What Are Incoterms and Why Should the Amazon Seller Know about Them?
In case you didn’t know yet, incoterms stand for International Commercial Terms. This refers to the set of rules that determines the roles of buyers and sellers around the distribution of items. In short, these are guidelines that establish an important part of the buying transaction along with a seller. It dictates who will pay for unloading or loading expenses, import expenses, insurance, export processes, and more.
Knowing the common incoterms will allow you to have an understanding of the final price of the item you are importing. Not knowing this will lead you footing the bill for more than you have negotiated.
Incoterms can be divided into categories according to several criteria. For example:
- By the method of delivery: applicable only to sea and inland water transport or universal, applicable to any type of transport;
- By categories: E, F, C, D.
In this article, we will consider incoterms that you are most likely to encounter when buying goods on Alibaba.
5 Incoterms That Buyers Most Often Encounter When Ordering Goods from China
The International Chamber of Commerce publishes an update for the global commercial terms every ten years. This is what we now refer to as incoterms. Such trade terms are often utilized by national and global trade contractors.
EXW (Ex Works, ExWarehouse)
EXW refers to the term where the manufacturer has supplied after the delivery or place suitably packaged items at the disposal of the buyer at an approved location. This location might be a warehouse, a quay, a factory, or others. The items aren’t cleared for any export.
The seller isn’t obliged to load the items into a collecting truck. If they do, it’s at the expense of the buyer. Take note that this is the only incoterm where the products aren’t needed to be cleared for export.
This is the riskiest option for the buyer. The obligations of the manufacturer are minimal and include only a few points:
- Production of goods in the right amount.
- Packing it for shipment.
- Providing access to the warehouse with items.
The buyer must solve a number of issues:
- Customs clearance (import and export).
- Loading and unloading operations along the entire route of the goods.
However, with this method of organizing delivery, the amount of your order will be the smallest. On the one hand, you can increase your margin. But don't forget that additional costs (for transportation, customs clearance, loading, etc.) will be on you. And you should calculate how justified this delivery option is.
If you order goods for the first time on Alibaba, we don't recommend using this delivery method. This is too risky and can take a lot of time. In the future, when you find a responsible and reliable supplier and will know about the many subtleties of delivering goods from China, you can use this option to deliver a small batch of goods.
FOB (Free on Board)
Free on Board (FOB) refers to the seller delivering the items after they’re loaded safely on the stop at the settled upon shipping port. The buyer is now accountable for the peril and charge of the cargo contract. That is, when the goods are loaded onto the ship, it is believed that the manufacturer has fulfilled its obligations. Further, all responsibility for the placement of cargo on the ship, its unloading at the port of destination, delivery to the buyer's warehouse passes to you.
The main advantage of this delivery option is less load on the buyer and approximately the same distribution of risks and responsibilities.
- Make the goods according to the contract.
- Carry out packaging, labeling.
- Deliver the goods to the port specified in the contract.
- To inspect the goods.
- To ensure loading onto the ship.
- Ensure the customs clearance of goods with the receipt of all permits.
In this case, the costs for each of these stages are borne by the manufacturer.
On the other hand, the buyer provides the following:
- Organizes the placement of goods on board the vessel.
- Pay for insurance during transportation (if he considers it necessary).
- Prepares documents for the import of goods, receives the necessary certificates, etc.
- Pays the costs associated with paperwork, unloading, and subsequent delivery to the warehouse.
The buyer must also inspect the goods before loading them onto the vessel at his own expense.
The price of the goods in this case will be higher since the supplier must take into account the additional costs that he incurs with this type of delivery.
In practice, most Chinese suppliers work specifically with FOB. But this doesn't mean that you should agree to it. There are other delivery options that we'll discuss below. If you are just starting your business, perhaps they will suit you more, as they shift more obligations to suppliers.
CIF (Cost, Insurance, Freight)
A feature of this type of incoterms is that the cost of goods will include minimum insurance for transportation on board, as well as for the freight contract to the chosen destination port. All this is paid by the seller (supplier). However, the responsibility for them will be transferred to the buyer when the items are stowed on board safely.
The supplier is responsible only for procuring the least level of insurance coverage. That minimum level of coverage isn’t enough for manufactured items. Therefore, the seller and the buyer have the freedom to deal with a greater level of handling.
Responsibilities of the seller include the following:
- Organization of delivery of goods from a warehouse to a port inside China.
- Execution of export documents.
- Passing the customs inspection and processing of customs documents.
- Payment of customs, port charges when loading goods, payment of insurance in a minimum amount.
- Organization of loading goods on board.
- Payment by sea shipping.
You, as a buyer, will need to do the following:
- On-time and in full to pay your order to the supplier.
- Organize timely unloading of goods after arrival at the port of destination.
- Draw up the necessary documents, pay fees.
- Organize the delivery of goods to your warehouse.
