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Chapter Five

Chapter Five. International Trade Terms.  the importance of trade terms  the definition of Incoterms  the most frequently used trade terms  how to use various trade terms in international trade . At the end of this chapter, you should be able to understand:.

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Chapter Five

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  1. Chapter Five International Trade Terms  the importance of trade terms  the definition of Incoterms  the most frequently used trade terms  how to use various trade terms in international trade At the end of this chapter, you should be able to understand:

  2. The Contents of Chapter 5 1. International Trade Terms 2. Introduction to Incoterms 2000 3. Use of Incoterms 4. The Structure of Incoterms 2000 5. Modes of Transport of Incoterms 6. Notes on Incoterms 7. The Most Frequently Used Trade Terms

  3. Questions 1. What are trade terms? 2. Why should trade terms be used in international trade?

  4. Overview In the international sale of goods, it is of great importance to determine the responsibilities and obligations of both the seller and buyer. In order to make definite the obligations, risks and costs of the two parties in the transfer of the goods, the buyer and seller, during business negotiation, must adopt a certain trade term, which is a dispensable part of the contract for the international sale of goods, because trade terms are directly related to the prices of commodities. Therefore, it is essential for the people engaged in international trade to understand and master various kinds of trade terms that are in universal use in international trade and relevant international trade practices so that they can choose them to their own advantage

  5. l. InternationalTrade Termsns of Packing Trade terms, also referred to as “price terms” or “delivery terms”, stand for specific obligations of the buyer and the seller. Key elements of sale contracts: delivery terms (carriage of the goods from the seller to the buyer and division of costs and risks between the parties) ; price terms (stipulating what are included in the price the buyer paid to the seller, e.g. cost, freight, insurance, export and import clearance fees, etc. ) ; delivery obligations (what documents should the seller provide, e.g. bill of lading, insurance policy, etc. ). Unit Price: US$ 100 per M/T CIF New York

  6. Trade Terms Trade terms are abbreviations used to indicate the formation of the unit price and determine the responsibilities, expenses and risks borne by two parties as well as the time of the passing of the property in the goods. Examples: USD 100 per M/T CIFC3 New York EUR750 per dozen CFR London

  7. Links and Liabilities The various links and liabilities might add to the cost and hence to the price of goods. Production or manufacture or purchase of the goods; Storage, freight from the production site, purchase site or storage site to the port, or in land delivery, etc. Export customs clearance, export commodities inspection, export license and formalities; Loading lighter; Insurance; Marine transportation or main carriage; Unloading lighter Import license, import customs clearance, import commodity inspection; Land transportation from the port to the delivery spot.

  8. International Trade Practices Regarding Trade Terms 1.Warsaw — Oxford Rules 1932《1932年华沙——牛津规则》《CIF买卖合同的统一规则》 2.Revised American Foreign Trade Definitions 1941 《1941年美国对外贸易定义修正本》 3. INCOTERMS 2000《国际贸易术语解释通则》

  9. 2. Introduction to Incoterms 2000

  10. 3. Use of Incoterms  Not implied into contracts for the sale of goods.  Specifically include them in the contract when using Incoterms, • Further, your contract should expressly refer to the rules of interpretation as defined in the latest revision of Incoterms. • Ensure the proper application of the terms by additional contract provisions. In case of a dispute, courts and arbitrators will look at: 1) the sales contract, 2) who has possession of the goods, and 3) what payment, if any, has been made.

  11. Incoterms Do . . . Incoterms 2000 may be included in a sales contract if the parties desire the following: • To complete a sale of goods. • To indicate each contracting party’s costs, risks, and obligations with regard to delivery of the goods as follows: • To establish basic terms of transport and delivery in a short format.

  12. Incoterms Do Not . . . Not sufficient on their own to express the full intent of the parties. They will not: • Apply to contracts for services. • Define contractual rights and obligations other than for delivery. • Specify details of the transfer, transport, and delivery of the goods. • Determine how title to the goods will be transferred. • Protect a party from his/her own risk of loss. • Cover the goods before or after delivery. • Define the remedies for breach of contract.

