Language of Trade: International Commerce Terms
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International Trade has been a long standing practice between foreign nationals. Countries require commodities or goods from other countries for their needs. They in turn provide the reciprocal thus enhancing the countries development and economics. Because of the cultural and foreign business barriers, countries have to communicate effectively. Canada, China and Japan are the United States major trade partners. If a shipping problem or damage to goods occurs in route to the United States from one of these countries responsibility has to be established. International Commerce Terms (Incoterms) have been established to clarify and establish shipping and delivery responsibilities between buyers and sellers to bridge the foreign and cultural business gaps. Incoterms specified on the freight bill outlines the responsibility of both parties to the damage.
Language of Trade
International Commerce Terms
The languages of trade, International Commerce Terms (Incoterms) are standard international trade terms. Incoterms establish and regulate the necessary trade definitions most commonly used in international sales contracts to minimize foreign barriers and a common understanding to international trade. International trade has been in existence since the early 1800s. The English and Cantonese nationals used applied/simplified words, sounds, or body language to communicate their terms of trade. As the profitable business of international trade expanded among foreign nationals a form of communication was necessary. Because interpreters among the foreign traders were limited, business English, also known as Chinese Pidgin English, was used to communicate. The applied language of trade was Chinese Pidgin English, a combination of Cantonese and broken English (Britannica, 2010).
The terms of trade has evolved since the 1800s to substantiate the terms of international trading. Established by the International Chamber of Commerce (ICC) in 1936, formerly known as Terms of Trade, Incoterms dictates the required responsibilities of the exporter and importer to alleviate foreign contract barriers (David P, 2008). Countries use Incoterms to make international trade easier by specifying one of the applicable 13 Incoterms available to help exporters and importers understand the terms of trade and contract. Incoterms are also used to establish and assign transaction costs and responsibilities, respective roles and clarify ownership and risk of goods between exporter and importer. The applicable Incoterm term applied minimizes obstacles such as clearing goods for export, coordinating the appropriate means of transportation and clearing customs (David P, 2008). Countries that establish contracts for international trade and transportation use Incoterms that outline the specifics and responsibilities of the exporter and importer.
Specifics include the terms of time and place of delivery and payment, responsibility of risk, loss shifts from the seller to the buyer, and responsibility of freight and insurance cost. Since Incoterms establishment, six revisions have been revised and incorporated; current version is Incoterms 2000, to sustain the constant expansion of international trade. The many innovations of Incoterms were a result of international trade reliance on intermodal transportation, simplifying delivery obligations under the Incoterm Free Carrier (FCA) and allocating loading and unloading responsibilities of exporters and importers (Commerce, 2010). Other terms that have been revised are Free Alongside Ship (FAS) and Delivered Ex Quay (DEQ). Prior versions of FAS required the importer clear goods for export, the revised terms requires exporters to clear exported goods. DEQ now requires the importer to organize and clear goods and pay for all formalities, duties, and taxes unlike prior versions of Incoterms required the importer only coordinate import clearance (Commerce, 2010). There are 13 Incoterms that are used to minimize the uncertainties that are associated with international trade from different countries.
The terms are further divided into four groups, E, F, C and D. The Groups designate the first letter of the Incoterm and the specifics of their associated terms. There is only one term assigned to Group E, Departure Incoterms; Ex-Works (EXW). EXW is when the seller accepts responsibility to ensure goods are available at the buyer’s location and the buyer accepts responsibility of the charges. The simplest of Incoterms, EXW renders all costs and risks involved in transporting goods from the seller’s location to the buyer; the seller has minimum obligation and responsibilities. The seller is responsible for packing goods but not responsible for loading the goods on the pre-arranged vehicle that is provided by the buyer. The buyer bears all expenses involved to transport goods from the exporter’s location to the importer’s destination. However, the terms of EXW are negotiable by both parties. An amendment to the applicable Incoterm, a variant, can be applied to modify the importer or exporter’s responsibilities or for special contractual terms (Guru, 2004).
