Incoterms, an abbreviation for International Commercial Terms, are a way of describing the terms and conditions of commercial transactions by dividing various forms of commercial trade into structured transactions. Incoterms are the internationally accepted terms of trade and are revised every 10 years by the International Chamber of Commerce (ICC). In a trade transaction, there is an exporter and an importer, and the importer pays a cost to the exporter. Incoterms are the terms that distinguish whether the cost paid by the importer includes the price of the goods, freight, and insurance, and the place of delivery at which the responsibility for the risk of the goods, such as customs clearance, is transferred from the seller to the buyer.
Incoterms can be categorized into C Term and F Term based on who bears the main transportation costs. Let's take a look at the characteristics of each term.
Among the export incoterms, C Terms require the seller to execute a transportation/insurance contract and bear the freight cost or insurance premium. There are CFR, CIF, CPT, CIP terms where the seller does not bear the risk and additional costs after shipment.
Cost and Freight (CFR) is a freight-inclusive delivery term where the exporter pays all freight to the designated port, and the importer bears all the risk and cost when the goods are transferred across the importer's border. Since the exporter pays the freight to the destination port, risk and cost transfer from the exporter to the importer at different points.
Cost, Insurance and Freight (CIF) is a delivery term that includes freight and insurance, and the exporter bears all transportation costs and risks to the destination port. The importer is responsible for the costs incurred in the importing country, and the exporter is responsible for the premiums of marine insurance contracts.
Under CIF, the exporter is responsible for all costs and risks until the goods are loaded on the ship. The exporter must send the necessary documents for shipment as well as other documents such as the certificate of origin that enables the importer to carry out the import procedures.
In addition, ownership is transferred from the time the original bill of lading (OB/L) is lawfully delivered to the importer to the time the cargo is shipped. In other words, the transfer of ownership under CIF is a transfer of ownership by paper.
Carriage Paid to (CPT) is a delivery term in which the exporter pays all freight costs to the destination, with the exception of customs fees and insurance. The exporter transfers risk to the importer upon delivery of the goods to the carrier.
CPT is similar to but different from CFR in that it can be used on multiple modes of transportation. The destination is determined by agreement between the exporter and importer.
Carriage and Insurance Paid to (CIP) is a delivery term that includes carriage and insurance fee, where the exporter pays all freight and insurance costs to the destination. The exporter arranges and pays for insurance, but is not responsible for any losses. The importer bears the risk to the destination and pays customs fees from the point of destination.
CIP is the same as CIF in that the exporter bears the cost of insurance, but it can be used for intermodal transportation.
Among the import incoterms, F Terms consist of FCA, FAS, and FOB terms where the seller delivers goods to the buyer from a specific point in the exporting country.
Free Carrier (FCA) is a carrier-delivery term, meaning the exporter is responsible for transportation to a designated location after export customs clearance. The importer assumes all costs and risks from the designated location and can specify the location, which can be the exporter's worksite. If it is the exporter's worksite, the exporter is obliged to load the cargo onto the importer's transportation vehicle.
Free Alongside Ship (FAS) is a free on board delivery condition, meaning that the importer bears all costs and risks from the time the goods are loaded onto the ship. The exporter bears all the burdens and expenses up to the time of delivery to the ship, which are transferred to the importer after delivery to the ship. The vessel is designated by the importer and is usually used for bulk cargo that cannot be shipped in containers.
Free On Board (FOB) is where the importer bears all transportation costs and risks from the time the goods are loaded onto the ship. It is the most popular F term, and the exporter is responsible until the goods are delivered on board the vessel as per the contract. Therefore, once the exporter delivers the goods to the domestic port, the importer assumes all responsibility thereafter.
Same as CIF, under FOB, the exporter is obligated to bear all costs and risks until the goods are loaded onto the ship. The exporter is also responsible for sending the necessary documents for shipment, as well as the importer's proof of origin to fulfill import formalities.
FOB requires the importer to pay for the transportation of the goods, including vessel arrangements, sea freight, and insurance. Ownership of the goods is transferred to the importer upon completion of shipment.
The 2020 revision of Incoterms categorizes 11 types of terms, with C Term and F Term being the most commonly used terms in practice. The distinction is based on the delivery method based on the payment of transportation costs. The main characteristic of C Term is that the exporter pays the main transportation costs, whereas in case of F Term, the exporter does not pay the main transportation costs and the importer bears the main transportation costs.
Compared to CFR and CIF, CIP and CPT impose relatively less burden on importers. This is because the exporter bears the cost of transportation to the point of destination, and the importer only bears the cost of customs clearance/insurance. The difference is that they can be used in multimodal transportation. Therefore, CFR and CIF can only be used for ocean and inland transportation.
Cost, Insurance, Freight (CIF) is a trade term under which the exporter bears all the costs and risks of loading the goods onto the ship, as well as the ocean freight and insurance. The exporter pays for transportation to the importer's port and marine insurance.
Under CIF, the importer bears all costs and risks after the exporter has loaded the cargo onto the ship, and payment is due immediately after acceptance of the shipping documents. It is a favorable condition for the importer, as the exporter is responsible for paying the major ocean freight and insurance costs.
Free On board (FOB) means that the exporter's liability for exporting goods is discharged at the same time as the goods are loaded onto the ship. The exporter bears the cost of loading the goods onto the importer's vessel. Under FOB, the importer must arrange and guide the exporter to the ship, pay insurance and ocean freight, and bear the risk of the goods being loaded onto the ship. In contrast to CIF, the importer is responsible for paying the major ocean freight and insurance, which is a favorable condition for the exporter. # Reference