Incoterms, also known as trade terms, are the essential elements of international contracts of sale and are widely used in trade and commerce. They clarify the parties involved in trade deals regarding what to do for the carriage of goods from buyer to seller and export & import clearance. They also explain the division of costs and risks. ‘Incoterms 2020’ has been in use since 1st January 2020.
What are the Incoterms?
Incoterms, short for “international commercial terms,” is used to make international trade more manageable by helping traders in different countries understand one another.
Incoterms were first developed in 1936 and are updated every ten years to conform to changing environments and adopt current trade practices. Incoterms are trade terms published by the International Chamber of Commerce (ICC), and right now, Incoterms 2020 has been in effect since 1st January 2020. Incoterms are known and implemented by all major trading nations.
What are Incoterms in Amazon?
Amazon Sellers uses Incoterms in product-sourcing contracts. Incoterm clarifies the obligation, method, and place of goods delivery by the product supplier. The most commonly used terms by Amazon sellers are EXW, FOB, and DDP.
Incoterms are only part of the entire export contract, and they don’t say anything about the price to be paid or the method of payment used in the transaction. Whether you are sourcing locally or importing products from any other country, As a seller, you need to have a good understanding of terms and jargon used in international trade. With that, we move on to the terms included as part of Incoterms 2020.
1. EXW ( Ex-Works )
The supplier will only manufacture the product and hand it to the buyer at the seller’s factory/warehouse. The buyer bears all risks and costs starting when it picks up the products at the seller’s location.
2. FCA ( Free Carrier )
The seller manufactures the product and is responsible for delivering the product to a warehouse or place nominated by the buyer within the seller’s country. This term has been clarified further in the Incoterms 2020 rules. Earlier, problems arose with this term when the seller was responsible for loading the goods on a truck hired by the buyer and not directly on the international carrier. Suppose the seller and buyer had agreed to use a credit letter as the payment method for this transaction. In that case, banks often require the seller to present a BOL with an onboard notation before they can get paid. An international carrier won’t typically provide a seller who did not deliver the goods directly to them with such a bill of lading.
Under the new Incoterms 2020 rules, FCA allows the parties to agree in the sales contract that the buyer should instruct its carrier to issue a bill of lading with the onboard notation to the seller.
3. CPT ( Carriage Paid To )
The seller clears the goods for export and delivers them to the carrier or another person stipulated by the seller at a named place of shipment, at which point risk transfers to the buyer. The contract under this term does not include any insurance.
4. CIP ( Carriage And Insurance Paid To )
“Carriage and Insurance Paid to” is similar to CPT but includes insurance which is the seller’s responsibility. Furthermore, as per Incoterms 2020 rule, the seller is responsible for purchasing a higher level of insurance coverage—at least 110% of the value of the goods.
5. DAP ( Delivered At Place )
The seller delivers at the place/warehouse within the buyer’s country. Still, customs duty and import clearance are the buyer’s responsibility.
6. DPU ( Delivered At Place Unloaded )
The seller is responsible for delivering goods to the agreed-upon place. Use this term for any mode of transportation. Import and Custom duty is the responsibility of the buyer.
7. DDP ( Delivered Duty Paid )
The seller delivers the shipment to the buyer’s warehouse with all duties already paid. The buyer is only responsible for unloading and storing the cargo within his warehouse.
8. FAS ( Free Alongside Ship ) [For Sea & Inland Waterway Freight]
The seller clears the goods for export and delivers them alongside the vessel at the named port of shipment. Buyer assumes all risks/costs for goods from this point forward.
9. FOB ( Free On Board ) [For Sea & Inland Waterway Freight]
FOB indicates the placement of cargo on board the ship. The term FOB is used in conjunction with the port name like FOB NINGBO means FOB price with product placement at Ningbo port of China. FOB is used for ports within the seller’s country. After getting the cargo loaded, the responsibility transfers over to the buyer.
10. CFR ( Cost and Freight ) [For Sea & Inland Waterway Freight]
“Cost and Freight” mean that the seller is also responsible for freight charges till the goods arrive at the port of the buyer’s country; however, the risk is transferred to the buyer once the shipment is loaded onto the ship.
11. CIF ( Cost, Insurance, and Freight ) [For Sea & Inland Waterway Freight]
CIP is like CFR; however, insurance is now part of the contract, but under these terms, the risk still transfers to the buyer when the shipment is on board.
Well, now you know your Incoterms! If you have already found a profitable product to sell on Amazon and coordinated with a supplier for product sourcing, then let’s learn how to use the incoterms correctly.
What incoterm to use for Amazon FBA Shipment?
Use DDP for directly sending your small parcel shipment to Amazon FBA. Amazon will not pay custom duties or import fees on your behalf, so DDP is the best-suited term.
However, if you can negotiate better prices with freight forwarders, we recommend EXW or FOB terms with the supplier and subsequent freight handling by the selected freight forwarder.
Schedule a free consulting session by clicking the link below for guidance or clarity in using the incoterms, getting the best freight rates, or ensuring proper shipment prep as per Amazon FBA requirements.