the terms and conditions referenced in the quotation are not included in this text. 41

50 It often helps the seller and buyer to have a cheat sheet, based on Incoterms 2000, to give a shorthand reference to the various terms and their requirements. Figure 24 provides a summary of the trade terms and the corresponding expenses the seller and the buyer will incur and pay by Incoterm selected. The following definitions are assigned to the terms listed under Costs in Seller s Country and Costs in Buyer s Country of Figure 25. Costs in Seller s Country: Definitions o Trade Term: This is a listing of the 13 Incoterms; however, FCA is listed twice with two notes 5. and 6. o Loading Goods on Truck: This includes charges for additional handling and labor to stow the goods in a container, in a trailer, or on a flat bed. o Inland Haulage (pre-carriage): Inland haulage is the truck or rail freight charges to a location, port or point in the seller s country. o Documentation Fees: These will typically be charges billed by the freight forwarder for preparing a Certificate of Origin, Export Declaration or associated with submitting documentation to a certifying body, such as a foreign consulate. o Export Charges: Fees or charges associated with exporting the goods. o Loading Goods at Carrier s Facility: These are fees incurred for handling, loading, stevedoring, pier charges, and other charges billed by the carrier for a shipment. o Transportation Equipment Fees: Chassis rental fees, detention charge, bobtail fee, container storage, and other charges. o Cargo Insurance: Cost of insurance billed by either the insurance company or the freight forwarder. o International Freight: Air, motor carrier, ocean freight charges for moving the goods to the international destination. Costs in Buyer s Country: Definitions o Unloading Goods at Terminal: Fees charged by the carrier for unloading product from a plane, truck or ocean vessel. o Import Duties: Duties owed for importing goods at final destination based on application of the foreign customs tariff. This does not include taxes, such as Value Added Tax (VAT). o Inland haulage (on-carriage): Cost of shipping the goods from the port or airport to the inland destination. o Unloading Goods at Buyer s Facility: Unloading the trailer, container, van or flat rack at the buyer s premises. Under Incoterms, the term selected assists in dividing the costs between the seller and the buyer. However, it is up to the seller to assure that the costs associated with their chosen term(s) are included in the pricing stated on the seller s quote, pro forma invoice and commercial invoice. Figure 25 is a template for identifying internal costs for an international transaction. 42

51 Figure 24 Internal Costs - Quote Information 29 Our reference: Customer reference: Country: Supplier: Customer Information: Name Fax No: Internet/ Address: Telephone No: Product Information, this order (appropriate to business and product): Dimensions (length x width x height) x x = Cubic Measure (METERS, CENTIMETERS OR FEET, INCHES) X No. of Units = Total measurement (inches/ centimeter/meter/feet) Net weight per unit Gross Weight (lbs. and kg) Schedule B or HTSUS Number: Product Charges (use data relevant to your product) Cost per unit x number of units. Etc: Commissions or other payables, to whom: Other sourcing costs, basic Base sales price per unit x = Total Special labels/marks/promos (type and source) Pre-export packing, marking, labeling done by Bank fees (charges for payment term: Draft: Sight Time, Letter of Credit: Sight Time, Cash, Credit Card INCOTERM EXW at the source or factory: Shipment from to : Ocean, Air, Rail, Truck, Air, Other Fees, Special Packing, marking, and handling for this destination, inland freight Strapping/pallets (provided by) Freight forwarder: Name/Telephone Consular documents/messenger used/cost: Certificate of Origin/messenger used/cost: Export license requirement: ECCN # License required? Y/N Exception symbol Other charges-list each: subtotal INCOTERM FCA, Sub-total, at the source or factory: Inland freight, to (name inland point) INCOTERM FCA, Sub-total, at (name the point): Port Charges and Documents Pier Delivery charges (basis/assessed by): Unloading (heavy lift/bags/conveyor): Terminal charges (basis): Dock receipt/mates receipt (who arranged): Other documents & requirements, or charges (list): Vessel or carrier (name the port or location): INCOTERM Choose one FAS or FOB: USD$ COST 43

52 Figure 24 (continued) Internal Costs - Quote Information 30 Freight rate and basis to named destination: Freight rate based on (circle each that applies) Weight-Measure/Ocean Air On Deck Under deck Reefer Other data - Freight Rate $ per Minimum Weight Volume Subtotal INCOTERM Choose one CFR, CPT at (name the point): Insurance: Required by seller buyer - Copy to bank Type Coverage: Rate/$ INCOTERM Choose one: ClF, CIP, DES, DEQ, or DDU at (name the point): Add Customs Clearance Costs if DDP is selected at (name the point): Total Invoice price, this transaction and Incoterm Selected: Other notes regarding this buyer: 44

