Understanding Incoterms For Beginners

A Simplified Guide To International Trade Terms

Understanding Incoterms is very important, so it’s a good thing you are here! When you enter the international trade arena as a newbie, it can feel overwhelming. Terms such as FAS, CIF, CFR and FOB seem more like cryptography than shipping guidelines. But these terms are essential to understand if you want to succeed at selling your products on an international scale. These logistics concepts cover the different costs of moving goods from one place to another — from “origin” where they’re created or manufactured, to their final destination where they will be purchased by customers. Effective international trade requires that both parties clearly understand what is included in every cost and every bill of lading. Since there are many different combinations of shipping terms, it’s helpful to break them down into categories. Here are a few common types of terms that you need to know in order to conduct successful international trade.

Determining price

The most important factor to understand is the price terms. To begin, the price will be determined by the mode of transportation. You can expect to pay more to ship by air than to ship by sea. You can also expect to pay more to move cargo in the peak season than in the off-season. The price will also be determined by where the product is headed. Is it going to a major global hub like New York City or Hong Kong? Or is it bound for a more remote location? As a general rule, products bound for more remote locations will cost less to ship because they require less transportation, handling and distribution. The price will be further determined by the type of product you are shipping. Is it hazardous cargo? Does it require temperature-controlled storage? Will it need to be crated? The type of cargo you are moving will also influence your shipping costs.

Free Alongside Ship (FAS)

The FAS price term means that the seller has to load the goods onto the vessel, but the buyer has to bear all other costs, like marine insurance and the inland transport of the goods to the destination. FAS is known as “Free Alongside Ship” (FAS) when the goods are loaded at the seller’s location or “Free on Board” (FOB) when the goods are loaded at the buyer’s location. This is a cost-free term but the buyer has to bear all other costs.

Free on Board (FOB)

With the FOB price term, the seller has to load the goods onto the vessel, arrange marine insurance and cover the costs of inland transport to the destination. In this case, the buyer only has to pay the price of the goods once they are on board the vessel.

Cost and Freight (CFR)

The CFR price term means that the seller has to arrange for the goods to be transported to the destination. The seller also has to arrange marine insurance for the risk of loss or damage to the goods during transit to the destination. The seller only has to pay for the movement of the goods to the port of export. The CFR price term requires the seller to pay for the movement of the goods to their final destination.

Cost, Insurance and Freight (CIF)

CIF is similar to the CFR price term, but the seller also has to arrange for the insurance of the goods during the transit from port to port. This means that the seller has to pay the costs of the goods, the marine insurance and the inland transport to the destination.

Ex-Ship and Ex-Works

The Ex-Ship and Ex-Works price terms are mostly used when the seller is located in a remote place without any port facilities. In this case, the seller does not have to load the goods onto any ship. The Ex-Ship price term means that the seller has to deliver the goods to a specified place at the nearest navigable waterway. The Ex-Works term means that the seller has to deliver the goods to the place specified by the buyer.

Shifting sands: Conclusion

If you’re new to the field of international trade, you may feel like you’re drowning in a sea of acronyms and complicated terms. But with a little bit of education, you’ll be able to swim in this ocean like a pro. The most important thing to remember is that these terms are there to help you conduct business more successfully. They help you understand the different costs associated with moving your products from one place to another. If you’re entering the field of international trade for the first time, you need to make sure you understand the logistics behind shipping products. If you’re not sure how to proceed, let as do the heavy lifting for you! If you still interested in learning even more, click here.