If you’re planning to import from China, then you’re almost certainly going to be dealing with incoterms.
Being familiar with incoterms and the various three-letter acronyms they involve is essential for negotiating a good deal with a Chinese supplier and understanding the risks you face.
Different incoterms can drastically change the value of a sourcing deal, so when you import from China you should understand the different incoterms and negotiate accordingly.
Communicating with Chinese factories can sometimes be a difficult process and although many have excellent English language skills, there is still much room for misunderstanding.
Incotems help buyers and sellers alike, giving clarity over shipping terms and responsibilities. This allows buyers to import from China with greater confidence that both parties understand the terms of the trade with regards to shipping, insurance and when the goods officially change hands.
The word ‘incoterms’ is a shortened form of ‘International Commercial Terms’. They’re an international standard for describing who is responsible for what at various stages of the production and shipping process, and have existed in various forms since 1936.
Incoterms allow both sides of a deal to communicate clearly about shipping terms and responsibilities. The current set has been in place since 2010, and the 11 different options are well-documented by Wikipedia, so we won’t go into detail about them here.
In short, incoterms allow consistent and clear communication regarding:
As a quick example, we’ll look at the two extreme ends of the range provided by incoterms: total responsibility for the buyer, and total responsibility for the seller.
Total responsibility for the buyer is described by the incoterm EXW – Ex Works. This means that the seller simply makes the goods available at their own premises. After that they have zero responsibility for them. A buyer would likely expect a lower cost for this incoterm, as they are taking on all the responsibility.
At the other end of the scale is the incoterm DDP – Delivery Duty Paid. Under this incoterm, the seller is responsible for ensuring the goods arrive safely at a location specified by the buyer. The buyer has absolutely no responsibility until the goods have arrived at this location, so the seller is taking on all costs and risks. A seller would likely negotiate a higher price for this incoterm to cover their increased costs and risks.
Between EXW and DDP there are of course a wide range of other incoterms describing various different arrangements for the costs and risks taken on by the buyer and seller. Having these standard terms (which also have standard translations in many languages) is extremely useful for enabling clear and consistent communication across linguistic, geographical and political boundaries. Let’s take a look at some more examples:
CFR (Cost and Freight) and CIF (Cost, Insurance and Freight) are identical in that they both make the seller responsible for the costs of freight to the port of destination (i.e. the end port in the country of the buyer), but the buyer is responsible for any risks once the goods are on the vessel.
The only difference between CFR and CIF is that CIF further requires that the seller covers insurance, whilst CFR does not. Note that both of these incoterms only apply to freight by sea and inland waterways.
DAP (Delivered at Place) and CIP (Carriage and Insurance Paid to) appear identical in the table above. Both require that the seller pays for everything to the stated destination.
The difference is that with DAP the seller remains responsible for the goods up to delivery at the stated destination, whereas with CIP the buyer becomes responsible once the goods are handed over to the first carrier (despite the seller covering the payment).
It is important to remember that despite being an international standard and seeming ‘official’, incoterms are ultimately only a communication tool. They are simply convenient labels for referring to established standards.
In other words, incoterms reduce the risk of poor communication, but they do not reduce the risk of dealing with low quality suppliers when you import from China.
A supplier agreeing to a particular incoterm does not guarantee that they will fulfil it, so background checks and the usual supplier verification process remain as important as ever.
The incoterm for a particular deal should be clearly specified in a contract with the supplier to make it enforceable in any potential disputes.
Some buyers when they import from China may confuse incoterms for payment terms, and mistakenly believe that by having negotiated payment terms they have also clarified incoterms.
This is not the case, and the lack of clarity in such an arrangement could lead to nasty surprises for the buyer.
For example, a buyer might negotiate payment terms of 30% prepayment and 70% within 30 days of delivery. These payment terms do nothing to specify the shipping process and who is to be held responsible for the goods and costs at each stage, though. Those should be covered by incoterms, and not specifying them leaves you (the buyer) open to unexpected costs and risks.
Typically, complete payment terms will include an incoterm, and altogether cover the following points:
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