MKTG Discussion Questions

6-12 Chapter 6: Terms of Trade or Incoterms

Chapter 6: Terms of Trade or Incoterms 6- 13

Chapter 6

Terms of Trade or Incoterms® Rules

lEARNING oBJECTIVES

At the end of this chapter, YOU SHOULD:

Understand how Incoterms® rules are used to split the responsibilities of the exporter and the responsibilities of the importer.

Be able to identify the eleven terms of international trade, or Incoterms® rules.

Understand how Incoterms® rules can be used for strategic advantage.

Have a basic understanding of the concept of electronic data interchange (EDI).

PReview

Since 1936, a set of standardized terms of trade has been offered by the International Chamber of Commerce. Using part of the Chamber’s name, they are known as Incoterms® rules and have gone through some revisions over the years. This is a highly technical chapter, and there are no shortcuts to examining each of the Incoterms® rules and their relationship to the obligations of exporters and importers in shipping products. There is a handy summary of Incoterms® rules in Table 6-3 (found in Section 6-15, p. 209), and Tables 6-4 and 6-5 (found in Section 6-16, pp. 211-212).

Please note that Incoterms 2010 replaced Incoterms 2000 as of 01/01/2011. At this point (2013), there is still a significant percentage of students who are not familiar with the new Incoterms® rules, and do not know that four Incoterms® rules have been eliminated:

· DAF (Delivered at Frontier)

· DES (Delivered Ex-Ship)

· DEQ (Delivered Ex-Quay)

· DDU (Delivered Duty Unpaid)

and two new ones created:

· DAT (Delivered at Terminal)

· DAP (Delivered at Place)

In addition, the definition of the FOB point has been radically changed from “crossing the ship’s rail” to “on board the ship.”

Finally, the 2010 Incoterms® rules require a precise address for the responsibility transfer, unlike previous versions of Incoterms, which were OK with just a city or general location. So the syntax has become “FCA Bâtiment B, 46 Allée Corbière, F-81000 Castres, France, Incoterms® rules 2010,” rather than the previous “FCA Castres, France, Incoterms 2000.” The “Bâtiment B, 46 Allée Corbière” is the address, and “F-81000” is the postal code of that address.

Chapter Outline

6-1 International Commerce Terms

I. Standardize set of eleven terms of trade called Incoterms® rules: acronym for International Commerce Terms. The registered trademark and the word “rules” were added in the 2010 version, and are mandatory.

6-2 Understanding Incoterms® rules

I. Incoterms® rules determine which tasks will be performed by the exporter and by the importer

II. Incoterms® rules determine which activities will be paid for by the exporter and by the importer

III. Incoterms® rules determine when the transfer of responsibility will take place:

a. Different from transfer of title, which usually is when the exporter gets paid

b. Transfer of responsibility is usually earlier than transfer of title

6-3 Incoterms® rules Strategy

I. Incoterms® rule is determined by strategy of exporting firm. Also constrained by:

a. Type of product sold

b. Method of shipment

c. Ability of either party to perform tasks involved in shipment

i. Exporter may facilitate sale by assisting importer in the shipment

ii. Importer may get price break if it agrees to perform all or most tasks of shipment

iii. Importer in effect always pays for transportation either as an add-on or by it being reflected in the exporter’s price

d. Amount of trust parties have toward one another

II. Choice of Incoterms® rule is almost always exporter’s decision

a. It is usually based upon its strategy instead of on conditions of making a specific sale

b. Since it involves strategy, it is a critical decision for the exporter

6-4 Ex-Works (EXW)

I. Used with any merchandise

II. Used with any form of transportation

III. Syntax: “EXW 2400 Progressive Drive, Poughkeepsie, NY 12601, USA, Incoterms® 2010” = the address in Poughkeepsie where exporter will hold merchandise for importer (usually in the exporting country)

IV. Easiest Incoterms® rule for exporter, most difficult for importer

V. Basically, exporter says: “Here is the product, come get it”

VI. EXW term makes exporter vulnerable to competitors who may offer more importer-friendly terms of trade

6-4-1 Delivery under Exw

I. Nothing specific regarding delivery

II. Mutually convenient pickup time for exporter and importer

6-4-2 Exporter’s and Importer’s Responsibilities under exw

I. Exporter’s responsibilities limited to most basic functions:

a. Making goods available to buyer

b. Packaging goods for export

c. Assisting in export clearances

d. In United States, providing correct Export Commodity Classification Number (ECCN) and any required export license information

e. Providing information to clear Customs in importing country

II. Importer responsible for all aspects of shipment:

a. Clearing goods for export

b. Arranging for transportation

c. Clearing Customs in importing country

d. Purchasing insurance

e. Providing domestic insurance in importing country

6-5 Free Carrier (FCA)

