If you are planning to import products from China to overseas, you need to understand the trade terms commonly used in international trade.
When inquiring with suppliers, trade terms are one of the factors you must consider.
A quote from the supplier will normally have 3 sets of information, namely the MOQ, shipping terms, and each unit’s cost. Incoterms are the so-called shipping terms, MOQ stands for the Minimum Order Quantity.
The price of the product is different under different trade terms, and the responsibilities you should bear are also different.
Failure to fully understand the meaning of trade terms may cause many problems for your business, and may even lead to delays and disputes.
In this complete guide, we will explain what shipping terms are, why they are used, and which terms you should choose to deal with suppliers.
Table of Contents
In international trade, the obligations assumed by buyers and sellers will affect the price of commodities. In the long-term international trade practice, certain trade terms closely related to prices have gradually been directly linked with prices to form several quotation models.
Each model stipulates the obligations of buyers and sellers in certain terms of trade. The term used to describe this obligation is called trade term.
The trade term is a short English abbreviation used to indicate the price structure of the commodity, the responsibilities that the buyer and seller should bear, the cost and risk assumed, and the boundaries of the ownership of the goods.
In short, the trade terms refer to 4 things:
Since the trade terms provide a complete and precise explanation of the obligations that the buyer and seller should bear, it avoids certain disputes that may arise in the performance of the contract due to inconsistent understanding of the contract terms.
If this is your first time encountering the trade term, don’t panic. We will clearly explain every trade term you need to know!
Once you master these trade practices, you will be more confident when exporting goods to all over the world.
In international trade, there are dozens of trade terms.
Not all Incoterms are suitable for all types of international transportation. Depending on your mode of transportation (sea, air, road, rail, express, etc.), you may have to choose one.
Incoterms applicable to any mode of transportation:
Incoterms that are only suitable for sea and inland waterway transport:
Don’t panic, you don’t have to remember all of these, because many terms are only useful for large transactions. In fact, the most commonly used trade terms are FOB, CIF, EXW, DDU/DDP.
FOB is the most famous term, but FOB is not the best choice for everyone, especially not for new e-commerce sellers, small businesses, or people who want to use courier services (such as FedEx) as a delivery solution. For these importers, FOB will only lead to unnecessarily higher prices.
If the supplier quotes you the FOB price, it includes all the cost of sending the product to the vessel at your designated port of departure.
FOB clauses do not exist independently in trade, but are used together with ports, such as FOB Shenzhen, FOB Shanghai, and FOB Qingdao. This means that your goods will be shipped from this port.
Under FOB terms, buyers usually need to arrange the vessel and handle import customs clearance, bear the ocean freight and all costs incurred at the destination port. But in actual transactions, buyers can also ask suppliers to arrange vessels even on FOB terms.
EXW stands for “Ex Works”.
This is the original manufacturing price of the product, without any service or domestic shipping costs. You need to find your own freight forwarder in order to pick up the goods from the supplier’s warehouse in China.
So, if you want to know the original price of the product, you should ask your supplier to quote you the EXW price. Other trade terms are not helpful for your product research.
As I mentioned above, when you use express services such as FedEx to ship products, please remember to ask the supplier to quote you the EXW price. Because the courier company will go to the supplier’s address to pick up the goods.
For EX Works, the seller’s responsibility includes the correct marking of the goods to be picked up after correct packaging. The seller also needs to ensure that the goods are safely delivered to the pre-appointed pick-up point, which can be the seller’s factory, warehouse, local port or other agreed location.
The seller may also be asked to help obtain paperwork such as export licenses, but this may still be the buyer’s responsibility. In any case, the buyer must pay for any paperwork required.
CIF is also a very commonly used incoterm. It is an abbreviation of “cost, insurance and freight.” The transaction price includes the freight from the port of shipment to the designated port of destination and the agreed insurance premium.
But please note that the freight included in the CIF price is not the freight from the warehouse of the Chinese supplier to your warehouse. The freight here is only the cost from the supplier’s warehouse in China to the port in your country/region, and does not include the freight from your domestic port to your address.
Regarding insurance, I just want to mention that if your product is damaged during transportation, it will not help. It will help only when the entire shipment is lost.
If you don’t have a freight forwarder to ship products from the supplier’s place in China to your country, or you don’t want to bother to do so, then it is best to ask the supplier for the CIF price.
