Chapter Five

International Trade Terms

At the end of this chapter, you should be able to understand:

 the importance of trade terms

 the definition of Incoterms
 the most frequently used trade terms
 how to use various trade terms in international trade
The Contents of Chapter 5
1. International Trade Terms
2. Introduction to Incoterms 2000
3. Use of Incoterms
4. The Structure of Incoterms 2000
5. Modes of Transport of Incoterms
6. Notes on Incoterms
7. The Most Frequently Used Trade Terms
1. What are trade terms?
2. Why should trade terms be used in
international
trade?
 Overview
In the international sale of goods, it is of great importance to
determine the responsibilities and obligations of both the
seller and buyer. In order to make definite the obligations,
risks and costs of the two parties in the transfer of the
goods, the buyer and seller, during business negotiation,
must adopt a certain trade term, which is a dispensable part
of the contract for the international sale of goods, because
trade terms are directly related to the prices of
commodities. Therefore, it is essential for the people
engaged in international trade to understand and master
various kinds of trade terms that are in universal use in
international trade and relevant international trade practices
so that they can choose them to their own advantage
 l. International Trade Terms
ns ofterms,
Trade Packing
also referred to as “price terms” or “delivery
terms”, stand for specific obligations of the buyer and the
seller.
Key elements of sale contracts:
 delivery terms (carriage of the goods from the seller to the buyer
and division of costs and risks between the parties) ;
 price terms (stipulating what are included in the price the buyer
paid to the seller, e.g. cost, freight, insurance, export and import
clearance fees, etc. ) ;
 delivery obligations (what documents should the seller provide,
e.g. bill of lading, insurance policy, etc. ).

Unit Price: US$ 100 per M/T CIF New York

 Trade Terms

Trade terms are abbreviations used to indicate the formation

of the unit price and determine the responsibilities, expenses
and risks borne by two parties as well as the time of the
passing of the property in the goods.
Examples:

USD 100 per M/T CIFC3 New York

EUR750 per dozen CFR London
 Links and Liabilities
The various links and liabilities might add to the cost and
hence to the price of goods.
1) Production or manufacture or purchase of the goods;
2) Storage, freight from the production site, purchase site or storage site
to the port, or in land delivery, etc.
3) Export customs clearance, export commodities inspection, export
license and formalities;
4) Loading lighter;
5) Insurance;
6) Marine transportation or main carriage;
7) Unloading lighter
8) Import license, import customs clearance, import commodity
inspection;
9) Land transportation from the port to the delivery spot.
 International Trade Practices
Regarding Trade Terms

1.Warsaw — Oxford Rules 1932 《 1932 年华沙 ——牛津

规则》《 CIF 买卖合同的统一规则》

2.Revised American Foreign Trade Definitions 1941

《 1941 年美国对外贸易定义修正
本》

3. INCOTERMS 2000 《国际贸易术语解释通则》

2. Introduction to Incoterms 2000

WhatisINCOTERMS
Incoterms arestandardtradedefinitionsm ost
com m onlyusedininternational salescontracts.
DevisedandpublishedbytheInternational
Cham berofCom merce, theyareattheheartof
worldtrade.
Versionof INCOTERMS
ICCintroducedthefirstversionof Incoterms - shortfor
"International Commercial Terms" - in1936.
Updatedfor several times tokeeppacewiththedevelopmentof
international trade
INCOTERMS 2000: thelatestedition
Versions of Incoterms precedingthe2000editionmaystill be
incorporatedintofuturecontracts if theparties soagree.
notrecommended latestversionis designedtobring Incoterms
intolinewiththelatestdevelopments incommercial practice.
 3. Use of Incoterms
 Not implied into contracts for the sale of goods.
 Specifically include them in the contract when using
Incoterms,
 Further, your contract should expressly refer to the rules
of interpretation as defined in the latest revision of
Incoterms.
 Ensure the proper application of the terms by additional contract
provisions.
In case of a dispute, courts and arbitrators will look at: 1) the sales
contract, 2) who has possession of the goods, and 3) what payment, if
any, has been made.
Incoterms Do . . .