I. For goods shipped through multimodal transportation without handling

a. Oriented toward containerization

b. In 1990, replaced three other terms:

i. Free on Rail (FOR)

ii. Free on Truck (FOT)

iii. Free on Board airport (FOB Airport)

II. Syntax: “FCA Bâtiment B, 46 Allée Corbière, F-81000 Castres, France, Incoterms® rules 2010” = address in Castres where delivery takes place (usually in exporting country or a neighboring country)

III. Exporter delivers goods to the carrier importer selects

6-5-1 Delivery under FCA

I. If the named point in the Incoterm refers to the exporter’s plant, delivery takes place when the goods are loaded by the exporter and at its expense, unto the carrier’s vehicle (FCA exporter’s premises)

II. If the named point in the Incoterm refers to the carrier’s premises, then delivery takes place when goods are made available to the carrier (FCA carrier’s premises)

a. Goods arrive at carrier’s dock

b. Goods are unloaded from exporter’s vehicle by the carrier and at the carrier’s expense

III. Document signifying transfer of responsibility is receipt by carrier to exporter

6-5-2 Exporter’s and Importer’s Responsibilities under fca

I. Exporter responsible for:

a. Packing merchandise for export

b. Possibly loading merchandise into carrier’s container, loading container on carrier’s vehicle, or delivering merchandise to carrier’s facilities

c. Clearing merchandise for export

d. Providing information for importer to clear Customs in importing country

e. Obtaining insurance

f. In United States, filling out Shipper’s Export Declaration

g. Providing pre-shipment inspection, if required

II. Importer responsible for:

a. Arranging contract of carriage

b. Arranging insurance

c. Clearing Customs in importing country

d. Paying for pre-shipment inspection, if required

6-6 Carriage Paid to (CPT)

I. For goods shipped by any means of transportation, but mostly designed for goods not traveling by ocean

a. For goods handed to a carrier that will take the goods to their destination in the importing country

b. For goods shipped by sea, but not handed over the ship’s rail

i. Roll-on-roll-off cargo

ii. Multimodal containerized cargo

II. Syntax: “CPT Graacher Strasse 20, Köln, Germany D-50969, Incoterms 2010” = address in Köln where importer takes control of goods, usually in importing country or neighboring country

III. The exporter pays for transportation to the destination (importer’s place of business)

IV. The point at which the responsibility for the goods shifts from exporter to importer is when the goods are loaded onto the means of conveyance in the exporting country

6-6-1 Delivery under CPT

I. When exporter hands over goods to the carrier

II. Exporter is given bill of lading or equivalent document (air waybill, sea waybill, multimodal bill of lading)

6-6-2 Exporter’s and Importer’s Responsibilities under cpt

I. Exporter is responsible for:

a. Packing goods for export

b. Shipping them to the carrier

c. Pre-paying shipping costs to city of destination

d. In the United States, filling out Shipper’s Export Declaration

e. Paying for pre-shipment inspection, if required

II. Importer is responsible for:

a. Goods at time seller delivers them to carrier

b. Unloading goods from carrier’s vehicle

c. Clearing Customs

d. Paying inland transport if any

e. Paying for pre-shipment inspection if importing country requires it

6-7 Carriage and Insurance Paid To (CIP)

I. For goods shipped by any means of transportation but mostly meant for goods traveling by means other than ocean transport

a. For goods handed to a carrier that will take the goods to their destination in the importing country

b. For goods shipped by sea, but not handed over the ship’s rail

i. Roll-on-roll-off cargo

ii. Multimodal containerized cargo

II. Syntax: “CIP Ulitsa Poruchik Nedelcho Bonchev, Sofia, Bulgaria, Incoterms 2010” = address in Sofia (the city of destination) at which the importer takes control of goods. City is in importing country or neighboring country. A variant is possible: add “maximum cover” to increase insurance coverage to Coverage A of the Institute Cargo Clauses.

