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Fida HusainFollow
General Counsel / Vice President
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In international trade, cargo movement is the essence. It involves costs and risks which are often
unforeseeably huge. Most business managers apply various measures to mitigate risks as well as
manage costs and one of the primary starting point is often International Commercial Terms (or
INCOTERMS) which for most businessmen, immediately gives a sense of control on costs & risks
that they are about to incur should they sign on the dotted line.
INCOTERMS, for those who are new to this, are a nifty shorthand means of agreeing on who is
responsible for the costs and risks associated with the international sale of goods. It is usually
written with a three letter acronym (see table below) that confirms when risk in the goods passes
from the seller to the buyer, and who is responsible for transporting, insuring, and paying duties on
them. They also define the point of passage of risk with regards to cargo loss or damage. There are
currently 11 Incoterms, 7 of which can be used for any mode of transportation, and 4 of which only
apply to transport by water.
So why are Incoterms so relevant to cross-border trade; take a look at the below pictogram to
understand the stages of cargo movement from seller to buyer.
All points marked above represents a milestone in international trade, the responsibility of which
(including costs & risks) needs to be agreed upon between parties. To reduce the burden of
negotiations for every single stage, the three letters Incoterm acronym is used which comes with
pre-defined accountabilities between the parties. Depending on the nature of trade, specific
Incoterm can be used which will specify where does the risk transfers and who bears the costs.
For instance, FOB rule specifies that risk & costs transfers to buyer when the goods
have been loaded on board the vessel. However FAS rule specifies that risk & costs
transfers when the goods have been placed alongside the vessel on the quay (or in
lighters).
The above may appear not to be very complicated but when you factor in the costs involved in
getting the goods cleared for export and additional stevedoring charges involved in FAS compared
to FOB, the difference between the two would suddenly seem very evident.
In my experience, business managers often do not delve into the finer text of these terms and end up
negotiating without fully realizing the impact these terms have on the overall costs/risks. Even
more, I have noticed that due to lack of awareness business managers are unable to strategize their
available resources to extract maximum benefit during negotiations. Understanding the supply-
chain of the cargo is the key because it helps selecting the appropriate Incoterm that would be most
suitable and would enable businesses to reap the benefits of low hanging fruits by which costs can
be managed, such as: -
1. Cost Efficiency – negotiating the right Incoterm helps you control your shipping costs. For
instance if a buyer has a dedicated shipping network and FOB/FAS is chosen, then the
shipping fees can be procured directly with the main carrier which will most likely be
cheaper compared to one provided by the seller because it is often marked-up.
2. Route Optimization – if an Incoterm is selected where the sellers are to arrange delivery they
will often choose the most economical routing of the cargo which may not be aligned with
your business timelines. Choosing your own shipping route may not only be cheaper but
delivery would prove to be faster.
3. Control & Visibility – while booking shipping through your preferred agent, it will give you
more control and visibility on real-time status of your cargo. You will have the flexibility to
optimize the route to suit your business needs.
4. Insurance – depending on the point of transfer of risk in the goods, you will have the option
to procure the right insurance for your cargo which will become effective with the passage
of risk. Being handed-over a foreign insurance by seller (which may or may not be from a
reputable insurer), may be a challenge especially when there is a loss or damage to goods
involved.
Although the above highlighted points are few benefits of choosing Incoterms smartly, you will find
online many materials that are dedicated to academic discourse on Incoterms which I highly
recommend for reading. In the meantime, following are few tips that can be handy:
1. Understand the supply-chain of the cargo; if you chose Incoterms based on convenience then
costs will definitely be higher. Collate your resources and strategize how to deploy those
resources vis-à-vis Incoterms to ensure cost efficiency.
2. Be realistic with the expectations from the counter-party (& yourself). Issues such as
whether the seller can undertake all the necessary formalities in the buyer’s country, e.g.
paying GST or VAT while using DDP or using EXW without thinking through the
implications of the buyer being required to complete export procedures can create
unnecessary (& expensive) delays.
3. If more than one carrier is involved in transportation, ensure that the implications of risk
transfer by the first carrier which in all likelihood will be a small haulage firm, are
adequately addressed.
4. Always double check how terminal handling charges (THC) are going to be treated at the
point of arrival. Some carriers absorb these costs while some do not.
5. Incoterms state when risk in the goods passes, but not title. Please bear in mind that
Incoterms is not a substitute to a contract therefore contractual issues such as price,
consequences of breach, termination rights, governing law etc. must be incorporated in a
separate contract.
6. Always clearly specify which Incoterm is being used and also define the edition you are
using. For instance, ‘[Incoterm, delivery point] Incoterms® 2010’.
7. When naming a specific delivery point or port, be specific – simply mentioning ‘USA’ could
mean your goods end up in Houston when you want them in Long Beach.
