Incoterms
Incoterms are standardized trade terms published by the International Chamber of Commerce that allocate specified delivery responsibilities, costs and risks between buyer and seller. They do not by themselves determine ownership, payment method or every contractual obligation.
Incoterms are three-letter trade terms, published by the International Chamber of Commerce, that tell buyer and seller who arranges and pays for transport, who handles export and import clearance, and at what point the risk of loss passes. The current edition, Incoterms 2020, has 11 rules. Common ones in China trade include EXW, where the buyer collects from the factory; FOB, where risk passes once goods are on board at the port of loading; and CIF and DDP, where the seller carries more cost and obligation.
The chosen term affects the price on the commercial invoice and therefore the payment. An FOB Shenzhen price excludes ocean freight and insurance that a CIF price includes, and a DDP price may include import duties and taxes. When comparing quotes, the buyer has to compare like with like. Some FOB, CFR and CIF rules are designed for sea and inland waterway transport only, while others apply to any mode, a distinction that matters for container and air shipments.
Incoterms are often misunderstood as covering more than they do. They do not determine when ownership of the goods passes, which currency is used, how or when payment is made, or what happens if the goods are defective. Those points belong in the sales contract and the supplier-payment terms. A contract should name the rule and the edition, for example FOB Ningbo Incoterms 2020, to avoid ambiguity.
In practice
An Incoterm allocates delivery costs and risk, not ownership or payment. Payment timing, currency and title must be set out separately in the contract.
Example
Hypothetically, two suppliers quote for the same order: US$50,000 FOB Shanghai and US$54,500 CIF Los Angeles. If ocean freight and insurance would cost the buyer about US$5,200, the CIF quote is the cheaper landed offer, even though its headline price is higher. The comparison only works because both quotes state their Incoterm.
See also
- Bill of LadingA bill of lading is a transport document issued in connection with the carriage of goods by sea. Depending on its form, it can evidence receipt of the goods, contain the carriage terms and function as a document controlling delivery.
- Commercial InvoiceA commercial invoice is the seller’s formal statement of the goods or services supplied and the amount owed by the buyer. Banks, customs authorities and payment providers may use it to verify the payment amount, parties, currency and commercial purpose.
- Pro Forma InvoiceA pro forma invoice is a preliminary commercial document describing the proposed goods, price, currency and terms before the final invoice is issued. It is commonly used to support quotations, deposits, approvals and import preparations.
- Supplier-Payment TermsSupplier-payment terms define when and under what conditions a buyer must pay a supplier. They may include deposits, production milestones, inspection requirements, shipment events, credit periods and final-balance deadlines.