  13. 4. The Structure of Incoterms 2000

  14. The respective obligations of the parties under all the terms of Incoterms 2000 Seller A1-A10 Buyer B1-B10 A1 Provision of goods in conformity with the contract A2 Licenses, authorization and formalities A3 Contract of carriage and insurance A4 Delivery A5 Transfer of risksB1Payment of the price A6 Division of Costs A7 Notice to the buyer A8 Proof of delivery, transport document or equivalent electronic message A9Checking, packaging, marking A10 Other obligations B1 Payment of the price B2 Licenses, authorization and formalities B3 Contracts of carriage B4 Taking delivery B5 Transfer of risks B6 Division of costs B7 Notice of the seller B8 Proof of delivery, transport document or equivalent electronic message B9 Inspection of goods B10 Other obligations

  15. 《2000年通则》规定的买卖双方的义务 卖方义务 买方义务 A1 提供符合合同的货物 B1 支付货款 A2 许可证、核准书和手续 B2 许可证、核准书和手续 A3 运输和保险合同 B3 运输合同 A4 交付货物 B4 收取货物 A5 风险转移 B5 风险转移 A6 费用划分 B6 费用划分 A7 通知买方 B7 通知卖方 A8 交货证明、运输单据或具 B8 交货证明、运输单据或具 有同等效力的电子信息 有同等效力的电子信息 A9 检验、包装、标记 B9 货物检验 A10 其他义务 B10 其他义务

  16. 5 Modes of Transport of Incoterms . All modes of transport including multimodal transport EXW FCA CPT CIP DAF DDU DDP Sea and inland waterway transport FAS FOB CFR CIF DES DEQ

  17. 6. Notes on Incoterms • Underlying Contract (2) EXW and FCA (3) EDI (4) Insurable Interest (5) Customs of the Port or Trade (6) Precise Point of Delivery (7) Export and Import Customs Clearance (8) Added Wording (9) Packing (10) Inspection (11) Passing of Risks and Costs 6

  18. Passing of risks and costs under INCOTERMS 2000

  19. Passing of risks and costs under INCOTERMS 2000

  20. 7. The Most Frequently Used Trade Terms FOB, CFR and CIF are the three traditional trade terms that are widely used in international trade. With the development of transportation technology, FCA, CPT and CIP have also developed based on FOB, CFR and CIF. The former three trade terms apply to ocean carriage whereas the latter three can be used for all modes of transport, but are particularly suitable for container transport and all forms of multimodal transport. These terms are universally used in international trade.

  21. 1. FOB (Free on Board ) (…named port of shipment) Definition: The seller delivers when the goods pass the ship’s rail at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that point. The FOB term requires the seller to clear the goods for export.

  22. Obligations of the parties under FOB Seller’s obligations A1 Provision of goods in conformity with the contract A2 Licenses, authorization and formalities A3 Delivery A4 Transfer of risks A5 Division of Costs A6 Notice to the buyer A7 Proof of delivery, transport document or equivalent electronic message A8Checking, packaging, marking Buyer’s obligations B1 Payment of the price B2 Licenses, authorization and formalities B3 Contracts of carriage and insurance B4 Taking delivery B5 Transfer of risks B6 Division of costs B7 Notice of the seller B8 Inspection of goods

  23. Variations of FOB Term • As the loading of the goods is a continuous process, sometimes it is hard to use the ship’s rail as a point to divide responsibilities and costs. To avoid dispute, there are several derived price terms: • FOB Liner Terms • FOB Under Tackle • FOB Stowed • FOB Trimmed FOB班轮条件（FOB liner terms）：装船费用由支付运费的买方负担； FOB吊钩下交货（FOB under tackle）：从货物被轮船吊钩起吊开始的装船费用由买方负担； FOB包括理舱（FOB stowed, FOBS）：卖方负担将货物装入船舱并包括理舱费在内的装船费用。 FOB包括平舱（FOB trimmed, FOBT）卖方负担将货物装入船舱并包括平舱费在内的装船费用。

  24. 2. CIF (Cost, Insurance and Freight) (…named port of destination) Definition: The seller delivers when the goods pass the ship’s rail in the port of shipment. The seller must pay the costs and freight necessary to bring the goods to the named port of destination. But the risk of loss or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer. However, in CIF the seller also has to procure marine insurance against the buyer’s risk of loss of or damage to the goods during the carriage. Consequently, the seller contracts for insurance and pays insurance premium.

