Incoterms for beginners | Global Trade Explained

If you work in international trade, or if you want to start a business importing or exporting goods, you need to have a deep understanding of Incoterms. This is short for International Trade terms. They are basically delivery terms used in international trade, so both the buyer and the seller are on the same page when it comes to what obligations they each have in regards to shipping the goods to their final destination.

In this tutorial we’ll be covering the most recent version, Incoterms 2020, which haven’t really changed much from the previous versions. So let’s get started: Shipping goods from one country to another includes several processes: First the goods would be picked up from the supplier’s location, and then trucked to a sea port, airport cargo terminal, or a rail terminal, depending on the agreed delivery method. Before being able to leave the country of origin, the goods need to clear customs, then travel by air, sea or land to their destination country, after which they will have to be unloaded, clear customs, and then trucked to their final destination.

Incoterms covers exactly who will bear the costs and the risks of each process. There are several Incoterms, but we’ll be focusing on the ones that matter and are most commonly used. FOB, CIF, and CFR are some of the most commonly used terms for sea shipping, although many times they are incorrectly used for other modes of transport.

But let’s start with the simplest term, which is EX-Works, abbreviated as EXW. This means that the supplier provides no delivery whatsoever, so the buyer is responsible for picking up the goods from the supplier’s location and organizing transportation to the final destination. So on a contract or invoice, this term would be written as EXW and the city or location where the goods will be available for pickup.

Next there’s FOB, one of the terms most commonly used for shipping by sea. FOB stands for Free on Board, and it basically means that the risk is transferred to the buyer when the goods are loaded on board the vessel at the agreed port of loading. This means the supplier supports all the risks and costs of trucking the goods to the loading port, clearing customs, and all the local port charges associated with loading the goods on the vessel.

The buyer is responsible for all the remaining costs to the final destination, like ocean freight, destination port charges, customs clearance and transport to the final destination. The same as all other Incoterms, this would be written on a contract or invoice as FOB and the port of shipment. For example FOB Shenzhen, or FOB Shanghai.

CFR and CIF are similar terms. CFR means Cost and Freight, and CIF means Cost, Insurance and Freight. In both cases, the seller pays the carriage of the goods to the named port of destination, the only difference is under CIF the seller has to obtain insurance for the goods while in transit.

In both cases the risk is transferred to the buyer after the goods have been delivered on board the ship. The buyer is responsible for all the local charges at the port of destination, like unloading goods off the ship, local port charges, customs clearance and transport to the final destination. We are about done with the most commonly used terms for sea shipping, so now let’s see 2 of the most commonly used terms for any type of transport method: DDU and DDP.

Let’s talk about DDP first, which is Delivery Duty Paid. The seller is responsible for all the risks and costs until the goods have reached the specified place of arrival, ready to be unloaded. So the seller handles all the delivery and import formalities and duties to the final destination.

This is also many times called door to door delivery. DDU is an older term from Incoterms 2000, but it is so popular that is still being used today. It means Delivery Duty Unpaid and similar to DDP, it means the seller is responsible for all risks and costs to the place of arrival, except import formalities and duties.

Since a lot of traders still prefer using this older term in trade documents, it's mandatory when using DDU shipping to mention “as per Incoterms 2000” in the documents. In Incoterms 2020 the closest term to DDU is DAP, which stands for Delivered at Place. The same as DDU, the seller is responsible for all the risks till the goods have reached the destination, ready to be unloaded, except any import formalities and duties.

One way or another, delivery terms will affect either product costs or shipping costs; so when negotiating either with customers or suppliers, it is important to know what delivery terms to choose. So we’ll be focusing on that in our next video. Till next time, please remember to like this video, and if you’re new to this channel please subscribe to catch the next video.

Thanks for watching and see you next time!