53 Trade Term Loading Goods on Truck Inland Haulage (precarriage) Documentation Fees Figure 25 Incoterms 2000 Guide to Cost Division Costs in Seller's Country Export Charges Loading Goods at Carrier's Facility Transportation Equipment Fees ExW buyer buyer buyer buyer buyer buyer FAS seller seller seller 7. seller 7. buyer buyer FOB seller seller seller 7. seller 7. seller 3. buyer FCA 5. seller buyer seller 7. seller 7. buyer buyer Cargo Insurance 1, 1, 1, 1, International Freight (main carriage) Unloading Goods at Terminal Costs in Buyer's Country Inland Import Haulage Duties (oncarriage) Unloading Goods at Buyer's Facility buyer buyer buyer buyer buyer buyer buyer buyer buyer buyer buyer buyer buyer buyer buyer buyer buyer buyer buyer buyer FCA 6. seller seller seller 7. seller 7. buyer buyer buyer buyer buyer buyer buyer CFR seller seller seller seller seller seller 1, seller seller 2. buyer buyer buyer CIF seller seller seller seller seller seller seller seller seller 2. buyer buyer buyer CPT seller seller seller seller seller seller 1, seller seller buyer buyer buyer CIP seller seller seller seller seller seller seller seller seller buyer buyer buyer DES seller seller seller seller seller seller 1, seller buyer buyer buyer buyer DEQ seller seller seller seller seller seller 1, seller seller buyer buyer buyer DDU seller seller seller seller seller seller 1, seller seller buyer seller 4. buyer DDP seller seller seller seller seller seller 1, seller seller seller seller 4. buyer DAF seller seller seller seller seller seller 1, seller 4. buyer buyer buyer buyer 1. It is better to state who will pay for the insurance in a quote or contract. 2. It is best to look to the carrier's quotation, carrier contract, and terms and conditions of the bill of lading to determine who will be billed for off-loading charges. Carriers often include the off-loading charges as a part of the ocean freight charges, thus the seller (shipper) is typically responsible for this cost. 3. Seller and buyer are to be guided by practices at port of loading. 4. The seller pays to the agreed delivery point. 5. This depicts costs that will be paid by the seller if the term is "FCA seller's facility." 6. This depicts costs that will be paid by the seller if the term is, "FCA a named consolidator, city, state, country." 7. Common trade practice in the U.S. advises sellers that the buyer will pay for documentation and export charges, however it is best to clarify in underlying agreements. The Guide to Incoterms 2000 and Incoterms 2000 are silent as to a definition of documentation fees and export charges to be paid by the seller or buyer under FAS, FOB, and FCA. 1, 45

54 Now that we have reviewed the different steps, costs and responsibilities involved in export transactions, it is appropriate to consider calculation of price for your company s export sales. The price that your company charges is the most important aspect of an export transaction, as it determines the profitability (if any) of the sale to both the buyer and the seller. Pricing approaches used in making domestic sales are insufficient for exports, simply because there are many more steps and costs that arise in international transactions. Charging an inappropriate price, for example by failing to consider ocean transportation costs, can turn an export transaction into a financial disaster. At the same time, your prospective buyer faces possible additional costs and considerations in purchasing your company s goods instead of using known domestic sources. Pricing calculations will vary, depending on such issues as whether the prospective transaction involves a new product or a new foreign market, whether the article is a commodity or speciallyproduced, and whether your company sees the foreign country as a major market or an incidental destination for excess production. Will the product require an extensive support infrastructure, warranty services, or product modifications? What is the range of prices for competing products (whether imported or domestically produced) in the foreign market, and is your product price competitive there? Are there legal or regulatory requirements in the foreign country that could affect the price that your company can charge for exports there? One approach for the export price calculation is the cost plus method, under which the costs of producing and exporting a product are tallied to yield an export market cost. To prepare an accurate calculation, it is necessary to identify and accurately value all of the costs that a potential transaction will entail. As a starting point, the analyst would add to the cost of manufacturing the articles appropriate amounts for such fixed costs as selling, general and administrative expenses, research and development, and plant depreciation. To that point, the analysis is identical to a cost calculation for domestic sales. The analysis must then take account of the additional costs attendant to exporting and applicable to your proposed transaction. Those might include: additional packing, transportation to the port, loading and handling charges, ocean transportation and insurance, freight forwarding fees, finance charges, unloading and handling in the port of destination, foreign customs duties, and foreign sales representative s commissions. In addition, it is wise to identify the cost of product modifications needed for regulatory or competitive reasons in the foreign market, additional warranty and servicing costs, and other higher costs attributable to the export version of the product. The resultant price cannot fall below the total calculated cost plus the desired profit margin. A second approach is the marginal cost pricing method, under which the exporter calculates the direct expenses of producing and exporting articles, but excluding fixed costs from the analysis. Thus, the marginal cost pricing analysis looks to the incremental costs of producing and exporting merchandise, with the minimum price being no lower than the sum of such costs. 46