With this option of delivery, the cost of goods will be more for you, however, this is because the supplier needs to cover the costs that he will incur in the process of sending. On the other hand, this approach simplifies the process of delivering products from China.
An important point: if container transportation by sea is provided, cargo insurance from the moment it enters the terminal until loading onto the ship is not provided. Remember this!
CFR (Cost and Freight)
This refers to the seller delivering the appropriately packaged items. These are cleared for export and now loaded safely on the vessel at the decided shipping port. The seller is accountable for paying the freight contractor ahead of time.
The responsibility for the goods is reassigned to the buyer once they are packed on board safely. This is true even though the seller pays for the freight contract to the chosen location. The buyer must be updated on the schedules of the delivery with sufficient time to manage the insurance.
The difference between this delivery method and CIF is that the provider does not pay insurance costs even in the minimum amount. Therefore, if you want to get insurance, you must take care of this.
Otherwise, the rights and obligations of the supplier and buyer are the same as in Incoterms CIF.
DAP (Delivered at Place)
This means the seller delivers the items when they arrive at the pre-settled location. The role of the buyer is to effect any customs clearance and pay any import taxes. Take note that there’s no prerequisite for insurance. However, since both sides are interested in the goods being delivered intact, it is worth discussing ways to insure the goods with the supplier.
The delivery isn’t finished until the items are unloaded at the settled location.
This is very convenient for the buyer since he needs to take care only of obtaining the necessary documents for customs clearance and payment of duties and fees. In this case, the goods can be delivered directly to your warehouse, and you will only have to take care of unloading them.
However, remember that the cost of the product itself will be significantly higher than the minimum expected price. But this is due to the costs of the supplier for the transportation of goods to the point of transfer to the buyer.
In general, this option is quite good for both sides: you get a minimum of worries when delivering goods from China, and the supplier doesn't need to worry about processing and paying for your goods at customs upon import.
Other Used Incoterms
FAS (Free Alongside Ship)
This applies to inland or sea waterway transport. The seller is accountable for sending items to the agreed port. Nonetheless, it’s the responsibility of the buyer to take it from there after the items are at the port. You will pay the items to get loaded on the ship, the ocean freight, and others that are necessary to get the shipment to its location. In this case, the seller’s obligations after delivery of the goods to the port end. However, he must obtain a customs permit, certificates, if necessary, and pay all expenses for it at the same time.
Insurance with this option for the organization of delivery is not provided. But it is in your interests to formalize it in order to avoid risks. As soon as the seller has unloaded the goods at the indicated place (berth or barge), you are responsible for it.
It's necessary to indicate the place of final delivery and unloading of goods as accurately as possible. Otherwise, the supplier can simply unload the goods at that berth, where it will be convenient for him.
FCA (Free Carrier)
This means that the manufacturer is responsible for the goods until the moment they are transferred to the carrier. As for the latter, you can choose absolutely any company. And it will be responsible for the transportation and delivery of your goods.
It's important to understand that if the place for the transfer of goods is the territory that belongs to the supplier, or its warehouse, then the costs of unloading/loading are borne by him. If a port or a third-party warehouse is chosen as such a place, then you pay the costs.
The supplier is obliged to draw up customs documents, pay customs and export fees.
DAT (Delivered at Terminal)
This is a term showing that the seller transports once the items are unpacked at the agreed location. The word terminal here could refer to a warehouse, quayside, a container yard, or other areas of the cargo terminal. Do you want to avoid any confusion over the location? The terminal must be agreed upon ahead of time.
The manufacturer must provide packaging, labeling, delivery of goods to the specified place, as well as draw up customs documents, pay duties and unload items at the specified place.
The parties are not obliged to insure the goods, so you can solve this issue if necessary.
If the goods in the terminal will be stored for more than a specified period, the buyer pays these costs. He is also responsible for loading the goods for subsequent transportation and inspection of items.
Which of the Incoterms Is the Best for the Seller While Delivering Goods from China by Sea and Why?
You must decide which incoterms are more preferable for you, depending on the type of product you are importing and the price that the supplier will offer you. Sometimes many of them include in the price of the goods too much stock to cover risks, which may not be beneficial to you.
In general, the most preferable for those who have already ordered goods earlier is FOB when delivering from China by sea. The supplier will organize transportation from the warehouse to the port of loading, as well as its loading on board the ship, processing of customs documents. Not to mention that they will also deal with the export clearance process.
If you still don't have enough experience and don't know the delivery process from China, you can take the recommendation of many experienced buyers: organize the delivery of goods from China so that most of the worries are with the seller. That is, choose DAT or DAP, having previously calculated your expenses and comparing them with the amount that the provider offers you.
No matter if you’re a seller or a buyer, you take full responsibility for picking a freight forwarder, the date, and the shipping route. We hope you find these shipping terms helpful so you can lower the risks and expenses in the long run.