International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Chapter Six: Terms of Trade or Incoterms

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. International Commerce Terms Understanding Incoterms Overview of all 13 Incoterms Electronic Data Interchange Common Errors in Incoterms Incoterms as a Marketing Tool

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. International Commerce Terms In 1936, the International Chamber of Commerce developed the International Commerce Terms (or Incoterms) that formalize these responsibilities. Incoterms were revised in 1953, 1967, 1980, and The latest version of Incoterms is dated A new set is due to be implemented in For each international sale, it is important to determine, who — the exporter or the importer — is responsible for: Domestic transportation in the exporting country International transportation Domestic transportation in the importing country The risks involved in international transportation Customs clearance in the importing country

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Understanding Incoterms Incoterms formally define the following aspects of an international sale: Which tasks will be performed by the exporter Which tasks will be performed by the importer Which activities will be paid by the exporter Which activities will be paid by the importer When the transfer of responsibilities takes place There are 13 different Incoterms, all abbreviated with a 3-letter acronym, such as EXW, DEQ, FOB, and so on.

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Understanding Incoterms Choosing the correct Incoterm depends on which export strategy a company is following. The following factors are particularly important: The type of product being sold (weight, volume, perishability, value, sensitivity to temperature changes, and so on) The method of shipment The ability and willingness of either of the exporter and importer to perform the tasks involved The amount of trust placed by either of the parties toward the other

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Ex-Works EXW Free Carrier FCA Free Alongside Ship FAS Free on Board FOB Cost and Freight CFR Cost, Insurance, and Freight CIF Carriage Paid To CPT Carriage and Insurance Paid To CIP Delivered Ex-Ship DES Delivered Ex-Quay DEQ Delivered at Frontier DAF Delivered Duty Unpaid DDU Delivered Duty Paid DDP Thirteen Incoterms

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Thirteen Incoterms Every Incoterm has: A scope — The type of products for which it can be used A modality — The mode of transport for which it can be used A syntax — The way it has to be stated on invoices and paperwork Every Incoterm defines: The responsibilities of the exporter The responsibilities of the importer A specific transfer point at which the responsibilities for the goods shifts from the exporter to the importer

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. EXW [City where goods are made available] Syntax Ex-Works (EXW) The exporter has to make the goods available to the importer at a point located in the exporting country, at a mutually-convenient time. EXW can be used for any type of goods Scope Modality EXW can be used for all modes of transportation

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Ex-Works (EXW) packages the goods for the international voyage provides the importer with the documents necessary to clear Customs Exporter Importer does everything else Transfer Point when the exporter makes the goods available to the importer

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. FCA [City where goods are delivered to the carrier] Syntax Free Carrier (FCA) FCA was created for goods shipped through multi-modal transportation. The exporter/seller delivers the goods to a carrier specified by the importer. FCA can be used for any type of goods Scope Modality FCA can be used for all modes of transportation

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Free Carrier (FCA) packages the goods for the international voyage provides the documents necessary to clear Customs clears the goods for export Exporter Importer does everything else Transfer Point when the exporter delivers the goods to the carrier

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. FAS [Port of Departure] Syntax Free Alongside Ship (FAS) FAS was created for goods shipped by ocean transportation. The exporter/seller delivers the goods to a port of departure specified by the importer. FAS can be used for any type of goods Scope Modality FAS can only be used for ocean transportation

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Free Alongside Ship (FAS) packages the goods for the international voyage provides the documents necessary to clear Customs clears the goods for export delivers the goods to the port of departure Exporter Importer does everything else Transfer Point when the exporter delivers the goods to the carrier

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. FOB [Port of Departure] Syntax Free on Board (FOB) FOB was created for goods shipped by ocean transportation. The exporter/seller delivers the goods to the port of departure and pays to have them loaded on a ship specified by the importer. FOB can be used for any type of goods Scope Modality FOB can only be used for ocean transportation

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Free on Board (FOB) packages the goods for the international voyage provides the documents necessary to clear Customs clears the goods for export delivers the goods to the port of departure and pays to have them loaded on board Exporter Importer Transfer Point when the goods cross the ship’s rail does everything else

