Navigating international trade requires a clear understanding of various shipping terms that define responsibilities, costs, and risk transfer points between buyers and sellers. Misinterpreting these terms can lead to unexpected liabilities and financial losses. This guide provides a detailed explanation of 13 essential trade terms to help businesses negotiate contracts effectively.
Trade Terms at a Glance: Risk and Responsibility Comparison
The following table outlines the spectrum of seller and buyer responsibilities across different trade terms, from EXW (minimum seller obligation) to DDP (maximum seller obligation).
| Trade Term | Seller Responsibility | Buyer Responsibility | Risk Transfer Point | Applicable Transport |
|---|---|---|---|---|
| EXW (Ex Works) | Minimum: Only delivers goods at seller's premises | Maximum: Handles all transport, insurance, customs clearance | Seller's location | All modes |
| FCA (Free Carrier) | Delivers goods to buyer's carrier; handles export clearance | Assumes all risks/costs after carrier handover | Designated carrier location | All modes |
| FAS (Free Alongside Ship) | Delivers goods to port vessel side | Assumes all risks/costs after port delivery | Port vessel side | Sea/inland waterway |
| FOB (Free On Board) | Loads goods onto vessel; handles export clearance | Assumes all risks/costs after ship's rail | Ship's rail | Sea/inland waterway |
| CFR (Cost and Freight) | Pays freight to destination port | Assumes risks after ship's rail; handles insurance/clearance | Ship's rail | Sea/inland waterway |
| CIF (Cost, Insurance, Freight) | Pays freight and insurance to destination port | Assumes risks after ship's rail; handles clearance | Ship's rail | Sea/inland waterway |
| CPT (Carriage Paid To) | Pays freight to destination | Assumes risks after carrier handover | Carrier handover | All modes |
| CIP (Carriage and Insurance Paid To) | Pays freight and insurance to destination | Assumes risks after carrier handover | Carrier handover | All modes |
| DAF (Delivered At Frontier) | Delivers goods to border point; handles export clearance | Assumes risks after border delivery | Border point | Land transport |
| DES (Delivered Ex Ship) | Delivers goods to destination port vessel | Assumes risks after port delivery | Destination port vessel | Sea/inland waterway |
| DEQ (Delivered Ex Quay) | Delivers goods to destination port dock | Assumes risks after dock delivery | Destination port dock | Sea/inland waterway |
| DDU (Delivered Duty Unpaid) | Delivers goods to destination (uncleared) | Assumes risks after destination arrival | Destination point | All modes |
| DDP (Delivered Duty Paid) | Maximum: Handles all transport, insurance, customs to destination | Minimum: Only receives goods | Destination point | All modes |
Detailed Analysis of 13 Trade Terms
1. EXW (Ex Works)
The seller's obligation is minimal, requiring only that goods be made available at their premises. The buyer assumes all transportation costs, insurance, and customs procedures. This is essentially a "no responsibility after pickup" arrangement.
2. FCA (Free Carrier)
The seller delivers goods to the buyer's specified carrier and completes export formalities. The precise delivery location affects loading responsibilities. Suitable for all transport modes, including multimodal shipments.
3. FAS (Free Alongside Ship)
The seller places goods alongside the vessel at the loading port. The buyer assumes all subsequent risks and costs. Only applicable for sea and inland waterway transport.
4. FOB (Free On Board)
Among the most commonly used terms, the seller loads goods onto the vessel and completes export formalities. Risk transfers at the ship's rail. For example:
- If cargo falls on deck during loading: buyer's responsibility
- If cargo falls into water during loading: seller's responsibility
5. CFR (Cost and Freight)
The seller pays freight to the destination port, but risk transfers at the ship's rail. The buyer must arrange insurance. Only for sea and inland waterway transport.
6. CIF (Cost, Insurance, Freight)
Similar to CFR but includes minimum insurance coverage by the seller. Risk still transfers at the ship's rail. Only for sea and inland waterway transport.
7. CPT (Carriage Paid To)
The seller pays freight to the named destination, with risk transferring upon carrier handover. Suitable for all transport modes.
8. CIP (Carriage and Insurance Paid To)
Similar to CPT but includes insurance coverage by the seller. Suitable for all transport modes.
9. DAF (Delivered At Frontier)
The seller delivers goods to a specified border point after export clearance. Primarily used for land transport.
10. DES (Delivered Ex Ship)
The seller delivers goods onboard at the destination port without import clearance. Only for sea and inland waterway transport.
11. DEQ (Delivered Ex Quay)
The seller delivers goods to the destination port dock without import clearance. Only for sea and inland waterway transport.
12. DDU (Delivered Duty Unpaid)
The seller delivers goods to the destination without completing import formalities or unloading. Suitable for all transport modes.
13. DDP (Delivered Duty Paid)
The seller assumes maximum responsibility, including all transport costs, insurance, and import clearance. Not advisable if the seller cannot obtain import licenses.
Selecting Appropriate Trade Terms
Term selection depends on negotiation leverage, risk appetite, and market knowledge. Generally:
- More seller responsibility may reduce profit margins but increase order potential
- Buyers must balance cost control with risk exposure