How to

choose the
best incoterm
in 2021
A guide for exporters and importers
OMING U
The Importance of Incoterms 01

Best Incoterms for Exporters 03

CPT & CIP Incoterms

DDP & DAP Incoterms

FCA Incoterm

Best Incoterms for Importers 15

FCA Incoterm

EXW Incoterm

Importing from China: CIP or FCA 22

Conclusion 26
The
Importance
of
Incoterms

1.
For many importers and exporters, the price of an international shipment often

takes center stage during negotiation.

There is, however, another equally important factor that has the ability to influence

the outcome of a shipment that should always be considered: the Incoterm.

An Incoterm is one of the most important aspects in business negotiations as it lays

out the responsibilities of the buyer and seller.

It is extremely important for both parties to put extra thought into the selection of

an appropriate Incoterm.

But given that each party has its own interests to look out for, that is not always

easy to achieve.

In fact, there are many factors that must be considered when selecting an Incoterm,

which can greatly impact the competitiveness of the international shipment.

An Incoterm affects the purchase price of the goods. Suppliers often offer

different prices based on the chosen Incoterm.

An Incoterm determines who has the most control over the ocean freight, time,

and costs. This also implies having greater capacity to avoid delays, damages to

the goods and/or extra costs.

In the event of disputes and claims, Incoterms can be used to

resolve disagreements.

In this guide, we will cover the main Incoterms used in ocean freight today and what

each of these implies for both the importer and exporter to help select a safe and

competitive Incoterm for your international sale.

2.
Best

Incoterms

for

Exporters

CPT & CI

DAP & DD

FCA

3.
BEST INCOTERMS FOR EXPORTERS

“As an exporter, if you cantrol the ocean freight, you control the

security and cost competitiveness of the international shipment.”

CPT & CIP Incoterms

CPT Incoterm (Carriage Paid To)

The CPT Incoterm is an Incoterm that applies to all transportation modes. It states

that the seller is not only responsible for delivering the goods to the carrier, but also

bears the transportation costs of the goods to the agreed upon destination.

However, insurance costs fall under the responsibility of the buyer. Unlike many

other Incoterms, the risk transfer point differs from the cost transfer point. Under

the CPT Incoterm, the risk is transferred when the goods are surrendered to the

carrier at origin.

Exporter's obligations under CPT

Delivery of goods and documents required

Packaging and wrapping

Inland transport in the country of origin

4.
BEST INCOTERMS FOR EXPORTERS

Customs at origin

Exit charge

International freight

CIP Incoterm (Carriage and Insurance Paid to)

The CIP Incoterm is also applicable to all transportation modes and indicates that

the seller is responsible for the cost and freight of bringing the goods to the carrier.

The seller must also provide insurance for the transport of the goods.

Unlike other Incoterms, the risk transfer point is not the same point as the cost

transfer point. Under CIP, risk is transferred when the goods are surrendered to the

carrier at origin.

Exporter's obligations under CPI

Delivery of goods and documents required

Packaging and wrapping

Inland transport in the country of origin

Customs at origin

Exit charge

International freight

Insurance

4.
5.
BEST INCOTERMS FOR EXPORTERS

Advantages of exporting under CPT or CIP

Very competitive in cost

Low risk

FCL shipments under CPT/CIP are easier to manage than those under DAP/DDP

From an exporter's point of view, the main advantage of the CPT and CIP Incoterms
is that they are very competitive and do not pose too much risk.

They allow you, as a seller, to control the international shipping costs right up to
arrival at the destination port and ship cost-effectively.

When you are in control of this fundamental cost, you can:

Evaluate and compare different shipping companies

Obtain better rates from your freight forwarder if you are shipping above a
certain volume

Decide on transit times that best suit you

An added advantage with CPT and CIP is that you do not have to commit to as many
obligations as you otherwise have to with DDP or DAP.

6.
BEST INCOTERMS FOR EXPORTERS

Pro tip:

C-Incoterms are best suited for payments with a Letter of Credit as under these
Incoterms, the seller is in control of two of the most important documents required to
be produced in order to effect payment: the Bill of Lading and the commercial invoice.

The CIP Incoterm and Insurance

The main difference between CPT and CIP is that under CIP, the exporter
is responsible for insurance.

As a seller working under CIP, make sure to verify if the insurance coverage is
equivalent or more than the amount stipulated on the commercial contract.

