EXW and FOB: know the two most used modes of transport for importing products from China
One of the most fundamental points when evaluating your company’s imports is the international transport of goods. Therefore, you must know your incoterm, an essential question to understand who is responsible for what in the supply chain.
What does incoterm mean?
Incoterm is the abbreviation for International Commerce Terms. They are definitions or names that help to coordinate with the contract of carriage between buyer and seller, i.e. to coordinate the fact of who pays what?
Thus, in foreign trade, if we choose an Incoterm, it is already clear for both parties who is in charge of what and in case of any problem, mishap or error, who must correct it.
What are incoterms used for?
Incoterms define in brief:
- The point of collection of the goods.
- Distribution of export and import costs, expenses and risks.
- Who is in charge of customs clearance or customs formalities and customs costs.
Types of Incoterms:
Free On Board (FOB), Ex-Works (EXW) and Free Carrier (FCA) are the best known types of incoterms, but there is much to learn about these and other options. Because they are legal terms, written from a legal perspective, incoterms can be confusing or easily misunderstood. In addition, making the wrong decision could turn your shipment into an expensive nightmare.
On the one hand, there are incoterms that can be used in any mode of transport (land, sea or air) and then there are incoterms that are only used in maritime transport.
Incoterms for all types of transport
EXW (Ex-Works):
Called Exworks or in Spanish “En Fábrica”, it implies that the buyer assumes responsibility for the seller’s warehouse and is in charge of everything, including transportation and insurance.
We recommend this Incoterm to any seller, as it is the Incoterm that reduces the workload and transportation costs the most. On the other hand, it is also highly recommended for inexperienced salespeople, since it reduces responsibility and management to a minimum.
On the other hand, we recommend this Incoterm for those who are expert buyers with contacts in the transport world, since the buyers have full responsibility for the transport costs. Thus, the buyer will be responsible for:
- Transportation in the country of origin to customs.
- Customs clearance in the country of origin.
- Expenses of such office.
- Ocean Freight (if any).
- Extra expenses that may be incurred upon arrival in the destination country.
- Payment and customs clearance in the country of destination.
- Transportation to the destination country.
- Manage and pay taxes and duties in the destination country.
- It is advisable to take out insurance for this type of shipment, the cost of which will mostly go to the buyer.
The other types are FCA (Free Carrier); CPT (Carriage Paid To); CIP (Carriage and Insurance Paid To); DAT (Delivered at Terminal); DAP (Delivered at Place); DDP (Delivery Duty Paid).
Incoterms for maritime transport
The following incoterms only make sense within the maritime transport modality. Keep in mind that if a customer or supplier has offered you one of these incoterms for another mode of transport, it was probably a typo.
FOB (“Free on Board”)
FOB or as it would be with the translation “Free On Board Ship” clearly means just that, the seller leaves the cargo directly to the vessel at the agreed port of shipment.
The seller’s risk and costs end at the moment the goods are deposited on the vessel, at which time the buyer becomes liable.
FOB Incoterms does not oblige either the buyer or the seller to take out insurance to cover the possible risks that the goods may suffer during transport. However, it is advisable to take out insurance to cover the risks assumed by both the seller, who must place the goods on board the vessel, and the buyer, who assumes the risks from that moment onwards.
The selling company must prove that it has delivered the goods on board the vessel at the port of origin by means of the transport document. The proof of delivery is usually the contract of carriage or bill of lading (B/L).
Under FOB conditions, it is the buying company that controls most of the logistics chain and its cost, since maritime transport accounts for a large part of the total logistics cost. This allows the buyer to choose the carrier (shipping company and freight forwarder), negotiate freight conditions and access more advantageous rates and conditions.
The other types of incoterms are FAS (“Free Alongside Ship”); CFR (“Cost and Freight”) and CIF (“Cost Insurance and Freight”).
Have you already identified the right incoterm for your company?
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