International trade and shipping is a complex world.
More often than not, shippers must handle complex documentation across the globe, with laws changing depending upon the destination country.
Incoterms help solve some of these complexities by introducing standardised communication to international shipping. Here, WTA will break down the best Incoterms for your business if you are exporting.
What are Incoterms?
Incoterms are an important element of the international shipping process, allowing for multiple parties to easily organise responsibility during transport.
As a result, Incoterms are used to:
- Explain the costs and obligations incurred between the buyer and seller. The shared nature of Incoterms allows for a clear, straightforward understanding between the two respective parties.
- Incoterms also allow for a clear understanding of the risk involved with cargo, allowing both buyer and seller to be on the same page.
- Incoterms also make it easier for communication between the numerous parties involved in the shipping process, such as customs brokers, financiers, carriers, and freight forwarders.
Common Incoterms
There are several Incoterms to choose from, each having its own advantages and disadvantages.
The following are some of the most commonly used Incoterms:
- DDP – Delivered, Duty Paid: All charges are paid by the seller, including customs clearance charges at origin and destination, as well as any import duty & tax.
- DAP – Delivered At Place: All charges are paid by the seller, excluding destination customs clearance charges and duty & tax. More information on DAP can be found here.
- CPT / CFR – Carriage Paid to “X”: Traditionally it will be agreed that the exporter will pay to the port of arrival in the destination country. For example; CPT Sydney port. In this instance, the seller will pay the local charges at origin, plus the freight cost to the carrier. All charges from the destination port to the delivery point will be payable by the buyer, including customs clearance and duties.
- FOB – Free on Board: In this instance, the seller will pay all local charges in their country only. The freight portion of the costs is payable by the buyer, as well as the arrival charges.
- Ex-Works: All charges from the shippers door are paid by the buyer/importer.
For a full list of Incoterms, click on this link here.
Beware of the EX-Works Incoterm
In the realm of international shipping, it’s important that you understand the power of Incoterms. You shouldn’t see them as a way to shift responsibility onto the customer. Instead, see them as a way in which you can offer your customer, transparent, easy to follow, end to end solutions.
As the seller, the EX-Works Incoterm may appear to be the simplest solution for you. The EX-Works Incoterm means that the seller arranges the packaging and the buyer arranges shipping and carries all the costs.
However, it is important to consider all the implications here. Under EX-Works, the seller has no control over several aspects, such as when the goods will be collected and how they are transported. As a result, you will have no way of knowing that your food is being transported according to food safety standards - is this a risk you’re willing to take?
That being said, for smaller shippers who are exporting small amounts, EXW or FOB might be more preferable.
WTA’s recommended Incoterms for Exporting Food
WTA advises the use of DAP for exporting food, keeping control at the origin country. Using DAP means that, as the seller, you will remain in control of the shipment, though you should still ensure that you work with the right logistics provider.
Under DAP and DDP, the buyer is only held responsible for customs in the arrival country, as well as for transport to their premises and delivery. As a result, DAP and DDP are good options if the buyer is new to the world of importing and knows little of the nation in which they are buying.
The seller takes charge of customs at the country of origin, as well as insurance and transport to the destination country.
While some may not recommend the DAP/DDP Incoterm due to the requirement that the exporter takes charge of the logistic chain and assume responsibility, WTA finds that larger buyers actually prefer this agreement.
To discover more about 2020 Incoterms and which are best suited to your business, click below.
