Foreign trade terms, also known as international trade terms or incoterms, are acronyms commonly used in the shipping industry to define the cost transfer, risk transfer and insurance obligations between the seller and the buyer. Global trade comprises international shipping between multiple parties, such as importers, exporters, shipping companies, ocean carriers, and other logistics providers. Different incoterms state contracts between buyers and sellers that help shipping companies determine the party responsible for obligations, risks and insurance. The various foreign trade terms may apply to land-based transportation, while some are confined to maritime shipping. Let us know more about the incoterms used in the maritime industry.
What are the incoterms of trade?
Incoterms is an acronym for international commercial terms, a set of internationally recognised terms formulated by the International Chamber of Commerce (ICC). These terms are drafted to facilitate international trade contracts between importers and exporters and define the rights of both shipping parties and state restrictions concerning international trade. Various individuals, stakeholders, organisations, and companies are involved in trade business, and trade incoterms help standardise global trade. Incoterms such as Delivered duty paid (DDP), Ex-works (EXW), Free carrier (FCA), Carriage and insurance paid to (CIP) are a few commonly used incoterms that apply to the transport of goods via any mode of transportation, including land, sea, or air. Cost and freight (CFR), free on board (FOB), and cost, insurance, and freight (CIF) are among the various terms in trade limited particularly to sea and inland waterway transportation.
In short, trade incoterms or foreign trade terms are rules and regulations determined by the ICC to specify and delegate the responsibility of goods and transactions in the trade business. Based on the type of incoterms, it applies to transport by any mode or can also be limited to the sea routes as it is a significant method of international transportation of goods.
What is the role of foreign trade terms in international trade?
The buyer and seller are the two main shipping parties proposing the shipping contracts. Incoterms facilitate cross-border trade by listing the legal responsibilities of every shipping party. The function of incoterms in global trade is as follows-
- Offers clarity– International trade involves multiple shipping parties, such as importers, exporters, and shipping companies. It is essential to have transparency regarding trade contracts to specify the obligations and responsibilities for transactions so that the shipping company does not face many issues during payment.
- Allocating risks– Cross-border trade involves the risks of cargo damage, theft, and loss during long-distance transportation. Shipping companies should consider informing the concerned shipping party about the potential risks to the concerned shipping party, who will be responsible for cargo security or raise insurance claims in case of cargo damage.
- Assigning responsibility– In various cases, the ownership of goods changes midway during the transportation process. So, incoterms help define which party is responsible for arranging transportation and collaborating with the shipping company to containerise the goods.
- Paying customs and extra fees– The responsibility of filing for documentation and customs clearances, including the payment of duties and taxes, must be defined between the buyer and the seller. The customs regulations, taxes and fees vary from country to country, so knowing things beforehand is essential. Late charges, including detention and demurrage fees, can also be charged, and it is crucial to know which shipping party will pay for it.
What is CFR in trade?
Cost and freight (CFR) is a foreign trade term applicable to shipping parties involved in the international transportation of goods through sea routes or inland waterways. This trade contract is primarily designed as an arrangement between the buyer and the seller where the agreement suggests that the responsibility of arranging for the transportation of goods lies on the seller. Once the cargo is handed over to a shipping company or carrier and is loaded onto the ship, the seller is relieved of the responsibility. Cargo insurance rests on the buyer and not the seller. The seller will pay and arrange the transportation, handling, documentation, customs clearances, and extra charges incurred during transportation. The risk of the goods transfers to the buyer as soon as the goods are onboard. Upon reaching the destination, the financial responsibility of goods shifts to the buyer, and they are in charge of any transport activities or customs clearances from the destination port. Traders often seek the benefits of 4PL logistic solutions to facilitate the task of containerisation and other logistics and transportation activities including intermodal transport, cargo insurance, booking transportation and negotiating shipping rates.
What does CIF mean in trade?
CIF stands for cost, insurance, and freight and is an international trade agreement where the seller and buyer shipping goods via ocean come into a contract with each other. Under CIF, the seller takes financial responsibility for paying the insurance cost and transportation of goods to the destination port. The seller pays for all documentation, packaging, export licence, inspection, customs clearances, taxes and duties, and cargo damage during transport. The seller is responsible for getting the goods to the destination port. Once the goods are loaded on the ship, the exporter is relieved of his duties. The risks concerning the goods are transferred from the exporter to the importer once the goods are loaded on the vessel.
Who makes insurance claims in CIF?
The importer only takes financial responsibility for import clearances, unloading, and transporting the goods from the container yard to the final destination. It is essential to know that under the CIF international trade contract, the risk transfer is at a different point, i.e., after loading the goods on the ship, compared to cost transfer, i.e., when the goods reach the buyer. If the goods get damaged during the transit, the buyer will have to file a claim with the seller’s insurance company since the ownership of the goods was transferred to the buyer once the ship was ready for a voyage.
What does FOB mean in shipping terms?
Free on board is an international trade contract between buyers and sellers to define the point of change in ownership of the goods. It falls under the category of cy-cy shipping. FOB is designed in two types.
- FOB origin – The seller is responsible for bringing the goods to the container yard of the origin port. This can be done by the exporter or by booking a logistics provider. The goods loaded in shipping containers are checked and then loaded onto ships. In this type of FOB contract, the buyer assumes the ownership of goods once loaded on the vessel, and the seller’s responsibility ceases here. In case of cargo damage or additional risks, the shipping company or carrier will inform the buyer as he/they are liable for payments or financial losses.
- FOB Destination – The seller gets the goods to the container yard and is responsible for booking a 4PL logistics provider that transports the goods to the yard and ensures secure ship transportation to the destination port. The buyer assumes ownership of the goods once they have reached the container yard of the destination port. The seller pays all transportation costs, cargo damage risks, and other charges for exporting the goods.
What is CFR vs CIF vs FOB?
| CFR | CIF | FOB | |
| Logistics costs | Seller pays for cargo handling, transportation, freight, documentation, and customs clearances. | All costs incurred by the seller are the same as those incurred by CIF. In addition, the seller also pays for cargo insurance. | Buyers and sellers switch between transportation costs, taxes, duties, and other charges. |
| Risk Transfer | As soon as the goods are loaded onto the ship, the responsibility for cargo transfers to the seller. | It is the same as the case of CFR. | Depends on the type of FOB contract, FOB origin or FOB destination. |
| Cost Transfer | The buyer makes payments once the goods reach the destination port. | Once the goods reach destination port; the buyer pays for import, taxes and handling. | Depending on the FOB contract, is either the seller’s or the buyer can cover the cost of transportation and handling. |
These are a few foreign trade terms commonly used in the maritime industry to designate obligations, risks and costs between the seller and the buyer.
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