In the event if a seller wants to sustain a competitive advantage against competitors, the seller can agree to accept responsibility for loading the goods and accept any associated risks and all the costs of loading. Group F (Main Carriage Unpaid) are Free Carrier (FCA), Free Alongside Ship (FAS), and Free on Board (FOB). Group F Incoterms apply the responsibility of delivering goods to a pre-determined carrier that is designated by the buyer to the seller, establish shipment contracts with designated the shipment destination, and pre-carriage is paid by the seller at origin but not for main carriage (VEDP, 2009). FCA Incoterm was implemented in 1990 and replaced 3 Incoterms, Free on Rail (FOR), Free on Truck (FOT), and Free on Board-Airport (FOB-A) (David P, 2008). Primarily containerized goods are transported via multi-modal transportation that is either full-container loads (FCL) or less-than-container loads (LCL). FCA is when the seller delivers goods, cleared for export, to a pre-arranged carrier designated by the buyer at a designated location. The responsibility of loading and unloading the delivery is predicated on the terms of the delivery location. The seller is responsible for loading and unloading if delivery occurs at the seller’s premises, which may not be a custom clearing point in which the buyer assumes cost and risk (Export911, 2010)
. In addition, if delivery is coordinated at an alternate location, the seller is not responsible for unloading. FAS Incoterm is primarily used for ocean transportation. The seller is responsible for delivering the desired goods alongside the ship at the port designated by the buyer. The buyer assumes title, risk and the expenses of all transportation and insurance cost when delivered alongside the ship by the seller. Used for sea or inland waterway transportation. In addition, the seller is responsible for the export clearance. The classic Maritime trade term, ocean transportation is the primary for goods transported using FOB. The buyer assumes risk, payment of all transportation and insurance cost when the goods are delivered on board the ship by the seller (Shipping, n.d.). The seller is responsible for delivery and loading of goods on board the ship designated by the buyer. The cost and risk shift responsibility when the goods clear the ship’s rail. Group C Incoterms are Cost and Freight (CFR), Cost, Insurance, and Freight (CIF), Carriage Paid To (CPT) and Carriage and Insurance Paid To.
Group C Incoterms require a form of pre-pay from the seller, the seller contracts for carriage, and the transfer of risk, loss or damage to goods or additional costs associated to any events that may occur after shipment and dispatch when goods cross ship’s rail. In addition the seller is responsible for main carriage; however, the seller does not assume risk (VEDP, 2009). CFR Incoterm is used for ocean transport. The seller is responsible for the packaging, transportation cost to the destination port, loading of the goods and pre-paying for the shipment. When goods are delivered to the ship the buyer assumes risk, title, and insurance cost. CIF Incoterm is also used for ocean transportation. Title and risk are the responsibility of the buyer until delivered on board the ship. Goods that are transported under CIF require the seller to pre-pay Marine Cargo Insurance and shipping. Variants or mandated Coverages are applied to specify the applied insurance coverage. Countries such as Uganda, Congo and Cape Verde are not allowed to import goods under CIF Incoterms. These countries government’s have applied restrictions on purchasing insurance abroad to conserve foreign currency and allows importers to purchase locally (David P, 2008).
CPT is applied to goods that are transported via multi-modal modes of transportation. The buyer assumes title, risk and insurance cost when goods are delivered to carrier. The seller pre-pays transportation and insurance cost to destination. Goods are not delivered to the desired city of destination, the city where the goods are delivered is determined by the seller and unloaded to a designated carrier are the terms of CPT (David P, 2008). Group D are primarily used to establish the responsibilities of the arrival or delivery of shipped goods. These Incoterms establish the seller’s responsibility of all costs and risk required to transport goods to the country of destination (VDEP, 2009). Delivered Ex-Ship (DES), Delivered Ex-Quay (DEQ), Delivered at Frontier (DAF), Delivered at Frontier (DAF), Delivered Duty Unpaid (DDU) and Delivered Duty Paid (DDP) are Group D Incoterms. Under the terms applied to Incoterm DES, the seller assumes responsibility and risk of the transported goods until the goods are discharge from the ocean carrier in the port of designated destination.
The buyer is responsible for unloading the good form the ship, clearing customs, and transportation beyond the port of destination. Bulk shipments of commodities that require ocean transportation can be transported under the Incoterm DEQ. The seller is responsible for unloading goods and clearing for import. The buyer assumes the title and risk when goods are delivered at the destination point by the seller. There are two types of DEQ Incoterms, ex quay duty paid and ex quay duty on buyer’s account. In the first, the duty is paid by the seller. In the second, the duty also is paid by the seller, but the buyer must reimburse the seller. DAF Incoterms is primarily used for goods that are transported via land transportation. The transfer of responsibility and risk is transferred at the destination designated in the Incoterms. The buyer assumes responsibility of the goods while transported and loaded on the buyers designated carrier.
There is no required paperwork that is required to transfer responsibilities. The seller is responsible for packaging goods, transporting goods to the border city, clearing goods for export and providing shipping information to the buyer (David P, 2008). DDU Incoterms is when the seller assumes the majority of the associated risk and cost to transport goods. The buyer assumes responsibility of the goods when the goods are delivered to the destination designated in the Incoterms. The Incoterm DDP designates all responsibilities and cost to the seller. Equivalent to domestic door to door service, DDP provides little responsibility to the buyer.
The buyer’s major responsibility is to receive the imported goods. The Incoterm that is annotated on shipping or freight documents ensures clarity of shipping and receiving responsibilities between foreign countries. The business of International Trade is ever evolving bridging the diversity of the many languages and cultures. Countries have some form of commodity that is a necessity to another country. International trade thrives a countries resources and economy marking the country for success. Incoterms allows sellers and buyers to maintain control of the transporting and receiving of their commodities. Because international business relationship is expanding, ICC is currently in the process of amending the current version of Incoterm 2000. The new version is scheduled to be implemented January 2011(Commerce, 2010).
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