Know Your Incoterms
There are few aspects of international trade more important and simultaneously confounding as the use and definition of Incoterms. These rules were compiled by the International Chamber of Commerce in order to define international commercial transactions. The rules were originally complied and published in 1936, and have been updated periodically since then in order to further define the responsibility of charges associated with international trade. While it is important for all companies to have at least a basic understanding of Incoterms, it is especially important for any companies involved in import and export to know exactly how these terms define the responsibility of different parties.
Without the proper knowledge, it is easy for disputes between overseas importers and exporters to arise, which can jeopardize business sales. Differences in the understanding of how freight costs are to be apportioned can lead to tremendous cost overruns, if the intricacies of these international practices are not understood. Below are some of the more common misunderstandings that can arise from an incomplete knowledge of Incoterms.
Free on Board versus Ex-Works
The term, “Free on Board,” or, “FOB,” means that the shipper of goods is required to bear the charges for their product up to the time of loading of cargo onto the international transport vessel. Any goods transported under these terms are usually accepted as having been shipped or laden as soon as they are delivered to the ocean liner that is transporting the cargo. However, shippers will often declare their terms of sale as, “Free on Board from factory,” which is technically incorrect: FOB from factory implies that the importer, not the supplier would cover domestic shipping costs up to the point of international transport, which is not what FOB means.
The term exporters should use to establish responsibility of international and domestic shipping from the exporter’s factory is, “Ex-Works,” or, “EXW.” FOB implies that the shipper is to bear the cost of domestic transport up to the ocean port of departure, whereas EXW requires customers to bear the entire cost of transport from the shipper’s warehouse or shipping facility. For shipments by air, FCA terms are appropriate as FOB is only relevant to ocean and rail transport.
Another Incoterm that frequently causes disputes is, “Free Carrier,” or, “FCA.” This term states that the shipper of goods must deliver freight to the location required by the transporter or logistics service provider. This facility, specifically in air freight, is rarely the actual point of departure for the cargo. Freight must then be forwarded from the warehouse to the airline terminal where the goods will fly from, which requires additional trucking charges, airport transfer fees, etc. Customers frequently dispute these charges because they do not understand that FCA does not include coverage of the fees from the shipping warehouse to the airline, and therefore do not account for all of the extra shipping fees.
Other terms can be highly important, depending on the nature of the businesses involved. “Free Alongside Ship,” or, “FAS”, for example, is highly important to companies shipping vehicles or oversized freight that needs to be towed or hoisted onto ships pier-side. Similarly, “Delivered Duty Paid,” or “DDP,” is extremely important to any exporters shipping on a door-to-door basis.
Besides the problems with complying with export protocol, a failure to understand how these terms relate to a business or shipment can have major consequences for order costs and profitability. The difference between paying dollars on the pound for freight as it transfers to an airport or ocean port can be extraordinary. Understanding and fully complying with all procedures dictated by the Incoterms used in business agreements is highly important for keeping business running smoothly.