Choosing the correct terms in international trade is crucial for buyers and sellers. CIF (Cost, Insurance, Freight) and CIP (Carriage and Insurance Paid to) are standard trade terms, each with unique characteristics. This article will explore the details of these terms in depth, including their definitions, features, and key differences. By understanding these differences, traders can make informed decisions that meet their needs.
What are Incoterms?
Incoterms are standardized terms developed by the International Chamber of Commerce (ICC) to clarify buyers’ and sellers’ responsibilities, risks, and cost allocations in international trade. Different Incoterms determine how goods are delivered, who bears the transportation costs, and who is responsible for insurance. This helps to reduce misunderstandings and potential legal disputes.
What is EXW?
EXW (Ex Works) is one of the Incoterms® and means that the seller delivers the goods to the buyer at the seller’s premises (e.g., factory, warehouse, or other named place). The buyer bears all subsequent costs and risks, including the responsibility for loading, transport, customs clearance, and insurance. EXW is a good choice for sellers who want to reduce the liability and risk of international trade.
When to use EXW?
EXW (Ex Works) is a good option for sellers who want to hand over the goods to the buyer without assuming any responsibility for transport or risk. It is also a good choice for buyers with strong logistics and transportation capabilities who can handle the transportation from the seller’s location to the destination. EXW shifts the responsibility to the buyer, minimizing the seller’s liability. The buyer will bear full responsibility for transportation, customs clearance, and the risk of the goods until they arrive at the destination! It is suitable for buyers with extensive international trade experience and resources.
Features of EXW?
EXW (Ex Works) is the term in international trade with the least responsibility on the seller’s part. Its main features are as follows:
Seller’s responsibility:
- Delivery location: The seller only needs to prepare the goods at its location (such as factory, warehouse, etc.) for the buyer to pick up to fulfill the delivery obligation.
- No transportation involved: The seller is not responsible for loading the goods onto the buyer’s means of transport, nor does it bear any transportation costs or risks.
- No customs clearance: The seller is not required to carry out export customs clearance procedures, and the buyer bears all responsibilities related to import and export customs clearance.
Buyer’s responsibilities:
- Assumption of all costs and risks: From the time the goods are delivered to the buyer at the seller’s premises, the buyer is responsible for all costs and risks, including transportation, insurance, export and import customs clearance.
- Logistics control: The buyer is responsible for arranging the means of transport, customs clearance, and any problems that may arise during the transport.
What is Free on Board (FOB)?
Delivery is deemed to be completed when the seller loads the goods onto the vessel designated by the buyer at the designated port of shipment; at this point, the risk and cost of the goods are officially transferred to the buyer. The seller is responsible for transporting the goods to the port of shipment, handling export customs clearance, and bearing all costs and risks before the goods are loaded on the ship, including the cost of transporting the goods from the factory or warehouse to the port, port handling charges, and export tariffs. Once the goods are safely loaded on the ship, the buyer is responsible for all costs and risks from the port of shipment to the port of destination, including international transportation costs, insurance costs, import customs clearance costs, and the risk of damage or loss of the goods during transportation.
When to use FOB?
FOB (Free on Board) is a good choice when both seller and buyer can operate at the named port of shipment, and the buyer can assume responsibility for import clearance and shipping arrangements. It is also suitable when the buyer wants the seller to take care of export customs clearance and deliver the goods to the port of shipment. In contrast, the buyer is responsible for the transport and risks from the port of shipment to the destination. This trade term clearly defines the division of responsibilities between the parties. Hence, everyone knows what they must do: the seller ensures that the goods are safely loaded on the ship and handles export customs clearance. At the same time, the buyer is responsible for paying all costs after the goods are loaded on the boat and ensuring they arrive safely at their destination.
Characteristics of FOB (Free On Board)
FOB (Free On Board) is commonly used in international trade. Its main characteristics are as follows:
Seller’s responsibilities:
- Delivery obligation: The seller must load the goods onto the vessel designated by the buyer at the designated port of shipment and handle export customs clearance procedures.
- Transportation to the port: The seller is responsible for transporting the goods from the factory or warehouse to the port of shipment and bears the related costs.
- Provision of documents: The seller must provide the buyer with the necessary documents, such as commercial invoices, packing lists, and export licenses, to facilitate the buyer’s import procedures.
Buyer’s responsibilities:
- Arrange transport: The buyer must arrange for and pay for international transport from the shipment port to the destination port.
- Assume risk: Once the goods are loaded on the ship, the buyer assumes the risk of loss or damage to the goods that may occur during transport.
- Handle import formalities: The buyer is responsible for handling import customs clearance procedures and paying import duties and other fees.
The difference between EXW and FOB
EXW (Ex Works) and FOB (Free On Board) are two standard trade terms used in international trade. They differ significantly in terms of the place of delivery, division of responsibilities, point of transfer of risk, and applicable scenarios. The following is a detailed comparison of the two:
| Feature | EXW (Ex Works) | FOB (Free On Board) |
| Delivery Location | Seller’s premises (e.g., factory, warehouse) | Designated port of shipment |
| Seller’s Responsibility | Minimal, only packing | Transport goods to the port, load onto the ship, and handle export customs clearance |
| Buyer’s Responsibility | Maximum, bears all costs and risks | Bears all costs and risks after goods are loaded onto the ship |
| Risk Transfer Point | When goods are handed over to the buyer at the seller’s premises | When goods pass the ship’s rail at the port of shipment |
| Cost Allocation | Seller only covers packing costs | Seller covers costs up to loading onto the ship, buyer covers subsequent costs |
| Applicable Scenario | Buyer has strong logistics capability and wants to minimize seller’s responsibility | Suitable for sea transport, buyer wants better control over the shipping process |
| Price Composition | Seller’s quotation includes only the cost of goods | Seller’s quotation includes cost of goods, transportation to the port, and export customs clearance |
How do I choose the proper international trade term?
The following factors should be considered when choosing the proper international trade term:
- Willingness and ability of the buyer and seller: Both parties should clarify their responsibilities and scope of ability and choose a term acceptable to both parties.
- Transportation method and risk control: Different transportation methods correspond to different risks, and the appropriate term should be selected according to the actual situation.
- Cost control: Different terms correspond to different cost allocations, and cost factors should be considered comprehensively.
- Trade practices: Certain industries or regions may have specific trade practices that should be considered.