In the event the commercial contract calls for more coverage, this amount will need
to be met.

7.
BEST INCOTERMS FOR EXPORTERS

DDP & DAP Incoterms

DDP Incoterm* (Delivered Duty Paid)

DDP states that the seller must make the goods available to the buyer at
a prearranged location (buyer’s factory, warehouse, etc.) and cover all associated
expenses including the unloading of goods from the carrier and any customs
procedure costs and tariffs that may apply.

Under DDP, the seller bears full responsibility of all costs and risks until the goods
are unloaded at the agreed-upon location.

The DDP Incoterm is versatile as it can be used irrespective of the mode

of transport.

Exporter's obligations under DDP

Delivery of goods and documents require
Packaging and wrappin DDP; is possible to use
Inland transport in the country of origi a variant in order to
Customs at origi indicate that duties and
Exit charg taxes are excluded of
International freigh the agreement.
Insuranc
Arrival expenditure
Customs on arriva
Payment of fee
Inland transport at the destination country (depending on agreed location)

8.
BEST INCOTERMS FOR EXPORTERS

DAP Incoterm (Delivered at Place)

The DAP Incoterm is a replacement for the now-outdated DDU Incoterm, or Delivery
Duty Unpaid, which appeared in Incoterms 2000.

Under DAP, the seller must make the goods available to the buyer at the buyer’s
chosen location. However, the seller is not responsible for unloading the goods
from carrier at the destination location, or for any customs duties costs, tariffs, or
taxes that may apply during the delivery.

The buyer is therefore responsible for all risks involved with processing customs
clearance for the goods to be imported, and all duties, taxes and other charges that
may be added during this stage.

DAP is versatile as it can be used irrespective of the mode of transportation.

Exporter's obligations under DAP

Delivery of goods and documents required

Packaging and wrapping

Inland transport in the country of origin

Customs at origin

Exit charge

International freight

Insurance

Arrival expenditures

Inland transport at the destination country

9.
BEST INCOTERMS FOR EXPORTERS

Pros and cons of exporting under DDP & DAP

Pros

Offering DAP is often considered to be providing the best customer service

possible

Very competitive in cost

For LCL, DAP can be more competitive and less risky than CPT/CIP

Cons

FCL shipments under DAP/DDP can be more difficult to manage and riskier than
those shipped under CPT/CIP

10.
BEST INCOTERMS FOR EXPORTERS

DDP and DAP are very competitive Incoterms for exporters as they offer control
over ocean freight. When using them for FCL shipments, however, they pose more
risk than CIP or CPT.

As an exporter shipping under DDP or DAP, you are responsible for delivering the
goods to your client's warehouse or storage location at destination. As such, it
would be highly recommended for you to have absolutely in control of everything
happening in that country.

It is therefore necessary to be aware of and able to manage the

possible complexities of that task in the destination country.

Possible complications of DDP and DAP at destination

Exporters committing to DDP or DAP without checking if he/she can handle the
import responsibilities in the country of import is one of the most common
mistakes for these Incoterms.

As an exporter, you may have to deliver to a country that does not receive many
imports, has many restrictions, or is simply not properly-equipped for transport.

For example, transportation complications, delays at customs, or other similar

situations are not uncommon occurrences in developing countries. These often
result in additional costs.

11.
BEST INCOTERMS FOR EXPORTERS

It is very important to work with a reputable freight forwarder.

Should you decide to use DDP or DAP, keep in mind the following:

If you are exporting under DAP to a developing country with

known complications, it is highly recommendable to work with a freight
forwarder who has offices there as this gives you greater control over the
process.

If you are exporting under DDP, regardless of the destination country, it is

absolutely necessary to work with a freight forwarder with offices there.

The more control you have over transportation costs, the more competitive you
can be.

“DAP may seem to allow for greater competitiveness because all

costs until delivery to your client’s warehouse are under your
control. But keep in mind that with greater influence over these
aspects comes greater commitment. That exposes you to more
risk at destination”

12.
BEST INCOTERMS FOR EXPORTERS

FCA Incoterm

FCA Incoterm (Free Carrier)

The FCA Incoterm is applicable to all transportation modes. It states that the seller
must deliver the cargo to the carrier chosen by the buyer. The seller is also
responsible for all costs and risks up until all goods are surrendered to the carrier,
at which point the risks are transferred to the buyer.