Incoterms 2000 may be included in a sales contract if the parties

desire the following:
(1) To complete a sale of goods.
(2) To indicate each contracting party’s costs, risks, and obligations with
regard to delivery of the goods as follows:
(3) To establish basic terms of transport and delivery in a short format.
Incoterms Do Not . . .
Not sufficient on their own to express the full intent of the parties.
They will not:
Apply to contracts for services.
Define contractual rights and obligations other than for delivery.
Specify details of the transfer, transport, and delivery of the
goods.
Determine how title to the goods will be transferred.
Protect a party from his/her own risk of loss.
Cover the goods before or after delivery.
Define the remedies for breach of contract.
 4. The Structure of Incoterms 2000
Group E EXW Ex Works Departure (... named place)
Departure
Group F FCA Free Carrier Main carriage unpaid (... named place)
Main Carriage FAS Free Alongside Ship (...named port of shipment)
Unpaid FOB Free On Board (... named port of shipment)

Group C CFR Cost and Freight Main carriage paid (... named port of
Main Carriage destination)
Paid CIF Cost. Insurance and Freight (... named port of destination)
Carriage Paid To (... named place of destination)
CPT
Carriage and Insurance Paid To (…named place of
CIP
destination)

Group D DAF Delivered At Frontier ( a named place)

Arrival DES Delivered Ex Ship (... named port of destination)
DEQ Delivered Ex Quay(... named place of destination)
DDU Delivered Duty Unpaid (... named place of destination)
DDP Delivered Duty Paid (... named place of destination)
 The respective obligations of the parties
under all the terms of Incoterms 2000
Seller A1-A10 Buyer B1-B10
A1 Provision of goods in conformity with the contract B1 Payment of the price
A2 Licenses, authorization and formalities B2 Licenses, authorization and formalities
A3 Contract of carriage and insurance B3 Contracts of carriage
A4 Delivery B4 Taking delivery
A5 Transfer of risksB1Payment of the price B5 Transfer of risks
A6 Division of Costs B6 Division of costs
A7 Notice to the buyer B7 Notice of the seller
A8 Proof of delivery, transport document B8 Proof of delivery, transport
or equivalent electronic message document
A9 Checking, packaging, marking or equivalent electronic message
A10 Other obligations B9 Inspection of goods
B10 Other obligations
 《 2000 年通则》规定的买卖双方的义务

卖方义务 买方义务
A1 提供符合合同的货物 B1 支付货款
A2 许可证、核准书和手续 B2 许可证、核准书和手续
A3 运输和保险合同 B3 运输合同
A4 交付货物 B4 收取货物
A5 风险转移 B5 风险转移
A6 费用划分 B6 费用划分
A7 通知买方 B7 通知卖方
A8 交货证明、运输单据或具 B8 交货证明、运输单据或
具
有同等效力的电子信息 有同等效力的电子信
息
A9 检验、包装、标记 B9 货物检验
A10 其他义务 B10 其他义务
 5 Modes of Transport of Incoterms
EXW
. All modes of transport FCA
CPT
including multimodal transport CIP
DAF
DDU
DDP

FAS
Sea and inland FOB
waterway transport CFR
CIF
DES
DEQ
 6. Notes on Incoterms

(1) Underlying Contract

(2) EXW and FCA
(3) EDI
(4) Insurable Interest
(5) Customs of the Port or Trade
(6) Precise Point of Delivery
(7) Export and Import Customs Clearance
(8) Added Wording
(9)
6 Packing
(10) Inspection
(11) Passing of Risks and Costs
Passing of risks and costs under INCOTERMS 2000
Passing of risks and costs under INCOTERMS 2000
 7. The Most Frequently Used Trade Terms