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. CFR [Port of Destination] Syntax Cost and Freight (CFR) CFR is for goods shipped by ocean transportation. The exporter arranges the international transportation of the goods and pays to have them shipped to a port of destination specified by the importer. CFR can be used for any type of goods Scope Modality CFR can only be used for ocean transportation

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Cost and Freight (CFR) packages the goods for the international voyage provides the documents necessary to clear Customs clears the goods for export delivers the goods to the port of destination Exporter Importer does everything else Transfer Point when the goods cross the ship’s rail in the port of departure

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. CIF [Port of Destination] Syntax Cost, Insurance, and Freight (CIF) CIF applies to goods shipped by ocean transportation. The exporter arranges and pays for the international ocean transportation of the goods, as well as for international insurance. CIF can be used for any type of goods Scope Modality CIF can only be used for ocean transportation

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Cost, Insurance, and Freight (CIF) packages the goods for the international voyage provides the documents necessary to clear Customs clears the goods for export delivers the goods to the port of destination pays for international insurance (always 110 percent of value) Exporter Importer does everything else Transfer Point when the goods cross the ship’s rail in the port of departure

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. CPT [City of Destination] Syntax Carriage Paid To (CPT) CPT is similar to CFR, except that it applies to goods shipped by non-ocean means of transportation, or shipped on a multi-modal bill of lading that may include ocean transportation. CPT can be used for any type of goods Scope Modality CPT is used for non-ocean modes of transportation

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Carriage Paid To (CPT) packages the goods for the international voyage provides the documents necessary to clear Customs clears the goods for export arranges and pays to transport the goods to the city of destination Exporter Importer does everything else Transfer Point when the goods are delivered to the carrier in the city of departure

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. CIP [City of Destination] Syntax Carriage & Insurance Paid To (CIP) CIP is similar to CIF, except that it applies to goods shipped by non- ocean means of transportation, or shipped on a multi-modal bill of lading that may include ocean transportation. CIP can be used for any type of goods Scope Modality CIP is used for non-ocean modes of transportation

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Carriage & Insurance Paid To (CIP) packages the goods for the international voyage provides the documents necessary to clear Customs clears the goods for export arranges and pays to transport the goods to the city of destination pays for international insurance (always 110 percent of value) Exporter Importer does everything else Transfer Point when the goods are delivered to the carrier in the city of departure

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. DES [Port of Destination] Syntax Delivered Ex-Ship (DES) DES applies to bulk goods shipped by ocean transportation. The goods are unloaded at the expense of the importer in the port of destination. DES is generally used for bulk goods only Scope Modality DES can only be used for ocean transportation

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Delivered Ex-Ship (DES) provides the documents necessary to clear Customs clears the goods for export arranges and pays to transport the goods to the port of destination Exporter Importer does everything else Transfer Point when the goods are delivered to the port of destination

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. DEQ [Port of Destination] Syntax Delivered Ex-Quay (DEQ) DEQ applies to bulk goods shipped by ocean transportation. The goods are unloaded at the expense of the exporter in the port of destination. DEQ is generally used for bulk goods only Scope Modality DEQ can only be used for ocean transportation

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Delivered Ex-Quay (DEQ) provides the documents necessary to clear Customs clears the goods for export arranges and pays to transport the goods to the port of destination pays for unloading the goods in the port of destination Exporter Importer does everything else Transfer Point when the goods are delivered to the importer

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. DAF [City/Location of Border Crossing] Syntax Delivered at Frontier (DAF) DAF applies to goods shipped by land transportation. The goods are delivered to the importer at the border between two countries. DAF can be used for any type of goods Scope Modality DAF can only be used for land-based transportation

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Delivered at Frontier (DAF) provides the documents necessary to clear Customs clears the goods for export arranges and pays to transport the goods to the border city Exporter Importer does everything else Transfer Point when the goods are delivered to the border city

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. DDU [City in the importing country] Syntax Delivered Duty Unpaid (DDU) Under DDU, the exporter agrees to deliver the goods to a location in the importing country. The only thing that the importer has to do is to clear Customs in the importing country. DDU can be used for any type of goods Scope Modality DDU can only be used for any mode of transportation

