Terms of Trade

or Incoterms
International Commerce Terms
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

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, 1990 and 2000.

The latest version of Incoterms is implemented in 2010.

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.
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
Thirteen Incoterms
EXW • Ex-Works
FCA • Free Carrier
FAS • Free Alongside Ship
FOB • Free on Board
CFR • Cost and Freight
CIF • Cost, Insurance, and Freight
CPT • Carriage Paid To
CIP • Carriage and Insurance Paid To
DES • Delivered Ex-Ship
DEQ • Delivered Ex-Quay
DAF • Delivered at Frontier
DDU • Delivered Duty Unpaid
DDP • Delivered Duty Paid
 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
 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.

Scope
EXW can be used for any type of goods

Modality
EXW can be used for all modes of transportation

Syntax
EXW [City where goods are made available]

e.g. EXW Hyderabad, TS, India

 Ex-Works (EXW)

Exporter
• packages the goods for the international voyage
• provides the importer with the documents necessary to clear
Customs

Importer
• does everything else

Transfer Point
• when the exporter makes the goods available to the importer
 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.
Scope
FCA can be used for any type of goods

Modality
FCA can be used for all modes of transportation

Syntax
FCA [City where goods are delivered to the carrier]

FCA, Hyderabad, TS, India --- if the delivery happens at

exporters premises

FCA, Vizag, AP, India --- if the delivery happens at the

carriers premise
 Free Carrier (FCA)

Exporter
• packages the goods for the international voyage
• provides the documents necessary to clear Customs
• clears the goods for export

Importer
• does everything else

Transfer Point
• when the exporter delivers the goods to the carrier
 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.

Scope
FAS can be used for any type of goods

Modality
FAS can only be used for ocean transportation

Syntax
FAS [Port of Departure]
 Free Alongside Ship (FAS)

Exporter
• 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

Importer

• does everything else

Transfer Point

• when the exporter delivers the goods to the carrier

 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.

Scope
FOB can be used for any type of goods

Modality
FOB can only be used for ocean transportation

Syntax
FOB [Port of Departure]
 Free on Board (FOB)

Exporter
• 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

Importer
• does everything else

Transfer Point

• when the goods cross the ship’s rail

 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.

Scope
CFR can be used for any type of goods

Modality
CFR can only be used for ocean transportation

Syntax
CFR [Port of Destination]
 Cost and Freight (CFR)

Exporter
• 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

Importer
• does everything else

Transfer Point

• when the goods cross the ship’s rail in the port of departure
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.

Scope
CIF can be used for any type of goods

Modality
CIF can only be used for ocean transportation

Syntax
CIF [Port of Destination]
Cost, Insurance, and Freight (CIF)

Exporter
• 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)

Importer
• does everything else

Transfer Point

• when the goods cross the ship’s rail in the port of departure
 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.

Scope
CPT can be used for any type of goods

Modality
CPT is used for non-ocean modes of transportation

Syntax
CPT [City of Destination]
 Carriage Paid To (CPT)

Exporter
• 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

Importer
• does everything else

Transfer Point

• when the goods are delivered to the carrier in the city of departure
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.

Scope
CIP can be used for any type of goods

Modality
CIP is used for non-ocean modes of transportation

Syntax
CIP [City of Destination]
Carriage & Insurance Paid To (CIP)

Exporter
• 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)

Importer
• does everything else

Transfer Point

• when the goods are delivered to the carrier in the city of departure
 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.

Scope
DES is generally used for bulk goods only

Modality
DES can only be used for ocean transportation

Syntax
DES [Port of Destination]
 Delivered Ex-Ship (DES)

Exporter
• provides the documents necessary to clear Customs
• clears the goods for export
• arranges and pays to transport the goods to the port of destination

Importer
• does everything else

Transfer Point
• when the goods are delivered to the port of destination
 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.

Scope
DEQ is generally used for bulk goods only

Modality
DEQ can only be used for ocean transportation

Syntax
DEQ [Port of Destination]
 Delivered Ex-Quay (DEQ)

Exporter
• 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

Importer
• does everything else

Transfer Point

• when the goods are delivered to the importer

 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.

Scope
DAF can be used for any type of goods

Modality
DAF can only be used for land-based transportation

Syntax
DAF [City/Location of Border Crossing]
 Delivered at Frontier (DAF)

Exporter
• provides the documents necessary to clear Customs
• clears the goods for export
• arranges and pays to transport the goods to the border city

Importer
• does everything else

Transfer Point
• when the goods are delivered to the border city
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.

Scope
DDU can be used for any type of goods

Modality
DDU can only be used for any mode of transportation

Syntax
DDU [City in the importing country]
 Delivered Duty Unpaid (DDU)

Exporter
• 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

Importer
• clears Customs in the importing country

Transfer Point

• when the goods are delivered to the city in the importing country
 Delivered Duty Paid (DDP)

Under DDP, the exporter agrees to deliver the goods to a location in

the importing country, after having cleared Customs.

Scope
DDP can be used for any type of goods

Modality
DDP can only be used for any mode of transportation

Syntax
DDP [City in the importing country]
 Delivered Duty Paid (DDP)

Exporter
• 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

Importer
• takes delivery of the goods in the importing country

Transfer Point

• when the goods are delivered to the city in the importing country
 Incoterm Summary

X = Exporter’s Responsibility I = Importer’s Responsibility

TASK EXW FCA FAS FOB CFR CIF CPT CIP DES DEQ DAF DDU DDP

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

Mode of Transport EXW FCA FAS FOB CFR CIF CPT CIP DES DEQ DAF DDU DDP

Ocean Cargo YES NO YES YES YES YES NO NO YES YES NO YES YES
Multi-Modal (FCL) YES YES NO NO NO NO YES YES NO NO YES YES YES
Multi-Modal (LCL) YES YES NO NO NO NO YES YES NO NO YES YES YES
Rail YES YES NO NO NO NO YES YES NO NO YES YES YES
Road YES YES NO NO NO NO YES YES NO NO YES YES YES
Air YES YES NO NO NO NO YES YES NO NO NO YES YES
Incoterm Summary

Break-
Bulk RO-RO Container Small Packet
Bulk
EXW Yes Yes Yes Yes Yes
FAS Yes Yes Yes Yes No
FCA No Yes Yes Yes Yes
FOB Yes Yes Yes Yes No
CIF Yes Yes Yes Yes No
CIP No Yes Yes Yes Yes
CFR Yes Yes Yes Yes No
CPT No Yes Yes Yes Yes
DES Yes No No No No
DEQ Yes No No No No
DDP Yes Yes Yes Yes Yes
DDU Yes Yes Yes Yes Yes
DAF Yes Yes Yes Yes No
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.
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 2000. 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.
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.
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.