I. Structure of the Rules
What to look for regarding the structure of the rules?
Based on the structure of Incoterms 2020, the framework is viewed as follows: Two Groups—The primary distinction in Incoterms 2020 rules is between those applicable to any mode of transport or multimodal transport (EXW, FCA, CPT, CIP, DAP, DPU—formerly DAT—and DDP) and those applicable to sea and inland waterway transport (FAS, FOB, CFR, CIF); Four Maritime Terms—The four terms designated for sea transport (FAS, FOB, CFR, CIF); Group E (Departure)—EXW (Ex Works: seller prepares goods at their premises for buyer pickup); Group F (Main Carriage Unpaid)—FCA (Free Carrier: goods delivered to the carrier); Group C (Main Carriage Paid)—CFR/CIF/CPT/CIP (seller delivers goods to buyer’s designated carrier or arranges and pays for main carriage; CIF/CIP include insurance); Group D (Arrival)—DAP/DPU/DDP (seller transports goods to the designated destination); The Rules—Incoterms, established by the International Chamber of Commerce (ICC), define the obligations of buyers and sellers regarding delivery, risk transfer, and cost allocation. The structure is clearly understood through these six aspects: the two-group division, the four maritime terms, and Groups E (departure), F (unpaid), C (paid), and D (arrival).
II.
Decision-Making Steps
What to look for regarding the decision-making steps?
Based on practical decision-making regarding Incoterms, the decision process involves six key considerations: Flowchart—Use the official ICC decision flowchart from the seller’s perspective (choose FCA if you are willing to handle export customs clearance); Domestic—Choose terms like FOB if you wish to deliver the goods within your own country or prior to the main international transport leg, and do not want to include main international transport costs in the quote (China Chamber of International Commerce); Hoisting/Loading—Consider this if the goods are traditional commodities loaded via hoisting, or if you wish to transfer risk upon loading (choose CFR if the seller does not bear insurance costs; choose CIF if the seller does bear insurance costs; China Chamber of International Commerce); CPT—Choose CPT if you do not want the seller to bear insurance costs (China Chamber of International Commerce); CIP—Choose CIP if you want the seller to bear insurance costs covering “All Risks” (LMA/IUA Clause A or similar) (China Chamber of International Commerce); Note—The point where costs transfer often differs from the point where risk transfers (Douyin)—Six decision factors: seller’s perspective, export customs clearance, domestic delivery, risk transfer upon loading, insurance selection for CPT/CIP, and the separation of cost and risk transfer points.
III.
Commonly Used Terms
What to look for in commonly used terms.
Based on common trade term practices, here is a breakdown of the terms: EXW (Ex Works/Delivery at Factory)—The seller delivers goods to the buyer at the factory or warehouse; unless otherwise specified, the seller is not responsible for loading the goods onto the buyer’s vehicle or vessel or handling export customs clearance; the buyer bears all costs and risks from the point of delivery at the seller’s factory to the final destination; under EXW, the seller’s risk, liability, and costs are minimal. FOB (Free on Board)—The seller is responsible for transporting goods to the port of shipment and loading them onto the designated vessel (bearing all costs and risks prior to loading, including domestic transport, export clearance, and loading fees); the buyer is responsible for chartering/booking space, international ocean freight, import clearance at the destination port, and subsequent transport; risk transfers to the buyer once the goods cross the ship’s rail and loading is complete; the seller is not required to purchase marine insurance unless requested by the buyer. CIF (Cost, Insurance, and Freight)—CIF Price = FOB Price + Insurance + Freight (often called “landed price”); the seller bears freight and insurance costs to the destination port, but risk transfers at the port of shipment upon loading; delivery is deemed complete when goods cross the ship’s rail at the port of shipment. CFR (Cost and Freight)—CFR Price = FOB Price + Freight; a written record of the loading notice is mandatory; the vessel name and voyage number must be communicated in writing on the day of shipment to avoid insurance gaps or liability issues; the seller is required to handle export customs clearance. DDP (Delivered Duty Paid)—Equivalent to door-to-door express delivery; the seller is responsible for customs clearance, duties, and VAT; this offers the highest quote and the largest profit margin among the six terms. CIP (Carriage and Insurance Paid To)—Under the 2020 version, insurance requirements for CIP were upgraded to ICC(A) “All Risks” coverage. Summary of the six terms: EXW (minimal liability), FOB (risk transfers upon loading), CIF (landed price), CFR (notice required), DDP (all-inclusive), and CIP (upgraded to “A” insurance)—a clear overview of these six terms.
IV.