FOB, CFR and CIF are the three traditional

trade terms that are widely used in
international trade. With the development of
transportation technology, FCA, CPT and CIP
have also developed based on FOB, CFR and
CIF. The former three trade terms apply to
ocean carriage whereas the latter three can
be used for all modes of transport, but are
particularly suitable for container transport
and all forms of multimodal transport. These
terms are universally used in international trade.
1. FOB (Free on Board ) (…named port of shipment)

Definition:
The seller delivers when the goods pass the ship’s rail at the
named port
of shipment. This means that the buyer has to bear all costs and
risks of
loss of or damage to the goods from that point. The FOB term
requires the
seller to clear the goods for export.
 Obligations of the parties under FOB

Buyer’s obligations
Seller’s obligations
B1 Payment of the price
A1 Provision of goods in conformity
B2 Licenses, authorization and formalities
with the contract
A2 Licenses, authorization and formalitiesB3 Contracts of carriage and insurance
A3 Delivery B4 Taking delivery

A4 Transfer of risks B5 Transfer of risks

A5 Division of Costs B6 Division of costs

A6 Notice to the buyer B7 Notice of the seller

A7 Proof of delivery, transport document B8 Inspection of goods
or equivalent electronic message
A8 Checking, packaging, marking
 Variations of FOB Term

As the loading of the goods is a continuous process,

sometimes it is hard to use the ship’s rail as a point to
divide responsibilities and costs. To avoid dispute,
there are several derived price terms:
(1)FOB Liner Terms
(2)FOB Under Tackle
(3)FOB Stowed FOB 班轮条件（ FOB liner terms ）：装船费
用由支付运费的买方负担；
(4)FOB Trimmed FOB 吊钩下交货（ FOB under tackle ）：从
货物被轮船吊钩起吊开始的装船费用由买方
负担；
FOB 包括理舱（ FOB stowed, FOBS ）：卖方
负担将货物装入船舱并包括理舱费在内的装
船费用。
FOB 包括平舱（ FOB trimmed, FOBT ）卖方
负担 将货物装入船舱并包括平舱费在内的装
船费用。
2. CIF (Cost, Insurance and Freight) (…named port of destination)

Definition:
The seller delivers when the goods pass the ship’s rail in the port
of shipment. The seller must pay the costs and freight necessary to
bring the goods to the named port of destination. But the risk of
loss or damage to the goods, as well as any additional costs due to
events occurring after the time of delivery, are transferred from the
seller to the buyer. However, in CIF the seller also has to procure
marine insurance against the buyer’s risk of loss of or damage to
the goods during the carriage. Consequently, the seller contracts
for insurance and pays insurance premium.
 Obligations of the parties under CIF
Seller’s obligations Buyer’s obligations
A1 Provision of goods in conformity B1 Payment of the price
with the contract
B2 Licenses, authorization and formalities
A2 Licenses, authorization and formalities

A3 Contracts of carriage and insurance B3 Taking delivery

A4 Delivery B4 Transfer of risks

A5 Transfer of risks
B5 Division of costs
A6 Division of Costs
A7 Notice to the buyer B6 Notice to the seller
A8 Proof of delivery, transport document
B7 Proof of delivery, transport document or
or equivalent electronic message
equivalent electronic message
A9 Checking, packaging, marking
B8 Inspection of goods
Variations of CIF Terms
CIF Liner Terms (CIF 班轮条件 )
It denotes that the loading and unloading charges are
met by the shipping
company or specifically the exporter.
CIF Landed (CIF 卸到岸上 )
It means that unloading costs, including ligherage and
wharfage are borne
by the exporter.
CIF Ex-ship’s hold( CIF 舱底交货 )
It states that the importer pays for the unloading
charges.
3. CFR (Cost and Freight) (… named port of destination)