8. In general, Incoterms are silent on the matter of insurance (except CIF and CIP) and the
buyer/seller each decides insurance of the cargo for that part of the journey for which they
bear the risk of loss or damage. Ensure that adequate insurance terms are defined and agreed
beforehand.
9. Adding qualifications or variation to an Incoterms rule is generally acceptable but extra
caution should be applied to avoid introducing ambiguity which often comes from different
interpretation applied to common terms in market practice.
10.Incoterms are quite extensive, therefore always seek legal help when you feel you are
getting out of your comfort zone.
IMPORTANCE OF INCOTERM 2010, in
procurement cost reduction.
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Incoterms 2010 clarifies which terms are and are not intended for maritime intermodal shipping.
Nonetheless, many continually misuse Incoterms, leaving themselves vulnerable. I elucidate key
changes in Incoterms 2010, paying attention to the oft-misunderstood, misused FOB. I suggest FCA
might close this vulnerability gap, giving buyers greater visibility and control.
Introduction
Incoterms are an acronym for INternational COmmercial TERMS and were developed by the
International Chamber of Commerce (ICC) and were first codified in a pre-incoterms edition of
1923 (International Chamber of Commerce 2010a). The 1923 edition consisted of six terms: 1)
FOB-Free On Board; 2) FAS-Free Alongside Ship; 3) FOT-Free On Truck; 4) FOR-Free On Rail; 5)
CIF-Cost Insurance and Freight, and; 6) C&F-Cost and Freight (International Chamber of
Commerce 2010b). These terms were subsequently released as the first revision of Incoterms in
1936. Although it is well known that international trade had been transpiring over several millennia
(Beragami 2012), Incoterms came into being to address the problem of interpretation amongst
trading partners and to harmonize transactions. Incoterms were crafted to harmonize the world’s
maritime traders and their shipping policies; reduce the number of disputes between trading
partners, and; to clearly define dyadic responsibilities (e.g., costs, risks, documentation, contracting
for transport, etc.) between buyers and sellers (Stapleton and Saulnier 1999, 2000). Incoterms have
undergone substantial changes in 1957, 1967, 1976, 1980, 1990, 2000, and most recently in 2010,
taking effect in 2011 (Ramberg 2010). INCOTERMS 2000 were presented by the ICC in four
groups: E, F, C, and D, each group representing classes of terms that varied slightly within groups
but significantly across groups in terms of delivery points, risk, and cost responsibilities, and the
point at which those costs and risks shifted from the seller to the buyer. The new Incoterms (i.e.,
rules) are presented in two distinct groups instead of four, specifically to guide traders in using the
appropriate terms. That is, INCOTERMS 2010 are compressed and now presented in two groups—
the new classification makes it easier for shippers to discern between Incoterms that are to be used
only for ocean and inland waterway, and those that should be used for multi-modal contracts (i.e.,
intermodal transportation transactions). The new Incoterms, or Rules, are separated as follows: 1)
Rules for use in relation to any mode or modes of transport, which can be used where there is no
maritime transport at all, or for transportation transactions in which maritime transport is used for
only part of the carriage (i.e., intermodal maritime); and 2) Rules for ocean and inland waterway
transport, where the point of dispatch and delivery are both ports. Thus, FAS, FOB, CFR, and CIF
belong to the latter class of Rules; while EXW, FCA, CPT, CIP, DAP, DAT, and DDP belong to the
former. A major change in the latest version of Incoterms is the separation of the place-to-place
delivery terms, commonly known in the industry as “multimodal,” from the delivery terms that are
simply port-to-port ocean freight terms. There are seven terms to be used when delivery is from
place-to-place (i.e., EXW EX-Works, FCA Free Carrier At, CPT Carriage Paid To, CIP Carriage and
Insurance Paid to, DAT Delivered At Terminal, DAP Delivered At Place, and DDP Delivery Duty
Paid). The remaining four terms are purely ocean freight terms and often involve bulk carriage (i.e.,
CFR Cost and Freight, CIF Cost, Insurance and Freight, FAS Free Alongside Ship, FOB Free on
Board). In the definitions of FOB, CFR, and CIF, the phrase “ship’s rail” -the point at which cost
and risk shifted parties in the previous Incoterms - has been deleted and the reference now is to
delivery of goods “on board.” FAS and FOB do not apply to multimodal sea transport in containers
(Rosenberg et. al. 2011). While the ICC’s purpose in periodically updating Incoterms is to
harmonize policy and trade practices (Malfliet 2011), problems remain because parties continue to
use the “wrong” term (Ramberg 1999) given the circumstances and nuances of their trading
relationships. Using the “right” term, on the other hand, may prevent disputes (Richardson 1998),
and provide clarity. But an Incoterm is only “right” if it is in harmony and congruent with the other
trade facilitating documents (e.g., contract of sale, contract of carriage, insurance documentation,
Bills of Lading, DLC, etc.), as well as compliant with the ICC’s Incoterm policies and procedure as
codified in the latest Incoterms (i.e.,Incoterms 2010).
