In international trade, the first thing buyers and sellers often need to clarify is the quotation terms (Incoterms). They determine who is responsible for freight, insurance, customs clearance, duties, and other costs and risks. Understanding these terms not only protects your own interests but also enhances the professionalism and credibility of your quotations.
What Are Incoterms?
Incoterms is short for **International Commercial Terms**, established by the International Chamber of Commerce (ICC). It is a commonly used set of rules in international trade that clearly defines the responsibilities and liabilities in cargo transactions. The latest version is Incoterms 2020.
Common International Trade Terms
| Abbreviation | Full Name | Responsibility Overview |
|---|---|---|
| EXW | Ex Works | Seller is responsible for nothing; buyer picks up the goods. |
| FOB | Free on Board | Seller is responsible until goods are loaded on board the vessel. |
| CFR | Cost and Freight | Seller is responsible for freight but not insurance. |
| CIF | Cost, Insurance and Freight | Seller is responsible for freight and insurance. |
| DAP | Delivered at Place | Seller delivers goods to the designated destination but is not responsible for import duties. |
| DDP | Delivered Duty Paid | Seller is responsible for all costs, including duties, delivering directly to the buyer. |
What Differences Do Different Incoterms Make?
Taking the example of exporting goods from Taiwan to Mexico, there is a significant difference between FOB and DDP:
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- FOB：Seller delivers to the port; buyer completes import, customs clearance, and pays duties themselves.
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- DDP：Seller handles all procedures from export to delivery to the buyer’s hands.
For buyers, DDP is the most convenient; for sellers, FOB carries the lowest risk, but it presents a major challenge for buyers.
How to Choose the Right Terms?
The choice depends on your cargo type, supply chain capabilities, and the counterparty’s experience:
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- If you want to deliver goods to the buyer’s door and handle all processes yourself choose DDP
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- If you want to maintain control and reduce unknown risks choose FOB or CIF
Include Terms Clearly in the Contract
Regardless of which Incoterm you use, it must be clearly specified in the contract:
– Use the correct notation (e.g., **FOB Kaohsiung, Incoterms 2020**)
– Verify that the terms are mutually agreed upon and clear with the counterparty
– If there are non-standard provisions, they should be clarified or documented in attachments
Conclusion
Applying the correct international trade terms is the foundation of successful export transactions. Buyers who prefer DDP will inevitably face higher risk costs during price negotiations, while FOB is advantageous for controlling unknown situations. Most importantly, you and your counterparty must reach a clear mutual agreement.