Definition:
The seller delivers when the goods pass the ship’s rail in the port
of
shipment. The seller must pay the costs and freight necessary to
bring the
goods to the named port of destination but the risk of loss of or
damage
to the goods, as well as any additional costs due to events
occurring after
The difference between CIF and CFR ：
the time of delivery, are transferred from the seller to the buyer.
The
Under CFRthe seller is not obligated to arrange marine insurance
CFR,
term requires
against the
the risk of seller
loss to damage
of , or clear the
to goods for export.
, the goods in transit. The buyer
is obligated to arrange insurance and pay the insurance premium.
The nature of performance of a CIF contract
 It is sale of documents rather than goods.
Three stages of delivery in a CIF contract,
i.e. “provisional delivery” on shipment, “symbolical delivery” on tender of
the documents, and “complete delivery” when the goods are handed over to
the buyer,
 The contractual obligation of delivery is satisfied just by delivery of
documents and not by actual physical delivery of the goods.
 The buyer cannot refuse the documents and ask for the actual goods, nor can
the seller withhold the documents and tender the goods they represent.
 On presentation of the shipping documents, if they are complete and regular,
the buyer is bound to pay the price, irrespective of the arrival of the goods.
 Whatever happens to the goods in transit, the bill of lading and the insurance
policy provide an almost complete, continuous cover from the port of
shipment to the port of destination.
Follow-up Practice
1 Review and Discussion Questions
1) What are trade terms? Why are they used in international trade?
2) Ｗ hat is the meaning of Incoterms? What is the significance of
using Incoterms?
3) What are the benefits of organizing the terms in Incoterms 2000
into four basic groups?
4) What are the differences between FOB and CFR?
5) Why does an export price need to contain a measuring unit, unit
price, employed currency and trade term?
6) Why is it advisable to use CIF in export and use FOB in import?
2 Match the trade terms under INCOTERMS 2000 with their Chinese equivalents

a. EXW (EX Works) 1. 船边交货

b. FAS (Free Alongside Ship) 2. 运费付至
c. FCA (Free Carrier) 3. 目的港船上交货
d. FOB (Free On Board) 4. 未完税交货
e. CFR (Cost and Freight) 5. 工厂交货
f. CIF (Cost, Insurance and Freight) 6. 货交承运人
g. CPT (Carriage Paid To) 7. 运费、保险费付至
h. CIP (Carriage and Insurance Paid To) 8. 装运港船上交货
i. DAF (Delivered At Frontier) 9. 成本加运费
j. DES (Delivered Ex Ship) 10. 目的港码头交货
k. DEQ (Delivered Ex Quay) 11. 完税后交货
l. DDU (Delivered Duty Unpaid) 12. 边境交货
m. DDP (Delivered Duty Paid) 13. 成本、保险费加运费
3 Describe the differences and similarities of the following three trade
terms and complete the table below.

Risks Obligations Costs

Who is responsible for Who charters the Who arranges Who pays all Who pays the
Trade all risks after the goods ship and books marine costs and insurance
terms pass the ship’s rail at insurance? freight to the
the loading port? shipping space? port of premium?
destination?