Ex Works puts the full obligation for things like arranging and paying for shipping, and dealing with
customs clearance, on the buyer
Ben Lobel
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Ex Works – also expressed as the three-letter code EXW – is an Incoterm you might have spotted if
you’re involved in buying and selling internationally.
They’re only a few letters long, but using the wrong Incoterm when buying goods from a supplier
based overseas can be an extremely costly mistake.
Ex Works meaning
Incoterms or International Commercial Terms, are trade terms defined by the International Chamber
of Commerce, used to communicate the tasks and costs involved in international shipping. Having
an agreed definition of these terms reduces the risk of suppliers and buyers misunderstanding or
misinterpreting what each other wants or needs, when it comes to international procurement of
goods.
Ex Works, also known as Ex Works (named place of delivery), or EXW, can be used in relation to
any form of transport. This Incoterm puts the full obligation for things like arranging and paying for
shipping, and dealing with customs clearance, on the buyer.
EXW is often used when obtaining a quotation for a price of goods, to express the pure cost of
goods without any costs included.
Ex Works price
If you’re buying goods from abroad under EXW terms, you’ll be responsible for all of the costs
involved in setting up shipping and customs clearance. That can mean that, as well as paying your
supplier, you’ll have to arrange and pay for things like air or sea freight, and local haulage. You
might also consider employing the services of a customs broker, to help complete all the paperwork
needed to get your purchase through customs smoothly.
Importing Ex Works is likely to involve making several international payments – and these cross
border transactions can be costly. Not only are there upfront fees to consider, it’s common for banks
to add a markup to the exchange rate they offer customers, which can mean you lose out every time
you make an international payment.
Instead of using your bank to arrange payments to international suppliers and service providers, you
could be much better off choosing a specialist in international payments like TransferWise.
TransferWise offers international payments using the real, mid-market exchange rate, and just a low
upfront fee – which can mean they’re up to eight times cheaper than using a UK high street bank.
Payments can be arranged online for convenience, and the service is FCA regulated – just like your
normal bank.
EXW Risks
Under Ex Works terms, the buyer bears all of the risk involved in the shipment. That means that any
additional costs incurred when clearing customs, for example, will fall to the buyer. It’s important to
be really clear on the export documentation you will be able to obtain from the seller, and make sure
you familiarise yourself with local customs regulations, to avoid issues.
Summary of Ex Works
The cost, and in most cases, risks associated with moving the goods from their origin to the UK, fall
to the buyer.
Allocation of costs using
Ex Works Terms
Export customs
Buyer
procedures
Transport to export
Buyer
port/airport
Unloading of truck in port Buyer
Loading goods onto
Buyer
vessel/airplane
Transportation to UK Buyer
Insurance Buyer
Unloading at destination
Buyer
port/airport
Loading for local haulage
Buyer
in UK
Transport to final
Buyer
destination in UK
Import customs clearance Buyer
Import duties and taxes Buyer
Advantages of Ex Works
Using EXW terms means that as buyer, you have complete control of your shipment. The exact cost
of goods, and of all elements of transporting them, are clear – which should mean there are no
surprises.
Buyer is in control of shipping arrangements and costs
Because you’ll set up all the transportation arrangements yourself you can compare the market to be
sure you’re getting the best deal available. You can be confident that the seller isn’t adding a margin
or markup to the cost of transport. You might decide to employ a freight forwarder to make all the
arrangements on your behalf, or contract individual transport companies to move the goods as
needed.
Choose how to clear customs
You can also make your own decisions as buyer regarding customs clearance – whether or not to
use a broker to help with the import/export process, for example. If you’re very familiar with
customs processes, or have someone in your team who is, you might choose to tackle this step
yourself.
Disadvantages of EXW
Ex Works isn’t suitable in all cases. As well as the risks we have noted above, there are some other
possible disadvantages you’ll need to be aware of, too.
Check if your supplier has an export license
If your supplier doesn’t have an export license, then you might need to get one yourself, as a buyer
using EXW terms. This will then become an additional cost you need to consider.
Country of origin export paperwork
You’ll find that the supplier is responsible for providing paperwork and documentation to make sure
your goods clear customs for export in the country of origin. However, under EXW terms you
would then be liable, as buyer, for any issues encountered during customs clearance. So for
example, if the supplier provides incorrect or incomplete information, you might find the costs of
customs duty is higher than expected.
EXW VS FOB
If you’re working out whether or not Ex Works terms will suit your needs, it can be helpful to know
what other options are out there. One common alternative to EXW is to use FOB – Free On Board –
Incoterms. It’s helpful to know that usually, FOB terms are only available on sea freight shipments,
and basically mean the seller is responsible for costs up to the point that the goods are on the ship
and ready for transportation.
Here’s a brief comparison of how costs are divided, using EXW and FOB Incoterms – or you can
read more about FOB terms in this helpful article.