International Trade (Intl Trade) 101: Incoterms 2020 - Rules for Sea and Inland, Waterway Transport FAS, FOB, CFR, CIF

What This Is

Rules for Sea and Inland Waterway Transport (FAS, FOB, CFR, CIF) are essential in international trade, governing the transfer of ownership, risk, and costs between buyers and sellers. These Incoterms (International Commercial Terms) help avoid misunderstandings and disputes, ensuring smooth transactions. Consider a shipment of electronics from China to the US: if the seller uses FOB Shanghai, they must clear the goods for export and load them onto the vessel, while the buyer bears the costs and risks from Shanghai to the US port of entry.

Key Terms & Rules

• FAS (Free Alongside Ship): Buyer bears costs and risks from the point where the seller delivers the goods alongside the ship in the port of shipment – common in bulk commodities.
• FOB (Free on Board): Buyer bears costs and risks from the point where the seller delivers the goods on board the vessel in the port of shipment – widely used in international trade.
• CFR (Cost and Freight): Seller bears costs and risks until the goods are delivered to the buyer at the destination port – often used for high-value or sensitive goods.
• CIF (Cost, Insurance, and Freight): Seller bears costs and risks until the goods are delivered to the buyer at the destination port, including insurance – commonly used for high-value or sensitive goods.
• Incoterms: International Commercial Terms – standardized rules for the sale of goods between countries, published by the International Chamber of Commerce (ICC).
• UCP 600: Uniform Customs and Practice for Documentary Credits – governs Letter of Credit (LC) transactions globally, ensuring secure payment and minimizing risk.
• LC (Letter of Credit): A payment guarantee issued by a bank, ensuring payment to the seller upon presentation of compliant documents – a crucial tool in international trade finance.
• DPU (Destination Port Unloaded): A successor to DAT (Destination Port Unloaded), where the seller bears costs and risks until the goods are unloaded at the destination port.
• DAP (Delivered at Place): A successor to DDU (Delivered Duty Unpaid), where the seller bears costs and risks until the goods are delivered to the buyer at the destination place.

Step-by-Step Process

1. Determine the Incoterm: Identify the agreed-upon Incoterm in the sales contract, which will dictate the transfer of ownership, risk, and costs.
2. Classify Goods: Use the Harmonized System (HS) codes to classify the goods, ensuring compliance with customs regulations and tariffs.
3. Obtain LC: If using an LC, ensure it is properly issued and confirmed, with clear instructions and requirements for the seller.
4. Clear Goods: The seller must clear the goods for export, while the buyer must clear them for import, adhering to local regulations and customs procedures.
5. Document Transfer: Ensure the transfer of ownership and risk is properly documented, with the seller providing the buyer with the necessary documents, such as the Bill of Lading (B/L) or Commercial Invoice.

Common Mistakes

• Mistake: Confusing CIF and CIP – both involve insurance, but CIP includes additional services like customs clearance.
• Correction: Understand the differences: CIF includes insurance, while CIP includes additional services like customs clearance.
• Example: A seller uses CIF, but the buyer assumes CIP – resulting in disputes over insurance coverage and additional services.
• Mistake: Assuming "open account" is risk-free – it's not, as payment is still subject to credit risk and potential disputes.
• Correction: Understand the risks: open account transactions still involve credit risk and potential disputes, requiring careful management.
• Example: A buyer uses open account, but the seller fails to deliver goods – resulting in a dispute over payment and goods.

Exam / Certification Tips

• FOB vs FCA: FOB transfers risk at the port gate, while FCA transfers risk at the seller's premises.
• Confirmed vs Unconfirmed LC: Confirmed LCs are guaranteed by the issuing bank, while unconfirmed LCs are not.
• DPU successor to DAT: DPU transfers risk at the destination port, while DAT transfers risk at the destination port gate.
• Memory Aid: Use the acronym "FOB" to remember that it transfers risk at the port gate.

Quick Practice Scenario

A Chinese exporter sells electronics under FOB Shanghai – who pays for the main carriage?

Answer: The buyer pays for the main carriage, as FOB transfers risk and costs from the seller to the buyer at the port of shipment.

Last-Minute Cram Sheet

• FAS: Buyer bears costs and risks from the point where the seller delivers the goods alongside the ship in the port of shipment.
• FOB: Buyer bears costs and risks from the point where the seller delivers the goods on board the vessel in the port of shipment.
• CFR: Seller bears costs and risks until the goods are delivered to the buyer at the destination port.
• CIF: Seller bears costs and risks until the goods are delivered to the buyer at the destination port, including insurance.
• Incoterms: International Commercial Terms – standardized rules for the sale of goods between countries.
• UCP 600: Uniform Customs and Practice for Documentary Credits – governs LC transactions globally.
• LC: A payment guarantee issued by a bank, ensuring payment to the seller upon presentation of compliant documents.
• DPU: A successor to DAT, where the seller bears costs and risks until the goods are unloaded at the destination port.
• DAP: A successor to DDU, where the seller bears costs and risks until the goods are delivered to the buyer at the destination place.
• Under FOB, risk transfers when goods are on board the vessel – not at the port gate or on the dock.