The FCA Incoterm is similar to the FOB Incoterm. But FCA is more suitable for
containerized cargo as the risk transfer point is specified as the moment the carrier
takes possession of the cargo whereas FOB's risk transfer point is when the cargo
is loaded on board the vessel.

Exporter's obligations under FCA

Delivery of goods and documents required

Packaging and wrapping

Inland transport in the country of origin

Customs at origin

Exit charge
FOB must not be used
for container load and
still being used for a lot
parts of the industry.

13.
BEST INCOTERMS FOR EXPORTERS

Pros and cons of exporting under FCA

Pros

Few responsibilities, which less-experienced shippers may prefer

Cons

Less control over ocean freight

Can be less competitive in cost

Under FCA, your responsibility as an exporter is to deliver the goods to the carrier.
With no control over shipping times and costs, you lose influence and therefore
competitiveness.

The shipping costs can affect your sale price significantly, so take this into account
when considering this Incoterm.

The only advantage FCA offers an exporter is the relatively few responsibilities,
which less-experienced exporters may appreciate.

14.
Best
Incoterms

for
Importers
FC
EXW

15.
BEST INCOTERMS FOR IMPORTERS

“FCA is a favorite of many seasoned importers because it allows

them to maintain to control over the ocean freight without having
to be responsible for the shipment.”

As an importer or buyer, you will also want to select an Incoterm that gives you the
most control over shipping costs, as this plays into the final price of the
merchandise and its corresponding duties.

Each party is interested in having as much control over the ocean freight shipment
as possible, since it forms the largest expense in the overall international
transportation costs.

Whether or not you can achieve this depends on the negotiation power of both
parties.

We will now take a look at the best Incoterms for importers.

16.
BEST INCOTERMS FOR IMPORTERS

FCA Incoterm

FCA Incoterm (Free Carrier)

From an importer's perspective, under FCA, the exporter delivers the cargo to the
carrier at origin, ready for international transport with all formalities taken care of.

You are in charge of hiring the international shipping services, which gives you
absolute control of all related expenses and coordination of delivery to your storage
or warehouse at destination.

Importer's obligations under FCA

Cost of the goods

International freight

Insurance

Arrival expenditures

Customs upon arrival

Inland transportation in the destination country

Payment of fees

17.
BEST INCOTERMS FOR IMPORTERS

Advantages of exporting under FCA

Control over transportation

Control over costs

Few responsibilities/low risk

Many buyers enjoy working with FCA as it allows them to have control over their
import without having to assume many responsibilities.

The control an importer has under FCA is equivalent to that of an exporter's control
under CPT.

From an importer's point of view, FCA offers the possibility to choose shipping
routes, carriers, time, negotiate prices with a freight forwarder, etc.

18.
BEST INCOTERMS FOR IMPORTERS

EXW Incoterm

EXW Incoterm (Free Carrier)

When importing under EXW, you are in charge of picking up the merchandise from
the seller's warehouse (or another agreed upon location). From that moment on,
you are responsible for all costs.

Importer's obligations under EXW

Payment of the goods

Inland transportation in the country of origin

Customs at origin

Exit charge

International freight

Insurance

Arrival expenditures

Customs on arrival

Inland transportation at the destination country

Payment of fees

19.
BEST INCOTERMS FOR IMPORTERS

Pros and cons of exporting under EXW

Pros

Full control over transportation

Cons

Many responsibilities/potentially risky Incoterm

The main advantage of importing under EXW is that this Incoterm offers you the
possibility of controlling the entire shipment from start to end.

But given the responsibilities an importer has under EXW, this may be as much a
disadvantage as it is an advantage.

EXW is only recommended for:

Experienced importers

Importers who have a freight forwarder they trust at origin

Importers who understand and are capable of handling the export process at
origin

20.
BEST INCOTERMS FOR IMPORTERS

EXW is advisable for importers who fit the above-mentioned profile. However, if you
foresee even minimal complications, it is best not to take this risk. This is especially
so in a country whose export procedures you are not familiar with.

The better and easier option would be to have the goods delivered to a port and
work with an agent.

Possible complications of importing under EXW

As much as you prepare, keep in mind that unforeseen complications beyond your
control can always occur.

But that does not mean that they do not fall under your responsibility.

From the factory or pick up location to cargo loading on the vessel, many problems
can arise. These include complications with land transportation, customs, the
merchandise itself, etc.

