2022 Main Incoterms Guide in International Trade

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As the saying goes, “China is one of the biggest exporting countries for all the entrepreneurs in the world entirely,” which demonstrates precisely how often an international buyer or company imports from China nowadays.

By illustrating the frequency, you might have heard of a multitude of co-workers or international traders around you mentioning and talking about importing from China.

Since there are various potent and qualified manufacturers and factories settled down on the Chinese mainland. We have been devoutly supporting and providing numerous services and markets for you to choose from. This allows you to purchase premium quality goods at affordable prices.

However, it’s frequently asked by the foreign importers about the complete processes and methods of “Shipping” and the shipping cost from China to the USA.

There are several shipping methods available through which you can have your goods delivered from China to the USA efficiently.

Before being stuck with the intricate context of arranging shipment. We have prepared this thorough Incoterms guide to assist you in fully understanding the difference between Incoterms mainly used from China to the USA

By the end of this article, you will be equipped with the knowledge of different terms and modes of shipping. If there is no further we do, let’s get started!

Incoterms Guide

Incoterms

Refer to the rules that aid traders in differentiating the obligations and concerned accountabilities of the buyers and sellers.

If you are off to get the importing business started, you are exceedingly recommended to be familiar with these terms.

FOB (Free on Board)

Considered ideally by both the buyer and seller, FOB( Free on Board) is among the most used shipment terms.

Based on the FOB term, the supplier remains responsible and liable for the products only until they are received by the carrier at a shipping place.

Once the products arrive at the designated place, the complete responsibility and liability of goods will be transferred to the buyer.

FOB is further divided into two types i.e. FOB shipping point and FOB destination point. As per the former, the supplier’s responsibilities and liabilities are transferred to the buyer once the shipment leaves the Chinese port.

According to the FOB destination point, the responsibility changes hands as soon as the products reach the port of destination (the USA in our case).

The FOB Incoterms® Rules (Free On Board) is the third and final rule in the F Rules.

This is another rule that governs maritime transport and is more obligatory for the seller than the FAS rule is to load the buyer’s chartered vessel with the goods to be delivered.

By doing this, the seller obtains the bill of lading himself and therefore needs to provide the buyer’s company with the bill of lading, even if the transportation is rented by the latter.

This document was obtained at the buyer’s request and the seller must assist with their request. However, the cost and risk of this obligation remain with the buyer.

Therefore, even if the buyer pays for the loading of the goods onto its reserved vessel, the risk remains with the seller at that stage.

FOB rules are frequently used in bulk cargo and are often accompanied by extensions such as “STOWED” or “STOWED and TRIMMED” to indicate that the cargo has been properly loaded on board, leveled, and secured.

Key properties of FOB

  1. Place of delivery: The goods are deemed to be delivered by the seller after the goods have been transported at the terminal or port designated by the buyer on the specified date and time and loaded onto the vessel reserved by the buyer;
  2. Place of risk transfer: According to the FOB rules in the signed international sales contract, when the goods are loaded on board, the risk of the goods is transferred from the seller to the buyer;
  3. Mode of transport: FOB is only used for ocean shipping on sea and inland waterways.
  4. Customs Clearance: Same as FAS rules – the seller is responsible for carrying out export clearance procedures. Import customs declaration and transit customs clearance are the responsibility of the buyer;
  5. Shipping Insurance: None of the rules in Rule Group F oblige buyers and sellers to insure the goods against the risk of damage and loss during delivery and transit.

It should be noted that FOB can only be used while shipping goods from China to the USA via sea freight.

FCA (Free Carrier)

When using FCA, the buyer is responsible and liable for the cost once the goods have been loaded into one mode of transport or delivered to a specific location (usually a port) agreed upon by the buyer and seller.

This Incoterm is used for all shipping methods.

For FCA, the supplier is responsible for packaging and shipping at the origin. This means that the supplier has more responsibility than with ExWorks, but the buyer still takes on costs and liabilities earlier than with FOB.

Free Carrier – FCA is the first of three F Incoterms® rules and the only one in the group that deals with multimodal transport.

If the buyer and the seller agree to settle their international sales contract by these rules, the seller is responsible for delivering the goods to the beginning of the main transport stage of the logistics chain.

Unlike many Incoterms® rules, the FCA rules provide greater flexibility in deciding what to designate as a delivery location. Both seller and buyer can choose the seller’s origin, or the designated location where the goods can be used to start their main journey.