Under CIF terms, the supplier will ship the products to the designated seaport in your country/region. You need to find a local logistics company and customs broker to handle customs clearance and arrange transportation from the port to your warehouse.
Delivered Duty Paid (DDP) shipping agreement is Incoterm stipulates that the seller bears the greatest obligation and the buyer bears the least obligation.
This means that the seller owns the goods available in the importing country and pays all costs, including import duties, taxes and other delivery-related costs, and import customs clearance.
In a Duty Paid Delivery (DDP) arrangement, the seller delivers the goods to a designated location in the buyer’s country/region and pays import duties.
DDP is very suitable for importers who do not have any shipping company resources or do not want to worry about transportation and import and export issues.
Therefore, if you are doing product research and want to know how much it costs to import products from China, just ask the supplier to quote the DDP price for you.
The DDP price includes the paid import duties, but some suppliers still expect the buyer to pay the duties before the product is delivered. In this case, it is called the DDU price, which is an abbreviation of “Delivered Duty Unpaid”.
Although the trade term DDU was cancelled in Incoterm 2010, it is still widely used. For example, if the supplier does not have a freight forwarder to handle shipments to your location, this means that your supplier cannot help you pay for customs duties, and they will not be able to quote you DDU prices.
The biggest difference between DDU and DDP lies in who bears the risks and costs of the goods in the customs clearance process at the port of destination.
Alibaba transactions are divided into two types, one is online orders placed directly, and the other is customized orders that need to be negotiated with suppliers.
When you buy directly from Alibaba, you can directly click to view the shipping method and trade terms.
The transportation scheme shown here is set by the supplier in the background.
Here we can see that the trade terms for Alibaba’s online orders are DDP and DAP.
Duties and import taxes are not included under the DAP clause, which means that you need to pay additional duties and import taxes when the courier dispatches the package.
Under the terms of DDP, you only need to wait until the goods are received and do not need to pay any other fees.
For offline orders or customized orders traded through Alibaba Trade Assurance, you can negotiate with the supplier any of the above terms you want, and then specify the trading terms in the order contract to avoid disputes.
Yes, “duty-paid delivery” means that the seller completes import customs clearance procedures at the designated destination and delivers the unloaded goods on the delivery vehicle to the buyer to complete the delivery.
The seller must bear all risks and costs of transporting the goods to the designated destination, including any “taxes and fees” that should be paid at the destination when customs formalities are required (including the responsibilities and risks of customs formalities, as well as the payment of handling fees, customs duties, Taxes and other expenses).
Under the terms of DDP, the supplier will arrange all matters of delivery and the buyer only needs to wait for the receipt of the goods.
FOB (free on board)
It is delivered at the port of shipment. Therefore, the seller will deliver the goods to the ship designated by the buyer at the time and port of shipment agreed in the contract, and notify the buyer in time. The subsequent shipping and insurance fees have nothing to do with the seller.
CIF (cost, insurance and freight)
As the name suggests, it is more insurable than the FOB clause. That is, the seller is responsible for signing the transportation contract from the place of departure to the destination and paying the normal transportation costs. Under CIF conditions, the seller is also responsible for handling cargo insurance and paying corresponding insurance premiums.
Choosing the most suitable Incoterm for your international shipment can be challenging because it is a process that you need to think through. So how should you decide which one is right for you?
The biggest factor is the level of experience.
FOB (Free on Board) is the most popular Incoterm, and usually both buyers and sellers agree. As a partnership, the most reasonable way for FOB is usually to let the seller be responsible for the goods in his/her hometown, and then the buyer takes over the overseas transit.
Once the goods are on the ship, the seller’s risk is over, and the buyer can still control all costs and coordinate the delivery of the goods to the final destination.
If you are a more experienced importer and want to have absolute control over the transportation process and related costs, and are willing to take more risks and responsibilities, then you may need to choose EXW (Ex Works).
EXW imposes a minimum obligation on the seller, while DDP (Delivered Duty Paid) represents the highest obligation.
This is the only rule that requires the seller to be responsible for import customs clearance and the payment of duties and taxes. Therefore, the seller may also need to obtain an import license. Experienced sellers can benefit from this system because they can fully control costs, including factors that maximize profits.
However, experienced importers/buyers are more likely to avoid this shipping agreement. We generally do not recommend DDP for shipping.
FOB is more meaningful for others, and DDP is more meaningful for air express or parcel transportation.
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