  25. Obligations of the parties under CIF Buyer’s obligations B1 Payment of the price B2 Licenses, authorization and formalities B3 Taking delivery B4 Transfer of risks B5 Division of costs B6 Notice to the seller B7 Proof of delivery, transport document or equivalent electronic message B8 Inspection of goods Seller’s obligations A1 Provision of goods in conformity with the contract A2 Licenses, authorization and formalities A3 Contracts of carriage and insurance A4 Delivery A5 Transfer of risks A6 Division of Costs A7 Notice to the buyer A8 Proof of delivery, transport document or equivalent electronic message A9Checking, packaging, marking

  26. Variations of CIF Terms CIF Liner Terms (CIF班轮条件) It denotes that the loading and unloading charges are met by the shipping company or specifically the exporter. CIF Landed (CIF卸到岸上) It means that unloading costs, including ligherage and wharfage are borne by the exporter. CIF Ex-ship’s hold( CIF舱底交货) It states that the importer pays for the unloading charges.

  27. 3. CFR (Cost and Freight) (… named port of destination) Definition: The seller delivers when the goods pass the ship’s rail in the port of shipment. The seller must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer. The CFR term requires the seller to clear the goods for export. The difference between CIF and CFR ： Under CFR, the seller is not obligated to arrange marine insurance against the risk of loss of , or damage to , the goods in transit. The buyer is obligated to arrange insurance and pay the insurance premium.

  28. The nature of performance of a CIF contract  It is sale of documents rather than goods.  Three stages of delivery in a CIF contract, i.e. “provisional delivery” on shipment, “symbolical delivery” on tender of the documents, and “complete delivery” when the goods are handed over to the buyer, • The contractual obligation of delivery is satisfied just by delivery of documents and not by actual physical delivery of the goods. • The buyer cannot refuse the documents and ask for the actual goods, nor can the seller withhold the documents and tender the goods they represent.  On presentation of the shipping documents, if they are complete and regular, the buyer is bound to pay the price, irrespective of the arrival of the goods.  Whatever happens to the goods in transit, the bill of lading and the insurance policy provide an almost complete, continuous cover from the port of shipment to the port of destination.

  29. Follow-up Practice 1 Review and Discussion Questions 1) What are trade terms? Why are they used in international trade? 2) Ｗhat is the meaning of Incoterms? What is the significance of using Incoterms? 3) What are the benefits of organizing the terms in Incoterms 2000 into four basic groups? 4) What are the differences between FOB and CFR? 5) Why does an export price need to contain a measuring unit, unit price, employed currency and trade term? 6) Why is it advisable to use CIF in export and use FOB in import?

  30. 2 Match the trade terms under INCOTERMS 2000 with their Chinese equivalents a. EXW (EX Works) 1. 船边交货 b. FAS (Free Alongside Ship) 2. 运费付至 c. FCA (Free Carrier) 3. 目的港船上交货 d. FOB (Free On Board) 4. 未完税交货 e. CFR (Cost and Freight) 5. 工厂交货 f. CIF (Cost, Insurance and Freight) 6. 货交承运人 g. CPT (Carriage Paid To) 7. 运费、保险费付至 h. CIP (Carriage and Insurance Paid To) 8. 装运港船上交货 i. DAF (Delivered At Frontier) 9. 成本加运费 j. DES (Delivered Ex Ship) 10. 目的港码头交货 k. DEQ (Delivered Ex Quay) 11. 完税后交货 l. DDU (Delivered Duty Unpaid) 12. 边境交货 m. DDP (Delivered Duty Paid) 13. 成本、保险费加运费

  31. 3 Describe the differences and similarities of the following three trade terms and complete the table below.

  32. .4 Choose the right answer from each of the following. 1) Incoterms are a standard set of terms and abbreviations developed by _______. A. the International Law Association B. the International Chamber of Commerce C. the United Nations Conference on Trade and Development D. the United Nations Commission on International Trade Law ] 2) In the international trade practices regarding trade terms, which of the following is the most influential and widely used _______. A. Hague Rules《海牙规则》 B. Warsaw-Oxford Rules 1932 C. Revised American Foreign Trade Definitions 1941 D. Incoterms 3) INCOTERMS2000 includes _________ trade terms. A. 6 B. 12 C 13 D.14 4) As far as risks taken by the seller are concerned, A. CIF is bigger than CFR. B. CIF is as the same as CFR. C. CFR is bigger than CIF. D. FOB is bigger than CFR. 5) The term FOB should be followed by: A. point of origin B. port of importation C. port of discharge D. port of exportation