55 Of course, the potential buyer in the export market will undertake its own price analysis to determine the profitability of purchasing your company s merchandise at a specific quoted price. Depending, of course, on the terms of sale, the potential buyer will want to itemize a number of additional costs on top of the price it pays for the goods. These may include customs tariffs, other taxes imposed on imported merchandise (such as Value Added Tax), import brokerage and clearance fees, vessel unloading, inland transportation, financing charges, and warehousing. The potential buyer is unlikely to purchase your company s goods unless it is able to resell them at a price higher than its costs of acquisition. A legal concern to consider in setting your price is the possibility of antidumping duties being assessed on your goods by the government of the importing country. In brief, dumping is price discrimination between national markets. It occurs when the price of a product in an export market is lower than the price for that product in the country of production/exportation. An importing country s government can impose additional duties when dumping has occurred and the imports have caused economic injury to a competing production industry in the country of importation. Antidumping duties can disrupt your export sales or shut your company out of a foreign market altogether. Although your company and its foreign customers would receive ample warning that the foreign government is considering imposition of the additional duties, the potential for such trade disrupting measures warrants consideration of antidumping issues in setting your company s export prices. 31 Considerations for your firm include: Learn and understand the price sensitivity of your market: o Availability of substitutes, o Customer purchasing patterns for your products, and o The impact of the purchase on the buyer s budget. Learn and understand the special costs of exporting. Learn and understand the structure of your sales channels. Review your export pricing options: o Standard Ex Works Cost as a pricing basis, o Standard Ex Works Cost without allocations, as a pricing basis, o Marginal costing, as a pricing basis, or o Retrograde pricing. If you can t price your product for the market: o Wait. Enter the market at a later date, o Sell the features and benefits that support the higher price, o Adapt your product to the specific market, o Cut your costs or margins to achieve the market price, or o Redesign your pricing strategy to obtain market share. 47

56 E. Exercises 48

57 Figure 26 Loading Air Freight Figure 27 Incoterms Exercise: Air Freight Incoterm Selection Facts: Inland Freight: Seller Prepays and Freight Added to Invoice Forwarder: Buyer Selects and Pays Fees Air Freight: Collect, Paid By Buyer Insurance: By Buyer Place of Receipt: Logan Airport, Boston, MA Place of Delivery: Tokyo, Japan Incoterm 2000 selected: Where does risk transfer to buyer? Place: Steps to solving this exercise include: 1. Identify the mode being used to ship the goods: 2. Eliminate those Incoterms or Trade Terms that don t include the mode being used: 3. Identify the costs associated with the shipment that the seller will pay, and the buyer will pay, and eliminate the Incoterm(s) that that don t include those costs: 4. Identify where risk to the cargo will transfer from the seller to the buyer for this potential order: 5. If needed, specify on the quotation and commercial invoice any changes that may be made to the trade term based on common practice in this business segment or trade; for example, FCA Logan Airport, Boston, MA USA but avoid modifying the term itself by adding qualifying statements or comments. 6. Fill in the sample invoice with those charges to add for the Incoterm selected. 49

58 Export References: Invoice No: Purchase Order Number: Exporter Name and Address: Figure 28 Invoice for Exercise Ultimate Consignee Name, Address, Phone: Sold To Name, Address, Phone: Intermediate Consignee / Consigned to: Notify Party Name and Address: Shipment Date: AWB/BL Number: Currency: Conditions of Sale/Payment Term Transportation: Freight: Title Transfer Occurs At: Via: Reference Incoterms 2000: From: Payment Terms: Item Number, Harmonized Number, Product No. Description Country of Origin Total Number of Packages: Total Net Weight (kgs): Total Gross Weight (kgs): Quantit y Unit Price Total Price These commodities, technology, or software will be exported from the United States in accordance with the Export Administration Regulations. Diversion contrary to U.S. law prohibited. Authorized Signature: Company: Name: Date: Title: Telephone Number(s) Voice: Facsimile: 50

59 Figure 29 Cargo at Vessel Incoterm Selection Facts: Figure 30 Incoterms Exercise: Ocean Freight Freight Forwarder: Seller Selects Cargo will Ship in a 20' Container - ocean carrier Inland carriage by hired truck carrier - prepaid Place of Receipt: American President Lines (Ocean Carrier) Chicago Rail Terminal Place of Delivery/Port of Discharge: Tokyo, Japan Ocean Freight: Prepaid Insurance, All risk, Warehouse to Warehouse: Seller provides and pays Shipper Does Not Guarantee a Delivery Date Seller Limits Risk to a U.S. Point by use of Incoterm Incoterm 2000 selected: Where does risk transfer to buyer? Place: Steps to solving this exercise include: 1. Identify the mode being used to ship the goods: 2. Eliminate those Incoterms or Trade Terms that don t include the mode being used: 3. Identify the costs associated with the shipment that the seller will pay, and the buyer will pay, and eliminate the Incoterm(s) that that don t include those costs: 4. Identify where risk to the cargo will transfer from the seller to the buyer for this potential order: 5. If needed, specify on the quotation and commercial invoice any changes that may be made to the trade term based on common practice in this business segment or trade. 6. Fill in the sample invoice with those charges to add for the Incoterm selected. 51