11 Basic Trade Terms Alibaba Incoterms 【Incoterms Explained】
What are International Trade Terms?
Let’s focus on a few basic but important things that we ignore or even never took the time to think about here. Your quote came with 3 letters, which I can almost bet that you have no idea of their meaning. Are you aware of the trade terms Alibaba or other online platforms?
A quote from the supplier will normally have 3 sets of information, namely the MOQ, shipping terms, and each unit’s cost. Incoterms are the so-called shipping terms and are provided at the end of the quote as 3 letters. MOQ stands for the Minimum Order Quantity.
For clarity purposes, let us take a look at this quote. ”Thanks, Mark, kindly see below 1000-1.75pc, 2000-1.65/pc, 10000-1.5/pc, EXW.’
The abbreviation EXW stands for Ex-Works and defines the shipping terms alongside the parties’ obligations before it reaches the buyer. Most people ask whether Alibaba prices are inclusive of the shipping fee, which is not the case. What you need to know is that the shipping fee is quoted in FOB on their website.
Incoterms, also known as Trade Terms, are essentially international contractual terms applied when making sales. The most common incoterms are EXW and FOB.
Like all binding contract terms, Incoterms have two parties which are the seller and the buyer. The seller can be a trading company, a wholesaler, a manufacturer, or a factory. It is typically the party who is considered a source of the commodities being traded. The buyer is on the receiving end of the goods, which have to be shipped to reach them.
The incoterms 2020 is the updated version of the incoterms 2010, which are now reduced from 13 to 11 terms. The International Chamber of Commerce publishes the incoterms and hold the copyright.
Definition of Incoterms Newest
As we saw earlier, FOW and EXW are the most common incoterms, which we are likely to come across more often. In most cases, when we are requesting the initial quotes in our RFQ’s (Request for Quotations), we mostly ask for the prices in FOB and EXW. The quoted price for EXW indicates the cost of the individual item alone.
The quoted price for FOB covers the shipping costs since, in most cases, the products pass the port where freight forwarders pick the items from the supplier. The freight forwarders are responsible for the shipping of the product.
This brings the essence of having terms for the various contracts involved in the process of completing the sale. For example, when a supplier hands over a product to the freight forwarders for shipping, there needs to be certain terms and conditions that they agree upon.
Let us look at the recognizable terms as outlined in the incoterms newest.
Basic Trade Terms Alibaba Incoterms
- EXW- Ex-Works
It is the most common term provided by suppliers. In this particular term, the supplier gives the item’s unit price for the buyer to pick up at the industry; therefore, it exempts the supplier of any responsibilities over the product once it leaves the factory.
At this point, it is the buyer’s responsibility for all forms of insurance or customs incurred. Unless you request to purchase on different terms, most factories will provide the EXW on request. It is the lowest price you will get the product for since it is less the other expenses involved.
- FOB- Free on Board
Unlike EXW, this term takes the supplier’s responsibility further up to the point where the supplier takes the item to the nearest port and clears them for export. The buyer can choose to work with freight forwarders who are mostly stationed at or near the port or pick the item by themselves. Third-party inspectors can assess the goods at the port once the seller presents them. Once goods leave a country, the responsibility shifts to the buyer.
- FCA- Free Carrier
Further to EXW, the free carrier term dictates that a seller is responsible for clearing goods and taking them to the port or other destination that a buyer specifies. The buyer arranges for the carrier and for offloading the goods at the port. The responsibility of loading the goods is the supplier’s until they reach the port, where offloading is the buyer’s responsibility.
For clarity purposes and to avoid confusing FCA with FOB, the buyer should confirm each term’s extent with their supplier.
- CPT- Carriage paid to
Under this term, the seller pays for goods that are being shipped to the import port that the buyer chooses. The cost from the import to the export port is the supplier’s responsibility. The supplier also covers freight costs as well as export clearance costs. The buyer, though, is the party responsible for the insurance cost and unloading costs of the goods at the exportport.
- CIP- Carriage and Insurance paid to
This term is similar to the CPT only difference because the supplier covers insurance costs for goods in transit. CIP applies to all modes of transport, unlike CIF, which only covers sea transport. CIP and CIF are the two terms that define risk and insurance separately.
Once at the import port and unloaded, the goods’ insurance is no longer the supplier’s responsibility, but the risk is.
- DPU – Delivery Place Unloaded
Under this term, the supplier is responsible for the risk and cost associated with the goods until they are unloaded at the import port—the responsibility from that point shifts to the buyer. The buyer clears custom fees as well as import fees.
- DAP – Delivery at Place
In this term, all risks associated with the goods until they are delivered to the buyer’s destination are assumed by the seller/supplier. The seller can choose to pay a third party to cater for the shipment. The buyer’s responsibility, in this case, is to pay for goods clearance and the customs fees as well as the costs of unloading goods at their destination.
- DDPO – Delivery Duty Paid
Under this term, the buyer is only responsible for the costs incurred to unload the goods at their destination. The seller assumes risks as well as insurances associated with the goods until they reach the buyer. It is the term in which the buyer has very minimal responsibility.
Most people will be tempted to ask why not adopt the DPP terms for all purchases. It is all dependent on the buyer. The method means the buyer pays more to the seller since they assume zero risks, but this doesn’t mean it is more reliable. It also implies that the buyer fully trusts and depends on the shipping company.
I would suggest comparing the quoted prices for DPP from the supplier with a FOB from the freight forwarders.
It is important to note that CIF, CFR, FAS, and FOB apply to both inland waterways and ocean-based shipments. The terms mentioned above apply to all transportation forms, including road, rail, or air cargo transportation.
- FAS- Free Alongside Ship
In this case, the seller covers costs and assumes risks for the goods until they reach the port and also clears goods for export. The buyer covers the costs from this point, including loading the ship. The difference from the FOB is that the buyer is responsible for the costs of loading the ship.
- CFR- Cost and Freight
The buyer is responsible for the goods after loading at the export port and delivery to their final destination. The seller’s responsibility extends from shipping up to when the goods reach the import port. This is similar to CPT except that CFR is restricted to water transport.
- CIF – Cost Insurance and Freight
This is the last but not the least term. It is similar to the CFR, except that the goods’ insurance up to the destination port is the seller’s responsibility. The seller also clears the customs. The buyer’s responsibility is to pay for the duty. This term is also similar to the CIP, except the CIF is restricted for water-based shipments.
Basic terms of trade to help guide you when you import from China
Ad Valorem Tariff
Bill of Lading
Certificate of Origin
Cost and Freight (CFR)
Cost, Insurance, and Freight (CIF)
Countervailing Duties (CVD)
Export Control Classification Number (ECCN)
Electronic Export Information (EEI)
Free Trade Agreements
Goods and Services Tax (GST)
Importer Of Record (IOR)
Here are some frequently used Incoterms:
- EXW Ex Works
- FCA Free Carrier
- CPT Carriage Paid To
- CIP Carriage and Insurance Paid To
- DAT Delivered at Terminal
- DAP Delivered at Place
- DDP Delivered Duty Paid
Letter of Credit
Type of Export
The revised changes between the Trade Terms Alibaba Incoterms 2020 and incoterms 2010 are not major compared to the incoterms 2000 and the earlier versions. The interesting DPP term is newly introduced to the incoterms 2020. It helps a lot better understand the Trade Terms Alibaba Incoterms 2020 to be fully aware of what you incorporate into your manufacturing and shipping plan.
Remember, putting these terms in place was to cushion the seller and buyer and define their responsibilities to make business easier.
As always, there is a helpline in case you are stuck. Check out the DIY China Sourcing Kit for any assistance.