Under this rule, the buyer is obliged to engage a carrier for the primary transportation of the goods at its cost and risk.

With this rule, it is also clear that the seller is the party who should clear the export and pay for the export certification and documentation.

Key attributes of FCA

  1. Place of Delivery: If the agreed place is the place of origin, the seller is required to load the goods on a transport vehicle leased by the buyer. If it is agreed that the delivery place is another designated place, the seller is responsible for loading and unloading the goods through inland transportation, and the carrier hired by the buyer pays the cost to unload the goods;
  2. Risk transfer location: Depending on the delivery location, the risk transfer location can be the seller’s place or the unloading location designated by the seller’s transport vehicle;
  3. Mode of transport: The FCA rules provide for multimodal transport for both parties – either the seller’s inland transport or the buyer’s primary transport;
  4. Customs Clearance: Unlike EXW rules where all customs clearance procedures are performed by the buyer, under the FCA rules the seller is obliged to handle export clearance procedures. Import and transshipment clearance is the responsibility of the buyer;
  5. Transportation Insurance: The buyer assumes the greatest part of the liability under this article, but neither party is obliged to purchase transportation insurance.

CIF (Cost, Insurance, and Freight)

A CIF or Cost, Insurance, Freight agreement requires the supplier to take complete responsibility of goods. This includes shipping costs and insurance.

The responsibility shall last until the buyer receives their products (at the point of destination or any other mutually agreed on address).

The buyer should make the payment once the goods reach the designated point of destination.

Since the suppliers have to put in extra effort in such kind of agreement, they add additional charges. These extra charges are in short a compensation for their services.

The CIF Incoterms® Rules (Cost, Insurance, and Freight) impose the same obligations as the CFR Rules, with one additional requirement for sellers. This makes it the first rule on this list, requiring sellers to purchase insurance for the transport of goods at the main stages of the logistics chain.

Just like the CFR rule, this rule applies only to the carriage of goods by sea (sea and inland waterways). Other conditions are the same – CIF rules require the seller to bear the buyer’s freight and ensure that the goods are delivered to the final port of destination.

The cargo can be unloaded from the vessel if the parties agree in their contract of international sale by extending the CIF rules to the word “landing”.

With this provision, the seller must make the bill of lading readily available to the buyer, as the buyer needs this document when intercepting the goods at the port of destination.

The bill of lading should also be negotiable, which means it must provide the buyer with the ability to sell the goods before they reach the final port (while still in transit).

Key attributes of CIF

  1. Place of Delivery: As with the CFR rules, the goods are presumed to be delivered once they are loaded onto the vessel in the country of origin, even if the seller bears all costs of the primary carriage and its insurance;
  2. Place of risk transfer: when the goods are assumed to be delivered (onboard), the risk is also transferred;
  3. Mode of transport: cost, insurance, and freight rules are only for transport by sea (general cargo ships, multipurpose vessels, tankers, ro-ro ships (transport vehicles), container ships, dry bulk carriers, etc.);
  4. Customs clearance: Under the CIF rules, the seller is obliged to go through export clearance procedures. Import customs declaration and transit customs clearance are the responsibility of the buyer;
  5. Shipping Insurance: Unlike all previous rules, CIF rules require sellers to choose a full premium to insure the goods in transit. The policy is required to ensure that at least 110% of the full price of the goods is paid to the buyer in the event of loss or damage to the goods. The additional 10% assumes that this is the minimum profit the buyer can make from insured goods.

EXW (EX WORKS)

EXW: Based on EXW or Ex Works, all shipping arrangements should be made by the buyer. This gives them complete control over almost every process involved in shipping.

This rarely used agreement only requires the seller to obtain a Certificate of Origin and export license. As this type of agreement strongly favors the supplier, it is often used in compliance with other terms to assure a fair distribution of responsibilities.

The first rule of Incoterms® is unique for several reasons. This is the only rule in the E-rules group, as it is the only rule that enables goods to be delivered in their own country of origin. This is also a rule that imposes minimum obligations on the seller but focuses primarily on regulating the obligations of the buyer.

The ex-factory rule enables the seller to perform its obligations without loading the goods in the initial shipment for which the buyer is responsible. Although, after the EXW clause, a special option marked “loaded” can be drafted, which requires the selling company to agree to load the goods onto the initial transport vehicle.

Seller’s obligations include packing and labeling the goods and providing proof of sales receipt to the buyer.

