Incoterms ( short for International Commercial Terms ) are an internationally agreed set of rules that dictate the responsibilities, and risks apportioned to the buying and selling party in an international commercial transactional sale.

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The ICC ( International Chamber of Commerce ) is the body responsible for setting the rules and guidance, and although not in any way mandatory for use in international trade, they provide for a crystal clear set of rules that outline the roles of each party in terms of costs, responsibilities and risk. As 2020, there are 11 incoterms, and not all are applicable to importing from China, so we'll summarise the most common ones below:

 

EXW (Ex Works):

You ( the importer ) are responsible for handling everything from the factory door in China. This means you organise the origin trucking, export customs clearance, export licenses ( if required ) all the origin charges such as terminal handling, transport documents mainline carriage to Ireland and everything else up to your door in Ireland. Cheap for the supplier, but it means more work (and cost) for you. This also means that once your product leaves the factory, you have total control but also complete risk in case of any loss or damage to the shipment.

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FOB (Free on Board- Named Port/ Airport): 

Usually an Ocean Freight Incoterms, it is used interchangeably between air and ocean

The supplier covers the costs and risks associated with getting the cargo loaded onto the ship or aircraft in China. Popular and balanced—our recommended starting point for trade with China. This incoterms means that the importer is responsible for the mainline carriage from China to their door in Ireland. It offers control to the importer whilst also leaving the export formalities to the the Chinese supplier. 

 

CFR / CIF (Cost, Insurance, Freight): 

The supplier pays to get goods to an Irish port or airport (including insurance) The importer takes over from there, organising import customs, paying arrival terminal charges, collection from the port / airport and final mile delivery. ( see also common pitfalls in this guide )

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DAP / DDU & DDP (Delivered Duty UnPaid / Paid): 

The supplier handles everything—shipping, customs, ( duties under DDP—right to your door. Convenient but pricey.

We’ll tackle DAP/DDU later (spoiler: avoid them at all costs), but for now, know that FOB often strikes the best balance for Irish importers. It gives you control once the goods leave China without overloading you with export logistics.

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From the examples above, it should be obvious that the primary difference between FOB / ExWorks & CFR / DDU is that the former are COLLECTION incoterms, whereas the later are DELIVERED incoterms. Simply put it means that the collection incoterms means you as the importer organises the shipment logistics from China to Ireland, and with the DELIVERED incoterms, the Chinese supplier organises the transport. If you take one thing from this guide it is this.......

 

ALWAYS COLLECT YOUR FREIGHT FROM CHINA - NEVER ALLOW THE CHINESE SIDE TO DELIVER TO YOU

More on this warning here...>>>

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What incoterms mean for you as the importer:

When negotiating pricing for whatever cargo you are interested in, the fundamental element that needs to be included is the Incoterm. Some suppliers will be very transparent when indicating pricing on their proposals, and will be clearly indicated; for example a proposal might say;

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MOQ: 100 Units / USD$5 Per unit / FOB Shanghai

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In this example, the sales proposal is for a minimum order quantity of 100 units of whatever product in question, at 5 Dollars per unit, Free On Board The Port of Shanghai

This means, that for USD$ 500, your supplier will deliver the product to the port of Shanghai, export cleared with customs, the costs for the terminal handling at the origin terminal or warehouse paid for and the goods loaded on board the departing vessel or aircraft. Your responsibility as the importer is to then engage a forwarder to organise space with a shipping line or airline to get your goods back to Ireland.

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Determining the Incoterm at the outset of pricing & negotiations is very important, as it will determine the cost outlay by the importer to transport the shipment back to Ireland. Essentially you need to avoid any nasty surprises. It also helps in determining the post landing charges and import duty & VAT valuation.

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China is by and large ( not entirely ) an FOB Free on Board market - and so most suppliers will be happy to do business on a FOB basis. Moreover, suppliers that will do business on an FOB basis are mostly better exporters, as they will have more experience in exporting and the associate customs and trade formalities associated with their products. If a supplier offers ExWorks, thats not necessarily a RED FLAG, but in our experience, sometimes certain issues can present themselves in an ExWorks deal, such as it only becoming clear after the sale and final payment, that a supplier doesnt have the required export license that allows them to export out of China, adding an extra unforseen costs and additional layer of bureaucracy. 

In the case of certain steel and aluminium products, an export licence is mandatory and without one, additional charges of $1000s could be presented, as that type of product requires export taxes to be paid, and once youve paid for the goods, the supplier has no more risk, has no more responsibilities, you need your product, and someone needs to pay the tax !

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