  33. 6) The term CIF should be followed by: A. point of origin B. port of shipment C. port of destination D. port of exportation 7) The term CFR should be followed by: A. point of origin B. port of shipment C. port of destination D. port of exportation 8) The term EXW should be followed by: A. point of origin B. port of shipment C. port of importation D. port of exportation 9) The term DAF should be followed by: A. point of origin B. port of importation C. place of destination D. port of shipment 10) The term FAS should be followed by: A. point of origin B. port of destination C. port of shipment D. port of exportation

  34. 11) The term DES should be followed by: A. point of origin B. port of shipment C. port of exportation D. port of destination 12) The term DEQ should be followed by: A. point of origin B. port of loading C. port of destination D. port of shipment 13) The term FCA should be followed by A. point of origin B. seller’s place of shipment C. buyer’s place of shipment D. buyer’s railway station 14) The term DDP should be followed by: A. point of origin B. port of shipment C. port of buyer’s premise D. place of destination 15) Which of the following prices quoted is correct? A. US$1000 per M/T CIF USA B. US$ 200 per ton CIFC3 New York C. US$150 per case CIF D. US$ 100 per doz. CIFC3 New York

  35. 5. Decide whether the following statements are true or false. 1)If the seller agrees to deliver the goods to a ship, but not to pay for loading them, the term is FOB. ( ) 2) Under FOB, the seller must bear all risks of loss of or damage to the goods until such time as they have passed the ship’s rail at the named port of shipment. ( ) 3) The only difference between CFR and CIF is that under a CFR contract the buyer must purchase a marine insurance contract to cover the goods while they are on the voyage. ( ) 4) Under CFR, the seller must pay the usual freight rate and any additional costs that arise en route. ( ) 5) The terms FOB, CFR and CIF are applicable to all modes of transport. ( ) 6) DAF is only adopted when two countries have land-connected borderline. ( ) 7) Each term has a “liability point”, which means that costs and risks are all moved over to another party from that very point. ( ) 8) EXW contract is called "physical delivery" while CFR is “symbolic delivery”.( ) 9）CFR states that the exporter is obligated to make all necessary arrangements to ship the goods all the way from the exporter’s premises to the named port of debarkation. ( ) 10）Under CIF the seller also has to procure marine insurance against the buyer’s risk of loss of or damage to the goods during the carriage. ( )

  36. Case Study A Chinese exporter signed a CFR contract with an importer in America on canned meat for an amount of US$ 50, 000, with payment by D/P at sight. On the morning of May 5, 2006, the goods were all loaded onto the named vessel. The Chinese salesperson in charge of this contract was so busy that he forgot to send the buyer the shipping advice until the next morning. Unexpectedly, when the American importer went to the local insurance company to insure the goods, the insurance company had already learned that the ship suffered a wreck on May 6 and refused to insure the shipment. The American importer immediately sent a fax to the Chinese exporter reading as follows: “Owing to your delayed shipping advice, we are unable to insure the goods. Since the vessel has been destroyed in a wreck, the loss of goods should be for your account. At the same time, you should compensate our profit and expense losses which amount to US$ 50, 000”. Soon all the shipping documents sent through the collecting bank were returned to the Chinese exporter, for the reason that the importer refused to take up the shipping documents.

  37. Case Study A Chinese international trade company exported a batch of walnuts to England on the basis of CIF London. As it was a seasonal commodity, it was stipulated in the contract that the covering L/C should reach the seller before the end of September. The seller guaranteed that that the vessel would reach the port of destination not later than December 2. If the vessel reached the port of destination later than that day, the buyer was entitled to cancel the contract. In case the payment had been made, the seller should return the payment to the buyer. Then, where do you think the crux lies in this case?

  38. Web Links http://www 1. http://www.exporteam.com 合众出口网 2.http://www.intl-trade.com 国际贸易 3.http://www.iccwbo.org国际商会 4.http://www.mofcom.gov.cn 中国商务部 5.http://www.chinaintertrade.com中国国际贸易网 6. http://www.tradehr.com 外贸英才网

  39. THE END Thank You !

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