III. The exporter pays for transportation to the destination (importer’s place of business) + minimum-cover insurance

IV. The point at which the responsibility for the goods shifts from exporter to importer is when the goods are loaded onto the means of conveyance in the exporting country

6-7-1 Delivery under cip

I. When exporter hands over goods to the carrier

II. Exporter is given bill of lading or equivalent document (air waybill, sea waybill, multimodal bill of lading)

6-7-2 Exporter’s and Importer’s Responsibilities under cip

I. Exporter is responsible for:

a. Packing goods for export

b. Transporting them to port of departure

c. Minimum insurance costs

d. Clearing goods for export

e. In United States, filling out Shipper’s Export Declaration

f. Paying for pre-shipment inspection, if required

II. Importer is responsible for:

a. Unloading carrier’s vehicle

b. Clearing Customs in importing country

c. Transportation costs beyond city of destination

d. Paying for pre-shipment inspection, if required by importing country

6-8 Delivered At Terminal (DAT)

I. For goods shipped by any means of transportation, but mostly meant for goods not traveling by ocean

II. Syntax: “DAT Paranagua Container Terminal, Avenida Portuaria, Paranagua, Parana 83206-410, Brazil, Incoterms 2010” = address of the terminal in the Port of Paranagua in which the importer takes control of goods. The terminal can be in the exporting country, the importing country, or a neighboring country

III. Delivery takes place where exporter delivers goods to the terminal, unloaded from the means of conveyance (truck, train, or ship)

6-8-1 Delivery under DAT

I. When exporter delivers the goods, unloaded from the means of conveyance to the terminal

II. Exporter is given terminal receipt that documents that the goods were delivered

6-8-2 Exporter’s and Importer’s Responsibilities under DAT

III. Exporter is responsible for:

a. Packing goods for export

b. Transporting them to the terminal, whether in the exporting country, the importing country or somewhere else

c. Clearing goods for export

d. In United States, filling out Shipper’s Export Declaration

e. Paying for pre-shipment inspection, if required

IV. Importer is responsible for:

a. Clearing Customs in importing country

b. Transportation costs beyond terminal

c. Paying for pre-shipment inspection, if required by importing country

6-9 Delivered At Place

I. For goods shipped by any means of transportation, but mostly meant for goods not traveling by ocean

II. Syntax: “DAP 97 Brisbane Street, Sydenham 8023, New Zealand, Incoterms 2010” = the address in Sydenham (the city of destination) in which the importer takes control of goods. City is in importing country or neighboring country

III. Delivery takes place where exporter delivers goods to the location agreed upon with importer. The goods are still loaded on the means of conveyance

6-9-1 Delivery under DAP

I. When exporter delivers the goods to the importer, still loaded on the means of conveyance

II. There is no formal delivery document; however the goods have arrived, and the importer “sees” them on the means of conveyance

6-9-2 Exporter’s and Importer’s Responsibilities under DAP

V. Exporter is responsible for:

a. Packing goods for export

b. Transporting them to city of destination

c. Clearing goods for export

d. In United States, filling out Shipper’s Export Declaration

e. Paying for pre-shipment inspection, if required

VI. Importer is responsible for:

a. Unloading carrier’s vehicle

b. Clearing Customs in importing country

c. Transportation costs beyond city of destination

d. Paying for pre-shipment inspection, if required by importing country

6-10 Delivered Duty Paid (DDP)

I. Any merchandise and for any means of transportation (although if by ocean correct Incoterms are DES and DEQ)

II. Syntax: “DDP Kopparsbergsgatan 226, Malmö 14 44, Sverige/Sweden, Incoterms 2010” = address in Malmö (city of destination) where importer takes control of goods

III. Ultimate in customer service on part of exporter, who handles everything in shipment

IV. For importer it’s equivalent to receiving a domestic shipment from a domestic supplier

V. Importer only handles unloading

6-10-1 Delivery under ddp

I. Delivery takes place when exporter places goods at disposal of importer in city of delivery

II. No corresponding transportation document although bill of lading is usually used

6-10-2 Exporter’s and Importers Responsibilities under ddp

I. Exporter assumes all costs and responsibilities for shipment

II. Importer only has to receive goods and unload them

6-11 Free Alongside Ship (FAS)

I. For any merchandise, but is limited to ocean transportation

II. Syntax: “FAS Waalhaven Noordzijde 2089, Roterdam, 3089KM, The Netherlands, Incoterms 2010” = the dock in the port in which the delivery takes place. Port is usually located in the exporting country or in a neighboring country

III. Exporter brings goods to port designated by importer

IV. At port responsibility for goods shifts to importer

6-11-1 Delivery under FAS

I. Delivery occurs when exporter brings goods “alongside” ship

II. Exactly when and where delivery takes place is hard to determine and is a deterrent to use of FAS

a. Goods are rarely delivered “alongside” a ship

b. Goods usually go to a holding area, are then brought to the ship, and are stevedored aboard the ship

c. No transport document corresponding to delivery to holding area or quay alongside ship

d. Ocean carrier will not issue bill of lading until goods have been received in good condition aboard vessel