Responsibilities under Group D Terms
What to look for regarding Group D responsibilities: DAP—Delivered at Place (delivery is complete when the seller makes the goods ready for unloading at the named destination; the seller bears all risks and costs of transport to the destination, excluding import costs); DPU—Delivered at Place Unloaded (the seller unloads the goods at the named destination); Group D—All Group D terms require the seller to deliver goods to the buyer at a named destination or port of destination (under all Group D terms, the seller contracts and pays for transport to the named location; none of the Group D terms require the seller to arrange insurance for the buyer, as the risk during transit to the destination lies with the seller); DDP—Delivered Duty Paid (the seller is responsible for import customs clearance and taxes/duties; when handling DDP terms, payment conditions must be strictly enforced—never trust claims that the balance will be paid after customs clearance; do not ship the goods until the funds have been received); Risk—Under Group D terms, the risk is borne by the seller until the goods reach the destination; Beginners—Avoid DDP; beginners should prioritize FOB or FCA—Six key points on responsibility: DAP (ready for unloading), DPU (unloading included), Group D (door-to-door delivery), DDP (strict payment control), risk borne until destination, and avoidance by beginners—understand these six points clearly.
V.
Key Points to Avoid Pitfalls
What to look for to avoid pitfalls.
Based on practical experience in avoiding pitfalls related to trade terms, here are the key points to consider: **Nominated Freight Forwarder**—The fatal flaw of FOB lies in the buyer-nominated forwarder (if you follow the instructions of a forwarder appointed by the foreign buyer, they might release the Bill of Lading and allow the goods to be picked up before you receive the final payment; therefore, with FOB nominations, either require full payment before shipment or use your own forwarder’s Bill of Lading); **Bill of Lading**—Controlling the Bill of Lading (as a document of title) and ensuring consistency across all documents is crucial; **Port/Container Demurrage**—Be vigilant regarding “free time” allowances for port storage and container usage to avoid demurrage charges; **EXW**—EXW is suitable for domestic transport; if used for exports, it may cause complications for the seller or buyer, making FCA a preferable alternative; **Insurance**—Under CIF, the seller purchases marine insurance covering 110% of the cargo value, and the point of risk transfer is identical to that of FOB; **Timeliness/Precision**—When selecting trade terms, you must specify the Incoterms version and the designated location (e.g., “FOB Shanghai Incoterms 2020”) in accordance with industry practice. In summary, the six key areas to watch to avoid pitfalls are: nominated forwarders, Bill of Lading title control, port/container demurrage, caution regarding EXW for exports, 110% insurance coverage, and clearly specifying the version and location.
Conclusion
How should one select international trade terms for non-standard assembly lines?
The conclusion is to evaluate the choice based on five dimensions: the structure of the rules, the decision-making process, commonly used terms, the responsibilities associated with “Group D” terms, and key pitfall-avoidance strategies.
Structure—Incoterms 2020 are divided into two groups: rules for any mode or modes of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and rules for sea and inland waterway transport (FAS, FOB, CFR, CIF); categories include Group E (departure), Group F (main carriage unpaid), Group C (main carriage paid), and Group D (arrival); Incoterms, established by the International Chamber of Commerce (ICC), define delivery, risk transfer, and cost allocation; Decision-making—ICC flowcharts are viewed from the seller’s perspective (choose FCA if willing to handle export clearance; choose FOB for domestic delivery excluding international freight; choose CFR or CIF for traditional commodities requiring hoisting/loading; choose CPT to exclude insurance; choose CIP to include insurance—upgraded to ICC(A) “All Risks” in the 2020 version); note that the points where costs and risks transfer often differ; Common terms—EXW (Ex Works): seller has minimal responsibility (no loading or customs clearance; buyer bears all costs and risks); FOB (Free on Board): seller bears costs/risks until goods are on board; buyer pays ocean freight and insurance; risk transfers when goods cross the ship’s rail; seller need not buy insurance unless requested by the buyer; CIF (Cost, Insurance, and Freight): FOB + insurance + freight (seller pays freight/insurance, but risk transfers upon loading); CFR (Cost and Freight): FOB + freight (seller must provide written notice of vessel name and voyage number on the day of shipment); DDP (Delivered Duty Paid): all-inclusive (seller handles clearance, duties, and VAT; highest quote and profit margin); CIP: insurance upgraded to “All Risks” in the 2020 version; Group D—DAP (Delivered at Place): ready for unloading but no actual unloading required; seller bears all risks/costs to the destination except import charges; DPU (Delivered at Place Unloaded): unloading at the destination required; for all D-terms, the seller contracts and pays for transport to the designated location, yet none require the seller to arrange insurance; DDP requires strict payment control (do not ship until funds are received); FOB/FCA are recommended for beginners.
Handle DDP with caution; avoid pitfalls—the fatal flaw of FOB lies in the buyer-nominated freight forwarder (mitigate this by requiring full payment before shipment or using your own forwarder to control the Bill of Lading); ensure document consistency to maintain control over the Bill of Lading (which represents title to the goods); be vigilant regarding demurrage and detention charges and the limits of “free time”; while EXW is suitable for domestic transport, FCA is often preferable for exports; for CIF, insure the goods for 110% of their value, noting that the transfer of risk occurs at the same point as in FOB;
and when selecting terms, clearly specify the Incoterms version and the designated location.
To summarize trade terms according to industry practice: first determine transport arrangements, then insurance, then the point of risk transfer, and finally guard against buyer-nominated forwarders—master these four steps, and you can navigate trade terms with confidence.
