International Trade (Intl Trade) 101: Incoterms 2020 - Rules for Any, Mode of Transport EXW, FCA, CPT, CIP, DAP, DPU, DDP

What This Is

Rules for Any Mode of Transport (RAT) are a set of Incoterms that govern the delivery of goods from the seller to the buyer, regardless of the mode of transportation used. These terms are crucial in international trade as they determine the responsibilities and risks of both parties involved. For instance, consider a shipment of electronics from China to the US. If the seller uses DAP (Delivered at Place), they will bear the costs and risks of delivering the goods to the buyer's warehouse in the US, whereas if the buyer uses DPU (Delivered at Place Unloaded), they will be responsible for unloading the goods at the designated place.

Key Terms & Rules

• EXW (Ex Works): Buyer bears all costs and risks from seller's premises – most seller-friendly Incoterm.
• FCA (Free Carrier): Seller bears costs and risks until the goods are handed over to the carrier at the agreed-upon location.
• CPT (Carriage Paid To): Seller bears costs and risks until the goods are delivered to the designated place.
• CIP (Carriage and Insurance Paid To): Seller bears costs and risks until the goods are delivered to the designated place, and also arranges for insurance coverage.
• DAP (Delivered at Place): Seller bears costs and risks until the goods are delivered to the designated place.
• DPU (Delivered at Place Unloaded): Seller bears costs and risks until the goods are delivered and unloaded at the designated place.
• DDP (Delivered Duty Paid): Seller bears all costs and risks until the goods are delivered to the buyer's premises, including duties and taxes.
• Incoterms 2020: A set of 11 rules that govern the delivery of goods from the seller to the buyer, including the above-mentioned terms.
• URC 522: Uniform Rules for Bank-to-Bank Transfers – governs wire transfers between banks.
• UCP 600: Uniform Customs and Practice for Documentary Credits – governs LC transactions globally.

Step-by-Step Process

1. Determine the Incoterm: Identify the Incoterm agreed upon by the buyer and seller, which will determine their respective responsibilities and risks.
2. Identify the Delivery Location: Determine the designated place of delivery, which may be a specific address, a warehouse, or a terminal.
3. Calculate Costs and Risks: Determine who bears the costs and risks associated with the delivery, including transportation, insurance, and duties.
4. Arrange for Transportation: Arrange for the transportation of the goods to the designated place, which may involve selecting a carrier, negotiating rates, and arranging for insurance coverage.
5. Deliver the Goods: Deliver the goods to the designated place, which may involve unloading the goods at a terminal or warehouse.
6. Obtain Documentation: Obtain the necessary documentation, including a commercial invoice, bill of lading, and certificate of origin.

Common Mistakes

• Mistake: Confusing CIF (Cost, Insurance, and Freight) with CIP (Carriage and Insurance Paid To).
• Correction: CIF is an older Incoterm that is no longer widely used, whereas CIP is a more modern term that includes insurance coverage.
• Mistake: Assuming that FOB (Free on Board) is the same as FCA (Free Carrier).
• Correction: FOB is an older Incoterm that is no longer widely used, whereas FCA is a more modern term that includes the seller's responsibility to deliver the goods to the carrier.
• Mistake: Misusing "free on board" with air freight.
• Correction: "Free on board" is typically used with sea or inland waterway transportation, not air freight.

Exam / Certification Tips

• Tricky Distinctions: Be able to distinguish between FOB (Free on Board) and FCA (Free Carrier), and between CIF (Cost, Insurance, and Freight) and CIP (Carriage and Insurance Paid To).
• Confirmed vs Unconfirmed LC: Understand the difference between a confirmed and unconfirmed letter of credit, and how it affects the buyer's and seller's responsibilities.
• DPU Successor to DAT: Recognize that DPU (Delivered at Place Unloaded) is the successor to DAT (Delivered at Terminal).

Quick Practice Scenario

A Chinese exporter sells goods to a US importer under FCA (Free Carrier) Shanghai. Who bears the costs and risks associated with the main carriage?

Answer: The buyer bears the costs and risks associated with the main carriage.

Explanation: Under FCA, the seller bears the costs and risks until the goods are handed over to the carrier at the agreed-upon location, which in this case is Shanghai.

Last-Minute Cram Sheet

• EXW: Buyer bears all costs and risks from seller's premises.
• FCA: Seller bears costs and risks until goods are handed over to carrier.
• CPT: Seller bears costs and risks until goods are delivered to designated place.
• CIP: Seller bears costs and risks until goods are delivered to designated place, and also arranges for insurance coverage.
• DAP: Seller bears costs and risks until goods are delivered to designated place.
• DPU: Seller bears costs and risks until goods are delivered and unloaded at designated place.
• DDP: Seller bears all costs and risks until goods are delivered to buyer's premises.
• Incoterms 2020: A set of 11 rules that govern the delivery of goods from seller to buyer.
• URC 522: Uniform Rules for Bank-to-Bank Transfers.
• UCP 600: Uniform Customs and Practice for Documentary Credits.
• Under FOB, risk transfers when goods are on board the vessel – not at the port gate or on the dock.