6-11-2 Exporter’s and Importer’s Responsibilities under fas

I. The exporter is responsible for:

a. Packing the goods for export

b. Transporting them to the port

c. Unloading them unto quay or holding area in port

d. Clearing goods for export

e. Providing assistance in clearing Customs in importing country

f. Obtaining insurance

g. In United States, filling out Shipper’s Export Declaration

h. Providing pre-shipment inspection, if required

II. The importer is responsible for:

a. Port handling charges

b. Stevedoring

c. Ocean transport costs

d. Insurance

e. Unloading at port of arrival

f. Customs duties in importing country

g. Payment for pre-shipment inspection, if required

6-12 Free on Board (FOB) Port of Departure

I. Used for any merchandise, but is limited to ocean transport.

II. Syntax: “FOB Breakbulk Terminal, 660 Duncan Road, Cape Town, South Africa, Incoterms 2010” = the terminal in the port in which the delivery takes place. Port is usually located in the exporting country or in a neighboring country

III. Exporter responsible for goods until placed on board the ship, then importer is responsible

IV. FOB (sometimes called Freight on Board) is one of the oldest maritime terms of trade

a. Meaning somewhat dependent upon individual port—exporter may be responsible for loading costs

b. “FOB stowed”

c. “FOB stowed, trimmed, secured”

d. Syntax: “FOB FOB Breakbulk Terminal, 660 Duncan Road, Cape Town, South Africa, Incoterms 2010, stowed”

6-12-1 Delivery under fob

I. Centuries of maritime tradition said FOB point is the ship’s rail. The 2010 Incoterms changed that to “on board” the ship

II. Freight is “on board” the ship, but not stowed or trimmed

III. Documentation of delivery: ocean bill of lading or sea waybill

6-12-2 Exporter’s and Importer’s Responsibilities under fob

I. Exporter is responsible for:

a. Packing goods for export

b. Transporting them to the port

c. Loading them onto the ship

d. Clearing goods for export

e. Providing assistance in clearing Customs in importing country

f. Obtaining insurance

g. In United States, filling out Shipper’s Export Declaration

h. Providing pre-shipment inspection, if required

II. Importer is responsible for:

a. Arranging and paying for ocean transportation

b. Customs clearance in importing country

c. Arranging and paying for insurance

d. Paying for pre-shipment inspection, if required

6-13 Cost and Freight (CFR)

I. Any merchandise, but limited to ocean transportation

II. Syntax: “CFR ENL Multi-purpose Terminal, Apapa Wharf, Lagos, Nigeria, Incoterms 2010” = port of destination where importer takes control of goods, usually in importing country or neighboring country

III. Transfer of control takes place in the port of departure

IV. Exporter responsible for goods until they are on ship

V. Importer responsible for them when they are on ship

VI. Exporter pre-pays ocean freight

6-13-1 Delivery under CFR

I. Point of shift in responsibility is “on board” the ship in the port of departure

II. Documentation is ocean bill of lading or a sea waybill

6-13-2 Exporter’s and Importer’s Responsibilities under cfr

I. Exporter is responsible for:

a. Packing goods for export

b. Transporting them to the port

c. Loading them onto the ship

d. Clearing goods for export

e. Providing assistance in clearing Customs in importing country

f. Obtaining insurance

g. In United States, filling out Shipper’s Export Declaration

h. Providing pre-shipment inspection, if required

II. Importer is responsible for:

a. Arranging and paying for ocean transportation

b. Customs clearance in importing country

c. Arranging and paying for insurance

d. Paying for pre-shipment inspection, if required

6-14 Cost, Insurance, and Freight (CIF)

I. Any merchandise, but is limited to ocean transportation

II. Syntax: “CIF Naigai Lines, 176 Higashi-Machi, Chuo-Ku, Kobe 650-0031, Hyogo, Japan, Incoterms 2010” = the terminal in the port of destination in importing country in which importer takes control of goods

III. CIF Incoterm is similar to CFR term, except exporter pre-pays for Marine Cargo Insurance until port of destination

6-14-1 Delivery under CIF

I. Point of delivery, or shift in responsibility is “on board” the ship in the port of departure

II. Documentation is ocean bill of lading or a sea waybill

6-14-2 Exporter’s and Importer’s Responsibilities under cif

I. Exporter is responsible for:

a. Packing goods for export

b. Shipping costs and minimum insurance costs to destination

c. Paying minimum insurance cost

d. Clearing goods for export

e. In United States, filling out Shipper’s Export Declaration

f. Paying for pre-shipment inspection, if required

II. Importer is responsible for:

a. Clearing Customs in the importing country

b. Inland transportation after taking delivery

c. Paying for pre-shipment inspection, if required by importing country

6-15 Summary of the Division of Responsibilities between Exporters and Importers

I. Table 6-3 on page 209 gives a summary of the responsibilities of exporters and importers under each of the 11 Incoterms.

