Language is one of the complex barriers to international trade as every country may have its own trade language or local trade terms and it was necessary for a common and standardized trade language or commercial terms to be adopted hence the INCOTERMS. INCOTERMS is an acronym for International Commercial Terms whiles some also refer to it as the International Chamber of commerce terms as this terms were adopted by the international chamber of commerce to serve as a standard terms of agreement between the parties involved in international trade (buyer and seller). The International Chamber of Commerce revised the trading terms in 2010 to contain 11 unique commercial terms to be used in any international contract of sale.
These 11 unique terms have been divided into 2 classes, thus those that can be used for any transport mode (EXW, FCA, CPT, CIP, DAT, DAP, DDT) and those that are mostly used for maritime transport only. These article attempts to explain briefly those four terms used for maritime transport only.
- FAS (free alongside ship) — This commercial term requires the seller to make the goods available alongside the selected ship for the carriage of goods by sea. What this means is that the seller who usually doubles as the shipper takes care of all transactions including the inland transportation from the sellers warehouse/factory until the goods get to the origin port ready for loading onto the ship for the carriage of goods by sea. The term “free” means that the seller is free from all liabilities and financial responsibilities once the goods is delivered to the origin port to be loaded. The buyer from this point then assumes responsibility which includes freight, insurance etc till the goods get to the final destination.
- FOB (free on board) — This is one of the most common commercial term used, this requires the seller to take care of all other operations as far as the cargo is concerned until the goods is loaded(on board). The seller is responsible for the cost of inland transportation from the origin country and also takes care of all customs clearance for export .The seller is therefore free from liabilities once the goods are on board the vessel Buyers responsibility and liability begins when goods are onboard the vessel this includes freight, insurance etc .NB, the goods might not literally be onboard but once it has been delivered to the buyers forwarder then the responsibilities of the seller ends and that of the buyers’ begin.
- CFR (cost and freight) — Under this commercial terms of agreements, the seller is responsible for all what the FOB permits but in addition the seller pays for the cost of the sea leg journey (freight). The “C” in this means the cost, thus the overall cost of the goods including packaging, handling and transportation (inland). The buyer from this stage takes care of the insurance of the carriage of the goods by sea.
- CIF (cost, insurance and freight) — This term requires the seller to pay in addition to what the CFR stipulates, the insurance of the goods on its sea leg journey. The buyer then assumes responsibility.
The understanding of this INCOTERMS is very important to prevent international trade conflicts because it spells out the financial responsibilities of the parties involved and also spells out the liabilities in case of damage to cargo at each stage of the entire supply chain. It is important to note that, the more responsibility shifted to the seller, the more cost the buyer would have to incur. Another point worth noting is that, the kind of INCOTERMS selected has nothing to do with payments methods, there are different payments methods used for international transactions as well.