FOB

CFR

CIF
.4 Choose the right answer from each of the following.
1) Incoterms are a standard set of terms and abbreviations developed by _______.
A. the International Law Association
B. the International Chamber of Commerce
C. the United Nations Conference on Trade and Development
D. the United Nations Commission on International Trade Law ]
2) In the international trade practices regarding trade terms, which of the following is the most influential and widely used
_______.
A. Hague Rules 《海牙规则》
B. Warsaw-Oxford Rules 1932
C. Revised American Foreign Trade Definitions 1941
D. Incoterms
3) INCOTERMS2000 includes _________ trade terms.
A. 6 B. 12 C 13 D.14
4) As far as risks taken by the seller are concerned,
A. CIF is bigger than CFR. B. CIF is as the same as CFR.
C. CFR is bigger than CIF. D. FOB is bigger than CFR.
5) The term FOB should be followed by:
A. point of origin B. port of importation
C. port of discharge D. port of exportation
6) The term CIF should be followed by:
A. point of origin B. port of shipment
C. port of destination D. port of exportation
7) The term CFR should be followed by:
A. point of origin B. port of shipment
C. port of destination D. port of exportation
8) The term EXW should be followed by:
A. point of origin B. port of shipment
C. port of importation D. port of exportation
9) The term DAF should be followed by:
A. point of origin B. port of importation
C. place of destination D. port of shipment
10) The term FAS should be followed by:
A. point of origin B. port of destination
C. port of shipment D. port of exportation
11) The term DES should be followed by:
A. point of origin B. port of shipment
C. port of exportation D. port of destination
12) The term DEQ should be followed by:
A. point of origin B. port of loading
C. port of destination D. port of shipment
13) The term FCA should be followed by
A. point of origin B. seller’s place of shipment
C. buyer’s place of shipment D. buyer’s railway station
14) The term DDP should be followed by:
A. point of origin B. port of shipment
C. port of buyer’s premise D. place of destination
15) Which of the following prices quoted is correct?
A. US$1000 per M/T CIF USA B. US$ 200 per ton CIFC3 New York
C. US$150 per case CIF D. US$ 100 per doz. CIFC3 New York
 5. Decide whether the following statements are true or false.
1) If the seller agrees to deliver the goods to a ship, but not to pay for loading
them, the term is FOB. ( )
2) Under FOB, the seller must bear all risks of loss of or damage to the goods
until such time as they have passed the ship’s rail at the named port of shipment.
( )
3) The only difference between CFR and CIF is that under a CFR contract the buyer
must purchase a marine insurance contract to cover the goods while they are on
the voyage. ( )
4) Under CFR, the seller must pay the usual freight rate and any additional costs that
arise en route. ( )
5) The terms FOB, CFR and CIF are applicable to all modes of transport. ( )
6) DAF is only adopted when two countries have land-connected borderline. ( )
7) Each term has a “liability point”, which means that costs and risks are all moved
over to another party from that very point. ( )
8) EXW contract is called "physical delivery" while CFR is “symbolic delivery”.( )
9 ） CFR states that the exporter is obligated to make all necessary arrangements to
ship the goods all the way from the exporter’s premises to the named port of
debarkation. ( )
10 ） Under CIF the seller also has to procure marine insurance against the buyer’s
risk of loss of or damage to the goods during the carriage. ( )
Case Study

A Chinese exporter signed a CFR contract with an importer in America on

canned meat for an amount of US$ 50, 000, with payment by D/P at sight.
On the morning of May 5, 2006, the goods were all loaded onto the named
vessel. The Chinese salesperson in charge of this contract was so busy
that he forgot to send the buyer the shipping advice until the next morning.
Unexpectedly, when the American importer went to the local insurance
company to insure the goods, the insurance company had already learned
that the ship suffered a wreck on May 6 and refused to insure the
shipment. The American importer immediately sent a fax to the Chinese
exporter reading as follows: “Owing to your delayed shipping advice, we
are unable to insure the goods. Since the vessel has been destroyed in a
wreck, the loss of goods should be for your account. At the same time, you
should compensate our profit and expense losses which amount to US$
50, 000”. Soon all the shipping documents sent through the collecting bank
were returned to the Chinese exporter, for the reason that the importer
refused to take up the shipping documents.
Case Study

A Chinese international trade company exported a batch of

walnuts to England on the basis of CIF London. As it was a
seasonal commodity, it was stipulated in the contract that
the covering L/C should reach the seller before the end of
September. The seller guaranteed that that the vessel
would reach the port of destination not later than December
2. If the vessel reached the port of destination later than
that day, the buyer was entitled to cancel the contract. In
case the payment had been made, the seller should return
the payment to the buyer. Then, where do you think the
crux lies in this case?
Web Links
http://www

1. http://www.exporteam.com 合众出口网
2.http://www.intl-trade.com 国际贸易
3.http://www.iccwbo.org 国际商会
4.http://www.mofcom.gov.cn 中国商务部
5.http://www.chinaintertrade.com 中国国际贸易网
6. http://www.tradehr.com 外贸英才网