Incoterms, or international commercial terms, represent a set of codes designed to regulate the responsibilities of the various parties involved during an international trade transition (import/export). In particular, Incoterms specify when and how the responsibility for transporting goods passes from the supplier to the importer.
Each incoterm has two components: a three-letter code and the name of a city.
- Three-letter code
The letters (EXW, FOB, CIF, etc.) specify how far the supplier will have to take care of the goods (for example up to the port of departure in China, up to the port of destination in Italy, up to your warehouse, etc.). Depending on the Incoterm you choose, the price will also be different since the supplier will have to incur a different expense depending on whether you deliver the goods to the port of Shanghai or Milan, in front of your doorstep.
This means that any quote you receive will be based on a specific Incoterm. There are no exceptions.
As a result, the prices of goods vary depending on the incoterm used. It therefore makes no sense to compare prices for the same cargo when the latter are subject to a different incoterm.
Let’s take a calculator as an example. Depending on the Incoterm used, you will get four different prices:
EXW price (i.e. the cost of production without any transport included): 4.7 Euro per piece
FOB price (i.e. the cost of production plus the cost of transport to the shipping port in China): 5.45 Euro per piece
CIF price (i.e. the cost of production plus the cost of transport to the port of destination in the importing country): 5.95 Euro per piece
DAP price (i.e. the cost of production plus the cost of transport to the importer’s warehouse in the importing country): 6.25 Euro per piece
As you can see, the price of a unit of the product can vary by up to 50% depending on the Incoterm used. The EXW price will always be the cheapest since it does not include any transport costs: in fact, you will have to take care of collecting the goods from the production line and having to worry about transporting them to Italy.
- City Name
Let’s come instead to the second part of the Incoterm, or the geographical coordinate. The city name specified in the Incoterms represents the place where the supplier will have to deliver the goods to the importer.
For example, an Inconterm FOB Shanghai means that the importer will receive the goods at the port of Shanghai.
It is recommended to avoid the INCOTERMS EXW and FOB to inexperienced importers because, in this case, the cargo will be delivered to China and the transport to Europe will be the sole responsibility of the importer.
Terminology
Incoterm EXW (Ex Works)
Export Customs License Cost: Not Included
Freight Cost to China Shipping Port: Not Included
Freight Cost to Destination Port: Not Included
Import Country Unloading Cost: Not Included
Freight Cost from Destination Port to Importer’s Warehouse: Not Included
Goods Insurance Cost: Not included
The EXW price is equivalent to the production price of the goods and does not include any transport costs. If you choose to use this Incoterm, you will have to take care of the transport of the goods from the supplier’s production line to your warehouse in the destination country.
Incoterm FOB (Free on Board)
Export Customs License Cost: Included
Shipping cost to shipping port in China: Included
Cost of transport to the port of destination: Not included
Costs of unloading goods in the importing country: Not included
Freight cost from destination port to importer’s warehouse: Not included
Cost of Goods Insurance: Not Included
In this case, the supplier will have to take care of transporting the goods to the port of shipment in China and manage the export customs formalities. This last point is very important because, in the event that Chinese customs officials decide not to let the goods leave, the responsibility would fall on the supplier.
Cost Insurance Freight (CIF) IncotermExport Customs License Fee: Included
Cost of Transportation to the Port of Shipment in China: Included
Cost of Transportation to the Port of Destination: Included
Cost of Unloading Goods in the Importing Country: Not Included
Cost of Transportation from Port of Destination to Importer’s Warehouse: Not Included
Cost of Goods Insurance:
Included
In this case, the supplier must also take care of the transport to the port of destination in the importing country and pay for the insurance of the goods.
Incoterm DAT (Delivered at Terminal)
Export Customs License Cost: Included
Shipping cost to shipping port in China: Included
Cost of transport to the port of destination: Included
Costs of unloading goods in the importing country: Included
Freight cost from destination port to importer’s warehouse: Not included
Cost of Goods Insurance: Included
In this case, the supplier will have to transport the goods to the importing country, unload them and deliver them to the warehouse of the land transport company specified by you. However, the responsibility for getting the goods to your warehouse will still be yours.
Incoterm DAP (Delivered at Place)
Export Customs License Cost: Included
Shipping cost to shipping port in China: Included
Cost of transport to the port of destination: Included
Costs of unloading goods in the importing country: Included
Transportation cost from destination port to importer’s warehouse: Included
Cost of Goods Insurance: Included
This Incoterm is similar to DAT. The difference is that in this case the supplier will have to worry about transporting the goods to your warehouse.
Faq
What is the best Incoterm when importing from Asia?
If you want to simplify the process, but at the same time want to achieve maximum transparency and cost control, then we recommend that you buy according to FOB terms from the supplier, and enter into DAP terms with the transport agency of your choice.
This will ensure that the supplier handles the transport from the factory to the port of departure in Asia (and takes care of the export procedures).
Your transport agency, on the other hand, will take delivery of the goods at the port of departure, transport them to your country (Italy for example), take care of customs clearance at the port of arrival and, finally, transport the goods to your warehouse.
Are there any incoterms that are best avoided?
We suggest that you avoid buying the goods from the supplier under CIF terms, because by purchasing CIF you will not be aware of the entire freight charges, as the CIF Incoterm does not include the charges at the port of destination (unloading of goods, customs clearance, ground freight, etc.).
When buying FCL (full container load), the charges at the port of destination will amount to around 300-600 Euros. However, if you buy in LCL (partial load containers), it is unlikely that you will spend less. If you don’t know the meaning of the terms FCL and LCL, I recommend you read this article.
At first glance, the difference between these costs may seem contradictory since, in theory, transport in LCL should cost less than transport in FCL. And the transport itself actually costs less. However, the administrative costs at the port of destination are more or less the same in total; This means that the expenses per cubic meter will be higher.
Returning to the CIF Incoterm, many transport agencies do not inform the importer of the fact that he will have to incur additional expenses at the port of destination.
Technically, they don’t do anything illegal, since if the customer requests a CIF quote, the charges at the port of destination are simply not included. However, if the customer “ignores” this fact, he will have to face unexpected expenses for him.
That’s why, in the previous section, we said that the DAP Incoterm offers more transparency and cost control.
Can I save money if I buy under Ex Works (EXW) terms?
The purchase price under EXW terms is lower than that of any other Incoterms, simply because it does not even include transportation to the port of departure in or customs clearance fees in Asia (these costs are included in all other Incoterms).
This means that you will need to find a transport agency that can also handle the transport from the factory to the port of departure and customs clearance procedures in Asia.
So buying under EXW terms, you not only complicate your life, but you also risk spending more than buying with another Incoterm.
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