With EXW, the shipper

is not supposed to load
the cargo. Keep this
in mind when using
this Incoterm!

21.
Importing
from
China:

CIP or FCA

22.
PRACTICAL CASE STUDY

Importing from China: Why you should choose FCA instead of CIP

FCA and CIP are two of the most commonly-used Incoterms and many
firsttimers importing from China often favor CIP. But the CIP incoterm actually
encompasses a series of risks and complications.

As such, FCA is usually a much more secure and competitive Incoterm.

Implications of importing under CIP

As mentioned earlier, the importer is not responsible for the ocean freight under
CIP.

Instead, it is the exporter who has full control over selecting the shipping line,
transit time, costs, and free time at destination.

Under these conditions, the buyer takes over ownership of the merchandise only at
the port of destination and from a destination agent. This said agent is the party
responsible for securing the cargo at the destination port upon cargo arrival and
handing it over to the importer or his agent.

Prior to the handover, the agent will often request the importer to pay the expenses
at destination, including customs clearance, taxes, etc.

Many novice buyers find this option particularly advantageous because they are
relatively free of responsibility for the cargo – logistically and financially speaking.
Plus, suppliers in China often offer lower prices if buyers agree to the CIP Incoterm.

23.
There is, however, a catch. Here is what tends to happen:

The buyer import merchandise under CIP because of its low and competitive

prices – often much lower than FCA prices.

Importers are often unaware of the how the merchandise is managed, since this

is handled by the exporter.

The exporter's destination agent is listed as the consignee on the Bill of Lading

instead of the importer.

Upon cargo arrival, this destination agent over-charges the importer and

demands payment before releasing the cargo. Besides the above-mentioned

arrival expenses, destination agents sometimes charge fees such as handling

fees, exit fees, entry fees, etc – basically the agent’s ‘own’ charges to inflate

the price. This may result in the importer having to pay as much as five times

the market rate.

The root of this problem results from these destination agents having control over

time. This allows them to play it in their favor – waiting for your merchandise to

arrive before informing you. Since you were not given sufficient time to make

arrangements to collect your merchandise, delays and additional fees rack up,

which must be paid before you are allowed to claim your cargo.

The basis of this dishonest practice stems from an agreement between the agent at

destination and the seller, who establish a low price between them at which to sell

the merchandise. This is to lure buyers in before inflating expenses at destination

and then splitting this profit between them. This happens quite a fair bit in imports

from China and such cases have been on the rise in recent years – especially in

Latin America.

Incoterms can add desination to clarify their use.

For example; DDP Miami, or FCA door Barcelona.

24.
LCL shipments are easy targets as profit margins tend to be lower. As a result, this

gives the sellers and agents more power to inflate prices.

If you are considering CIP, you should ask yourself if it is really worth it to expose

yourself to these risks for low-value shipments.

Advantages of choosing FCA over CIP

Unless you are dealing with a seller or agent you can trust, or have an agreement

that allows you to list yourself as the consignee on the Bill of Lading, it is best to

avoid these risks by choosing FCA.

FCA offers importers what CIP does not; the responsibility of paying for, contracting

and managing the shipment.

Although it requires some extra effort on your part in comparison with CIP, it results

in a much lower risk as you get a clear picture of the expenses involved right off the

bat. That said, problems such as delays and unanticipated additional fees can be

avoided with good planning.

“As a novice buyer importing from China, you should not commit

to the CIP Incoterm unless you are familiar with the seller’s

practices. It is always advisable to use the services of a freight

forwarder, and to go with FCA if the situation permits. This is to

avoid unpleasant surprises upon arrival.”

25.
CONCLUSION

So what's the best Incoterm for an international shipment? As we have seen, the

answer walks the fine line separating having control over the ocean freight and the

risks and responsibilities that come with this control.

As a general rule of thumb, he who controls the ocean freight controls overall costs.

In other words, taking responsibility makes you more competitive.

In a nutshell, having control over transportation gives you:

Control over the ocean freight shipment and its costs

Greater bargaining power with your freight forwarder

The freedom to select the carrier and transit time that best suit you

A clear picture of all expenses involved right from the start

The power to negotiate free days at origin and destination to avoid delays and

unexpected fees

If you're still having doubts about what incoterms you must use in you contract, is

important to contact a freight advisor. Taking into consideration all possibles

incidentals will save you time and money in your international trade.

26.
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