TOPIC 2: SELECTING THE SUITABLE INCOTERM

FOR EXPORT ACTIVITIES.

I. Overview about Incoterms

Referring to Incoterms, surely anyone who cares about foreign economy has more or less
heard about this term. In 1936 the International Chamber of Commerce (ICC) established
a system of 13 international trade conditions, also known as Incoterms (International
commerce terms). But Incoterm 2010 was shortened to 11 trade conditions. The purpose
of this system is to help the international trade environment operate in order and security
through simple contract models that overcome language barriers.

II. Why need to choose the suitable Incoterms?

1. Reduce costs
Choosing the right terms will reduce transportation costs, labor costs, and insurance
costs. This greatly affects the seller if they do not carefully review the terms, when they
should not have been charged.
2. Dividing risks and responsibilities between seller and buyer
In some cases, if the goods are damaged, the one who will suffer the damage will be lost.
A smart seller is the one who chooses the terms that are in their favor. Because when the
risk strikes, it is difficult to determine which party belongs to.
3. Minimize disputes and risks due to misunderstandings
Understanding the terms and choosing it is extremely important for the buyer. Because
such terms are easy to cause disputes to the parties, and if there is a dispute it will be
difficult to resolve.
III. How to choose an Incoterm?
Any international sales process always has two involved parties buyer and seller each
with their own interests. Contract negotiations often include the conditions for
international shipping of the transaction of goods, which includes the Incoterm which
carries out the operation.
The two key parties involved in an international trade transaction are the buyer and the
seller. Though both are entering in a mutually-benefitting sale contract, there are
conditions under which the contract may take place determine the different roles and
responsibilities of each party and their costs.
Incoterms are set of pre-defined international rules published by the International
Chamber of Commerce which determine the contractual clauses to be used in the sales
transaction. They define the conditions of the transport of shipment and the different
responsibilities of the importer and exporter.

IV. Here are some of the best Incoterms for sellers

1. EXW: Ex Works
EXW stands for 'Ex Works' - referring to door-to-door shipments. If agreement under this
clause, the seller will not take responsibility for the entire transport process from
arranging transportation from the factory supplier to the address of the recipient
destination. Therefore, a forwarder to transport, need to ensure that transportation
solutions including customs clearance must in both countries of origin and destination..

In summary, both trade terms are used only for imports and have some similarities.
However, the difference between the two is clear: Using EXW, you are responsible for all
costs associated with your transportation to the destination port, whereas, with an FOB
agreement, you only Responsible for the costs that arrive after your goods have boarded,
because your supplier is responsible for local costs in the country of origin.
2. FOB: Free on Board
FOB - stands for 'Free On Board', in the form of port-to-door shipping. This means that
when you sell FOB, the seller / vendor will be responsible for all charges in the local
area, including transportation to the port, handling of goods and related products at the
place of origin. This also means that immediately after the goods are put on board - "On
board", responsible for shipping and the cost will be transferred from the supplier to the
customer.

3. CFR-CIF: Cost and Freight – Cost, Insurance and Freight

The CFR Incoterm and the CIF Incoterm are generally good options for the seller as
they’re competitive and do not involve too many risks. Under these Incoterms, you have
control over the international shipping costs all the way to the destination port. This gives
you the flexibility to opt for more cost-effective shipping options such as the best routes,
rates, and transit times.
V. Advantages and disadvantage:
In fact, there is no definitive answer to this question. Both incoterms have their pros and
cons and depend on your specific shipment. Let's find out the most notable advantages
and disadvantages to EXW, FOB, DAP shipping terms:
1. EXW
Advantages Disadvantages
- Seller not responsible for loading the - Bear all risks, costs and expenses
goods on means of transport, export incurred until the shipment is put on
clearance or if the contract is not transport of buyers.
specified. - Under this condition, the seller must
- The seller is only obliged to support the place an order under the buyer's control
buyer when the buyer asked to perform within the time limit (time) and venue
export but the seller has no obligation to specified by the contract
make customs procedures.

2. FOB
Advantages
- Sellers do not need to find units shipped
(forwarder or carrier), no need to worry
about insurance, not looking forward risk
locations soon, do not need to find
suppliers support shipment.
Disadvantages
- The seller assumes the cost until the
goods are delivered on board, including
the costs of customs declaration, taxes and
additional charges.
- Depends on the buyer of the calendar
book their ships, will have difficulty
packing in a container, difficulty tuning
vouchers unlikely to actively market price
for failing to do with many providers.
3. CFR-CIF
Advantages
- The opportunity increased the profit by
making the carriage and insurance
arrangements
- It is the buyer has to arrange for import
licenses and pay any import duties and
charges at the port of destination
- Do not bear any risk during transport of
the goods
- Seller has the right to dispose the goods
only until payment is made
Disadvantages
- Seller has to bear the risk of fluctuation
in the cost of carriage and insurance
because he cannot amend the price after
conclusion of the sale contract
- If the seller fails to ship the goods,
tender the documents or the goods does
not arrive at the destination on time would
result in breach of condition in each case

VI. Conclusion:
Summary, depends on the purpose, type of shipment and the ability of the supplier / seller
or forwarder, we will determine the most appropriate term. EXW, FOB and CFR or CIF
are the most suitable, because with EXW, the consignor has the least risk with the
shipment. Besides, if they chose FOB, they not only do not have to take too much
responsible but also do not think about insurance or main transport. Moreover, CIF or
CFR make shipper has the opportunity to increase the profit by making the carriage or
insurance arrangements and do not bear any risk during transport of the goods.
When negotiating an Incoterm with your supplier, keep in mind that whatever Incoterm is
best for you is probably the worst for him and vice versa. Your supplier will likely also
be fighting for the best. Incoterm for his role as a seller. Try to come to a mutual
understanding and make sure all points are clearly defined to avoid problems.
In addition, import / export country practices depend on two methods of buying CIF -
selling FOB. This makes them very dependent on the resources and facilities from
foreign forwarding companies and losing the opportunity to develop and build resources
in the country. Therefore, the flexibility in import / export practices under Incoterms is an
important factor promoting and optimizing import / export activities in the whole country
in particular and Logistics in general.