To benefit from the EXW rules, we recommend that buyers ensure that loading is included when renting a transport vehicle to avoid unnecessary accidents.

EXW is suitable for handling short distances between the initial and final destination of goods in smaller loads or parcel shipments.

Key attributes of EXW

  1. Place of delivery: The place of delivery can be the seller’s premises or other designated locations specified in the international sales contract (such as warehouses, distribution platforms, factories, warehouses, etc.);
  2. Location of risk transfer: The seller’s premises is also the location of risk transfer;
  3. Shipping method: After receiving the goods, the buyer is responsible for transporting the goods to the destination. Shipping under this rule can be multimodal (sea, rail, road, or air);
  4. Customs Clearance: After receiving the necessary documents from the seller, the buyer is responsible for handling import and export customs clearance procedures. If the delivery route passes through multiple countries, the transit procedure also falls on the buyer;
  5. Transportation Insurance: Since the entire transportation, risk, and cost of the goods are borne by the buyer, it is up to the buyer to ensure their loading unit against in-transit risk/damage insurance.

Ex Works

DAP: Delivered at Places

Surely not a favorite among suppliers. Except for the import customs fee, every other requirement has to be fulfilled by the seller to assure smooth shipping.

Furthermore, the seller remains responsible and liable for the products even after the shipment arrives at the port of destination. The buyer often decides the point from which the goods shall be picked up.

Once it’s time to start unloading products, the buyer should assume complete responsibility of their package(s).

All rules in D Incoterms® apply to any mode of transport or combination of different modes of transport (multimodal transport) for the goods sold. They also force the seller to take the highest responsibility for the risk and cost of delivering the goods.

The DAP rule (Delivered at Place) is the first rule in this group and focuses on regulating the delivery of goods to the destination chosen by the purchasing company. This is also the first rule that allows goods to be delivered outside the country of origin.

Under the DAP rules, the seller is also responsible for the risk and cost of shipping the goods through each stage of the primary shipment. In contrast, the rules in groups E, F, and C Incoterms® allow the selling company to deliver the goods in their country of origin and transfer the risk.

Under the DAP rules, the only stage of shipping that the seller is not required to perform is the final unloading procedure. This rule allows the seller to deliver the goods to the final destination in perfect condition and make them available to the buyer. The latter can contract the unloading of goods at the port of destination/railway station/terminal, or unload the goods on their own at their premises.

Key attributes of DAP

  1. Place of Delivery: Usually the country of destination, at the place of delivery specified by the buyer. Considering the mode of transport, this can be the main port of entry or terminal or the buyer’s premises;
  2. Place of transfer of risk: same as the place of delivery – the risk is borne by the seller throughout the main transport process and is passed to the buyer at the named destination before the goods are unloaded from the leased means of transport;
  3. Mode of transport: DAP rules make multimodal transport (road, rail, sea, or air) an option for both parties – however, the carrier employed to carry out the primary transport from the country of origin to the country of destination is the obligatory seller for both parties, they bear the cost of this part;
  4. Customs clearance: According to this rule, the seller is usually responsible for the export clearance procedures, and the buyer bears the import clearance fee (if applicable);
  5. Shipping Insurance: According to DAP rules, a large part of the risk falls on the seller, so it is up to them to decide whether to insure the goods for damage or loss in transit. Like most Incoterms® rules, DAP rules do not mandate that both buyers and sellers obtain shipping insurance.

DDP (Delivered Duty Paid)

 The last Incoterms® rule is the DDP (Delivered Duty Paid) rule – arguably the most convenient rule for buyers. A Delivered Duty Paid agreement puts the entire responsibility of arranging shipment on the shoulders of the supplier.

This includes the import customs fees as well. The buyer is only asked to unload the products and pay for import clearance.

Every additional expense is added by the supplier and quoted to the buyer beforehand in the form of a landing cost.

Upon the finalization of details, the seller is required to select a convenient carrier for reducing the shipment cost as well as time.

DDP can be quite complicated for the seller. A preferred practice is for buyer to agree on paying the import clearance.

In case the customs clearance task doesn’t get through successfully, the seller is responsible for finding an alternative carrier. The change in carrier or delivery method can impact the shipping time and cost.

This rule has all the characteristics of the other two D rules – the seller is obliged to hire a shipping company to deliver the goods to the specified destination, bear the cost and risk of the transportation process, and ensure that the goods are properly delivered to the destination.

In addition, DDP rules require sellers to bear the cost of import and export customs clearance procedures and, if necessary, the cost of each transshipment procedure.

