Sourcing Nova highly recommends being familiar with the major Incoterms for importing products from China. The three major terms mostly used are FOB, DDP and CIF. These are covered in detail in the following article. Sourcing Nova is always willing to answer questions for you about Incoterms and importing products from China.
Everyone engaged in international import and export trade has inevitably heard of the International Commercial Terms: FOB, Exw, CIF and DDP. In the international trade transportation process has nodes, points of the transportation process such as: Loading at origin, export customs declaration, carriage to port of export, unloading of truck at port of export, loading on vessel/airplane in port of export, carriage (sea/air) to port of import, insurance, unloading in port of import, loading on truck in port of import, carriage to place of destination, import customs clearance, import duties and taxes and the unloading at destination. In this process, the costs, risks and responsibilities of the products are transferred, and the buyer and seller reach a unified consensus.
In 1936, the International Chamber of Commerce, ICC, released the first version of the International Commercial Terms (Incoterms). The purpose of these terms is to clarify “Who pays for what” and reduce the uncertainty in international trade. With decades of development, these terms have been universally recognized throughout the world and have become universal standards for international trade. The latest Incoterms currently in use are Incoterms 2020. The Incoterms 2020 contain the following 11 terms:
CIF – Cost, Insurance & Freight (named port of destination)
CIP – Carriage and Insurance Paid to (named place of destination)
CFR – Cost and Freight (named port of destination)
CPT – Carriage Paid To (named place of destination)
DAP – Delivered at Place (named place of destination)
DAT – Delivered at Terminal (named terminal at port or place of destination)
DDP – Delivered Duty Paid (named place of destination)
EXW – Ex Works (named place of delivery)
FAS – Free Alongside Ship (named port of shipment)
FCA – Free Carrier (named place of delivery)
FOB – Free on Board (named port of shipment)
It is worth noting that in September 2019, the International Chamber of Commerce released a new set of Incoterms 2020. These updated terms will take effect on January 1, 2020. In the latest version of trade terms, DAT has been removed and replaced with DPU (Delivered at Place Unloaded). A much simplier breakdown of Incoterms is here.
These trade terms are difficult to explain, but Sourcing Nova can help you distinguish their meanings from several tables:
Allocations of costs to buyer/seller according to Incoterms 2010
Allocations of risks to buyer/seller according to Incoterms 2010
Rules for sea and inland waterway transport
Rules for any modes of transport
The most commonly used terms are FOB, DDP and CIF.
FOB – The first term
FOB, the Free On Board, and the port of export is indicated at the back, such as FOB Shenzhen, FOB Shanghai. Using the FOB terms, the seller/exporter is responsible for all formalities, costs and risks before the products pass onto the ship’s rail at the port of export.
“FOB port” means the seller pays the cost of transporting the products to the port of shipment, plus the loading fee. The seller must also arrange export clearance. The buyer/importer pays for sea freight, insurance as well as unloading and transportation from the port of arrival to the final destination.
Risk transfer occurs when the cargo is loaded at the port of shipment. For example, “FOB Shenzhen” means that the seller will pay the cost of transporting the cargo to the port of Shenzhen. The seller also pays the cost of loading the cargo on a cargo ship (This includes inland transportation, customs clearance, certificate of origin and demurrage – if any.) and the processing fee at the port of departure (in this case Shenzhen).
The buyer assumes all costs beyond the point of departure, including shipping charges, bills of lading, insurance and unloading. The responsibility for the products rests with the seller until the products are loaded on board the cargo ship. The buyer assumes responsibility after the cargo is on board.
Generally, if importers have designated freight forwarders, they will choose FOB as the main trade term.
DDP – The second term
DDP, the full name is Delivered Duty Paid, followed by the destination.
The seller is responsible for shipping the products to the designated location in the buyer’s country, and paying all costs for shipping the products to their destination. This cost includes import duties and taxes. The seller is not responsible for unloading. The term places the maximum obligation on the seller and the minimum obligation on the buyer. No risk or responsibility is transferred to the buyer until the goods are delivered at the designated destination.
Usually, DDP is the preferred trade term for Amazon sellers when importing products from China. The seller is responsible for all costs and bears all responsibility and risk before sending the goods to the Amazon warehouse.
CIF – The third term
Some buyers have seen CIF, Cost, Insurance and Freight (to the point of destination). The seller is required to have insurance up to 110 percent of the value of the goods, in the same currency, for transport to the buyer’s destination. Documents, such as the invoice, insurance policy and the bill of lading, the receipt of shipment, are necessary to obtain the goods or assert claim against a buyer. CIF covers the shipment until arriving at the buyer’s designated location.
EXW – The fourth term
Many first-time buyers of goods from China may want to try the EXW clause because they have heard that EXW-Ex Works is the lowest price. From a numerical point of view, the FOB clause of the same shipment is indeed higher than the EXW quote, but this does not mean that EXW is a suitable choice.
Using the EXW clause, the seller provides the goods on its premises or other designated location. The term places the maximum obligation on the buyer and the minimum obligation on the seller. EXW is the ex-factory price. EXW does not include any fees.
EXW means that the buyer bears the entire cost and risk of shipping the goods to their final destination. The buyer also assumes cost of loading from the factory.
More importantly, the buyer is also responsible for handling the customs documents required for export and the tax receipt for the product. In China, export businesses require import and export rights to operate. Your goods can only be exported until your branch in China has the right to import and export those types of products. The branch is also responsible for any taxes. Otherwise, your cargo is likely to be blocked at the terminal and cannot leave the port smoothly.
Freight Forwarders – Last step
If you, as the importer, have cooperative freight forwarding and the factory you choose has its own import and export rights, then choosing FOB when importing goods from China is a suitable choice.
If the importer has its own cooperative freight forwarding and the selected Chinese factory does not have its own import and export license, then it is necessary to find an intermediary with an import and export license to issue the invoice to export. This intermediary can be a trading company or a sourcing company like Sourcing Nova. If you don’t want to find a middleman, you can use your personal account to pay for goods. A factory without import and export rights cannot accept foreign exchange with a company account.
Sourcing Nova has its own freight forwarding company. Regardless of whether the factory has import or export rights, we can handle all import and export procedures on behalf of customers We eliminate all the details and troubles of purchasing from China. We have an article about freight forwarding and the advantages to having a company do it on your behalf here.
The Bill – Sourcing Nova covers
It should be noted that using personal business accounts carries high risk.
Many foreign buyers think to deal directly with the factories to save money on costs by eliminating the middle man altogether. This can be a problem if the factory does not have the import and export license.
It is also common for foreign buyers to be cheated if they elect to remit money directly to the personal account of the factory. It is much wiser on your part to have a purchasing agent, like Sourcing Nova, for your Chinese business transactions. You remit the payment to the account to Sourcing Nova, and we make payments for your products on your behalf. We will sign a domestic trade contract with the factory, and then ship your goods to any destination you specify.
The international trade process is complex and requires complete understanding of the Incoterms for export from China. Contact us directly when you are ready to source products for import from China. We look forward to hearing from you.