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Delivered Duty Unpaid (DDU) provides the documents necessary to clear Customs clears the goods for export arranges and pays to transport the goods to the city in the importing country Exporter Importer clears Customs in the importing country Transfer Point when the goods are delivered to the city in the importing country

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. DDP [City in the importing country] Syntax Delivered Duty Paid (DDP) Under DDP, the exporter agrees to deliver the goods to a location in the importing country, after having cleared Customs. DDP can be used for any type of goods Scope Modality DDP can only be used for any mode of transportation

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Delivered Duty Paid (DDP) arranges for transportation and pays for transportation from the country of export to the city of delivery in the importing country clears Customs in the importing country Exporter Importer takes delivery of the goods in the importing country Transfer Point when the goods are delivered to the city in the importing country

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. TASKEXWFCAFASFOBCFRCIFCPTCIPDESDEQDAFDDUDDP Export Packing X X X X X X X X X X X X X Inland Freight I X X X X X X X X X X X X Export Clearance I I X X X X X X X X X X X Arrange Carrier I I I I X X X X X X X X X Load onto Carrier I I I X X X X X X X X X X Pay Carrier I I I I X X X X X X X X X Unload Carrier I I I I I I I X I X X Pay Insurance X X Import Clearance I I I I I I I I I I I I X Pay Duty I I I I I I I I I I I I X Pay Inland Freight I I I I I I I I I I I X X Incoterm Summary X = Exporter’s Responsibility I = Importer’s Responsibility

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Mode of TransportEXWFCAFASFOBCFRCIFCPTCIPDESDEQDAFDDUDDP Ocean CargoYESNOYES NO YES NOYES Multi-Modal (FCL)YES NO YES NO YES Multi-Modal (LCL)YES NO YES NO YES RailYES NO YES NO YES RoadYES NO YES NO YES AirYES NO YES NO YES Incoterm Summary

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Bulk Break- Bulk RO-ROContainerSmall Packet EXWYes FASYes No FCANoYes FOBYes No CIFYes No CIPNoYes CFRYes No CPTNoYes DESYesNo DEQYesNo DDPYes DDUYes DAFYes No Incoterm Summary

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Electronic Data Interchange For a number of Incoterms, there is no transport document that is issued at the point where the responsibility shifts from the exporter to the importer (for example, a Bill of Lading). Electronic Data Interchange has attempted to solve this problem. Whenever there is no transport document possible, the exporter can still send an EDI “notice” to the importer, which acts as a proof of delivery for both parties. The exporter has a record of the notification sent, and the importer knows unambiguously when the goods were delivered to the quay or when they arrived in port.

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Common Errors in Incoterm Usage Domestic Terms as International Terms of Trade An inexperienced exporter will use “FOB factory” rather than the correct corresponding Ex-Works (EXW) Incoterm. Confusion with Older Incoterm Versions The International Chamber of Commerce modified the Incoterms in 1980, 1990, and It eliminated some Incoterms, modified others and created some new ones. For a number of reasons, several exporters have failed to adapt to these changes, and will use an obsolete Incoterm.

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Common Errors in Incoterm Usage Improper Use of Correct Incoterms Incoterms are sometimes specific to certain modes of transportation and types of cargo, and cannot be used for others. The most frequent misuse is when FOB is used with an air shipment: FOB is designed to be used only with an ocean shipment term. The correct Incoterm to use for an air shipment should be Free Carrier (FCA), to clearly outline the responsibilities of the exporter and of the importer.

International Logistics: The Management of International Trade Operations Ch. 6: Terms of Trade or Incoterms © 2011 Cengage Learning. Atomic Dog is a trademark used herein under license. All rights reserved. Incoterms as a Marketing Tool A strategic advantage can be gained by an exporter willing to facilitate the sale of its products by assisting a novice importer in the handling of a shipment. On the other hand, an experienced importer may be intent on performing all or most of the tasks involved in the shipment. Most exporters would gain by being flexible, offering a quote where they list several possible Incoterms: EXW Cleveland, Ohio, USA$ 245,000 FOB Miami, Florida, USA$ 258,000 CIF Santos, Brazil$ 285,000 and let the importer decide which Incoterm it would rather use.