Another difference between it and the DPU rule is that the seller does not have to contract with a carrier to unload at the final destination, which is not the case with the DAP rule.

Goods sold under DPU rules can be delivered by any mode of transport, including freight, rail, or road containerized cargo.

Key attributes of DDP

  1. Place of Delivery: As with all Regulation D (DAP and DPU), goods shipped under Regulation DPU will be delivered to the buyer’s designated destination (at the port of entry or terminal or beyond) at the designated place in the country of destination, which may be the buyer’s warehouse, factories, warehouses, distribution platforms, etc.);
  2. Place of transfer of risk: The transfer of risk under the DDP Rules takes place at the place of delivery like all other Incoterms®. Risk is deemed to pass from the seller to the buyer once the goods have reached the destination chosen by the buyer at the time of drafting the contract of sale (and made available to the buyer);
  3. Mode of transport: DDP rules allow multimodal transport (rail, road, sea, or air) as an option available to both parties to the sales contract. Seller assumes all costs and risks of initial, primary, and final carriage of the Goods unless required by Buyer after the Goods arrive at the port of destination or terminal;
  4. Customs clearance: this is where the DDP rules really come into play – export clearance procedures, import clearance procedures, and any possible transit procedures are the responsibility of the seller;
  5. Shipping Insurance: Neither the seller nor the buyer needs to choose a shipping insurance policy. However, sellers are strongly advised to consider purchasing shipping insurance as all risks of delivering the goods are entirely under their supervision.

BOL (Bill of Lading)

 An essential document between the carrier and shipper that serves to acknowledge the receipt of cargo for shipment.

A BOL including the cargo’s details such as quantity, quality, nature etc. is demanded by International laws such as Hamburg Rules, Hague Rules as well as Hague-Visby Rules.

As stated above, a BOL serves as a definite receipt that acknowledges the successful loading of cargo. It includes the terms of the contract in addition to being a document of title to the products.

Bill of Lading

LCL (less than Container Load)

A shipment that does not take up all of a container’s space. The remaining space can then be used by freight transport provider’s other customers.

This option is pretty cost-effective since the total cost is divided between all customers.  In case your cargo weighs less than 150 kg, then you should definitely opt for this mode of shipment.

However, it should be noted that the additional costs can make things inconvenient in the long-run.

FCL (Full Container Load)

As per this term, you have the entire container space reserved for your goods alone! This approach is quite convenient and boasts several perks.

For start-ups, the risk of loss and breakage is pretty low. Moreover, the overall cost associated with FCL is lower than that of LCL. Also, the China-USA shipping time is reduced considerably.

Which Incoterms should I use?

Here are some of the most common Incoterms and when you can choose them:

FOB (Free on board)

This very common Incoterm applies only to ocean freight and means that when the goods are “on” the ship, the responsibility and obligation to pass the cost to the buyer.

FOB gives buyers a high degree of control over the shipping process. Since buyers are choosing their freight forwarders, they have more flexibility in terms of costs, terms, and shipping plans.

EXW (EX Works)

ExWorks incoterm means that the responsibility transfers to the buyer at the supplier’s warehouse and not on board.

This means that the buyer pays and is responsible for every step of the shipment of the goods, from door to door. All the supplier needs to do is prepare for pickup.

This Incoterm gives buyers complete control over shipping costs, but it also means they are responsible for everything that happens in the country of origin – usually not their country of residence. More experienced shoppers may benefit from using this Incoterm.

Conclusion

In general, everyone in the world of international trade should be well aware of one key point of the Incoterms® Rules: These rules help regulate the obligations of each party in an international sales contract. They do not constitute the entire contract and other agreements should be drafted to cover additional responsibilities and obligations.

We are Union Source China, which was established in 2005 specialized in general merchandise procurement and export. We provide one-stop China sourcing solutions which include product sourcing, customization service, supplier selecting, OEM & ODM, factory audit, order follow-up, quality control, shipment, goods shipment tracking, and finance support.

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Our main headquarters is in the largest port city —Ningbo, China. Our constituent companies and factories are located in Yiwu, Guangzhou, Hangzhou, and Shantou which provide strong sourcing resources.

In the past 15 years, we have helped over 3000 importers from 86 countries sourcing from China. In 2021, the import and export volume of the whole group exceeded US$100 million. It has developed into one of the largest self-operated import and export businesses in Zhejiang.

Our ultimate goal is to make global sourcing easier!

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