6-16 Common Errors in Incoterms Usage

I. Incoterm confusion with domestic terms of trade

II. Incoterm confusion with older Incoterm versions

III. Improper use of correct Incoterms

6-17 Incoterms as a Marketing Tool

I. Flexible policy

II. Quotes with several Incoterm alternatives

Key terms

container terminal

A location where containerized cargo changes mode of transportation.

delivery

In an international voyage, the point at which the responsibility for the goods switches from the exporter to the importer.

FCL (full containerload) shipment

An international shipment that uses, by weight or volume, the entire capacity of a container.

Incoterm

An International Commerce Term, or a formalized international term of trade, which specifies the responsibilities of the exporter and of the importer in an international transaction. Incoterms were first codified by the International Chamber of Commerce in 1953, and the latest revision is dated 2010.

Incoterms® Rules

A series of eleven international terms of trade standardized by the International Chamber of Commerce.

International Chamber of Commerce (ICC)

The largest business organization in the world. Its goal is to champion international business growth and its members are the national chambers of commerce.

LCL (less than containerload) shipment

An international shipment that is combined with other shipments in a single container.

main carriage

The portion of an international shipment that takes place between the exporting country and the importing country.

on-carriage

The portion of an international shipment that takes place in the importing country.

pre-carriage

The portion of an international shipment that takes place in the exporting country.

ship’s rail

An imaginary rail that circles the entire hull of a ship. Should a cargo item fall from a crane onto the ship while it is being loaded, the determination of whose responsibility it is hinges on which side of the ship’s rail it falls on. Under CIF, for example, if the cargo falls on the outside of the ship’s rail, it is the exporter’s responsibility; if it falls on the inside, it is the importer’s.

transfer of responsibility

In an international voyage, the point at which the exporter ceases to be responsible for the goods. At that point, the importer becomes responsible for the goods.

transfer of title

The point in time at which the ownership of the goods changes from the exporter to the importer.

secured

Once goods are stowed and the vessel trimmed, the goods are tied to the vessel by means of ropes or chains.

stevedore

A company or a person whose responsibility is to load and unload ships in a port.

stowed

Goods are considered stowed when they are aboard the ship and placed in the position in which they will be transported.

trimmed

A ship is considered trimmed when the cargo aboard the ship is balanced side-to-side and front-to-back.

variant

A modification to one of the Incoterms codified by the International Chamber of Commerce. Variants are generally used to further clarify the responsibilities of the exporter and of the importer in a given transaction. For example, the variant “EXW loaded” clarifies that the exporter agrees to load the goods on the vehicle provided by the importer when the official Incoterm is silent on that specific point.

PowerPoint SLIDES – STUDY THEM – PRINT THEM OUT !

· Incoterm Definition (7 slides)

· Each Incoterm (2-4 slides each = 30 slides)

· Incoterms in domestic trade (1 slide)

· Electronic Data Interchange (1 slide)

· Errors in Incoterms (3 slides)

· Using Incoterms for Strategic Advantage (1 slide)

Additional Resources

Reynolds, Frank, Incoterms for Americans (Completely rewritten for Incoterms 2011), 2011, published by International Projects, Inc., P.O. Box 352650, Toledo, Ohio 43635-2650, USA.

Ramberg, Jan, ICC Guide to Incoterms 2010, 2011, International Chamber of Commerce Publication No. 720E, ICC Publishing S.A., 38 Cours Albert 1er, 75008 Paris, France and ICC Publishing, Inc.,156 Fifth Avenue, Suite 417, New York, NY 10010, USA.

Incoterms 2010, ICC Rules for the Use of Domestic and International Trade Terms, 2011, International Chamber of Commerce Publication No. 715E, ICC Publishing S.A., 38 Cours Albert 1er, 75008 Paris, France and ICC Publishing, Inc., 156 Fifth Avenue, Suite 417, New York, NY 10010, USA.

Debattista, Charles, Editor, ICC Guide to Incoterms 2010 , 2011, International Chamber of Commerce Publication No. 720(E), ICC Publishing S.A., 38 Cours Albert 1er, 75008 Paris, France and ICC Publishing, Inc., 156 Fifth Avenue, Suite 417, New York, NY 10010, USA.