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Trade terms, also called price terms or delivery terms, are an important component of a unit price in international trade, standing for specific obligations of the buyer and the seller. Every commercial transaction is based upon a sales contract, and the trade terms used in the contract have the important function of naming the exact point at which the cost and risk of the merchandise is transferred from the seller to the buyer. The trade terms also define the responsibilities and expenses of both the seller and the buyer. The use of the trade terms greatly simplifies the contract negotiations, and thus saves time and cost. The price of commodity usually refers to the unit price, which is made up of a name of currency, a unit price, a measuring unit, a trade term, and a name of destination or shipping place. For example,
The two parties in international trade are usually far away from each other and are separated by vast ocean. The cargoes carried from the export country to the import country will usually go through a long distance of transportation and sometimes, several transshipments during the process of transit of the goods. The seller or the buyer shall handle a series of complicated formalities, which include carrying out customs formalities for the goods, obtaining the import or export license, chartering a ship or booking shipping space, making insurance, asking for inspection, etc., and pay all kinds of charges and expenses, such as freight, loading and unloading expenses, insurance premium, warehouse charges, duties and taxes, and other miscellaneous expenses. Who shall be responsible for the above-mentioned duties and bear the relative expenses?All these problems resulting from international trade shall be solved. Therefore, after a long-term process of business practice, a set of special trade terms have taken shape in international trade which are not customary practices in domestic trade. These terms have developed into the international merchantable customs and have been simplified to a certain extent. They are in universal use in foreign trade transactions. They are, however, sometimes interpreted differently in different countries and their meanings may be modified by the agreement of the parties, by the customs of a particular trade or the usage prevailing at a particular port.
When the two parties determine to adopt certain trade terms, all other clauses in the contract shall be in conformity with them. Therefore, in international trade, we usually make use of certain trade terms to define the nature of the contract, such as FOB contract or CIF contract, to determine expenses and risks as well as their rights and obligations accordingly.
The trade terms refer to using a brief English concept or abbreviation to indicate the formation of the unit price and determine the responsibilities, expenses and risks borne by two parties as well as the time of the passing of the property in the goods.
Trade terms have been developed in practice over many years to fit particular circumstances.However, as different countries might have different interpretations of the terms,misunderstandings occurred frequently. To clear up the confusion, some international organizations have made quite a few rules and explanations, of which there are three influential international trade practices.
In 1928, the International Law Association held a meeting in Warsaw, and worked out the Uniform Rules for CIF Sales Contracts, which was called Warsaw Rules 1928, and renamed Warsaw-Oxford Rules 1932 at the Oxford Convention and includes 21 clauses. It is mainly used to indicate the nature and characteristic of the CIF contract and also to stipulate the responsibilities of the two parties under CIF terms.
In 1919, nine American commercial groups drew up The US Export Quotations andAbbreviations in 1919, then revised in 1941 and renamed Revised American Foreign Trade Definitions 1941. It was adopted by the American Chamber of Commerce, the National Importers Association and the American Foreign Trade Association in the same year. It defines six trade terms, i.e., Ex-point of origin, FOB, FAS, C&F, CIF and Ex-Dock. Except Ex-point of origin and Ex-dock, the other four trade terms are explained quite differently from those in INCOTERMS. These trade terms are often adopted in the United States of America, Canada and some other countries in America.
The Incoterms rules are an internationally recognized standard and are used worldwide in international and domestic contracts for the sale of goods. First published in 1936, Incoterms rules provide internationally accepted definitions and rules of interpretation for most common commercial terms.
The rules have been developed and maintained by experts and practitioners brought together by the International Chamber of Commerce (ICC) and have become the standard in international business rules setting. They help traders avoid costly misunderstandings by clarifying the tasks, costs and risks involved in the delivery of goods from sellers to buyers.Incoterms rules are recognized by the United Nations Commission on International Trade Law (UNCITRAL) as the global standard for the interpretation of the most common terms in foreign trade.
Since the first version in 1936, Incoterms were revised by ICC in 1953,1982,1990,2000 and again in 2010 in order to bring the rules in line with current international trade practices.Incoterms 2010 (ICC publication 715) came into effect on Jan. 1, 2011. Please note that all contracts made under Incoterms 2000 or even any earlier version remain valid even after 2011.Contracts are interpreted by the version of Incoterms referred to in the contract. Therefore,only a contract that refers to Incoterms 2010 will be governed by rules from that version.
Incoterms are not laws enacted by governments. Rather, they are rules agreed to by parties to a contract. Also, Incoterms are not implied into contracts for the sale of goods. If you desire to use Incoterms, you must clearly specify the chosen version INCOTERMS 2010, INCOTERMS 2000 or any earlier version in your contract. For example: CIF Oakland, California, USA, Incoterms 2010.
Incoterms 2010 rules incorporate a number of changes from Incoterms 2000. This page
highlights such changes. Here are some key items:
▶ Incoterms 2000 had 13 rules whereas Incoterms 2010 has 11 rules. For Incoterms 2010,four of the“D”rules: DAF, DES, DEQ, and DDU were dropped, and two new“D”rules were created: DAT and DAP.
▶ In Incoterms 2000, a number of rules, such as FOB, established that the seller“delivers”the goods when they“pass the ship's rail.” In Incoterms 2010 these rules require that the goods be delivered “on board the vessel.”
▶ Incoterms 2000 established four groups of rules, i.e., E: Departure, F: Main Carriage Unpaid, C: Main Carriage Paid, and D: Arrival. Incoterms 2010, however, establishes two classes: 1) rules applicable for all modes of transport, and 2) rules applicable only for sea and inland waterway transport.
▶ Incoterms 2010 gives electronic communications the same status as paper communication so long as the parties agree.
▶ Incoterms 2010 rules obligate both seller and buyer to give assistance in securing security clearances.
▶ Incoterms 2010 now acknowledges the existence of “string sales,” where goods in transit may be sold multiple times before arrival, by giving the seller the option to"procure goods shipped” .
In the past, Incoterms were arranged into four groups:
E (Departure), F (Main carriage unpaid), C (Main carriage paid), and D (Arrival). Traders,however, were mistakenly picking ocean transport terms (like FOB) for shipments by air. Incoterms 2010 classifies terms by mode of transport, but the four original groupings remain valid:
Table 3.1 Incoterms 2010 Groups
As mentioned, picking an inappropriate term can present problems. The pages describing individual Incoterms will assist you in making the right choice, but for the moment, you should know that some terms are applicable for all modes of transport, while others are applicable only for sea and inland waterway transport. The Incoterms 2010 are organized into two categories:Incoterms for any Mode or Modes of Transport, and Incoterms for sea and inland waterway transport only.
Table 3.2 Incoterms 2010 Categories
Table 3.3 Incoterms 2010 Comparison Table
Notes: * indicates that those occasions when insurance is not obliged by Incoterms 2010, however applicable, this is the party who will obtain insurance.B=buyer, S=seller