International shipping is a complex and complicated business involving many different cultures, countries, supply chains, and procedures. Incoterms are rules and regulations developed by the International Chamber of Commerce to clearly define the responsibilities of buyers and sellers for the delivery of goods and cargo on the commercial market. DDP (Delivered Duty Paid) Incoterm is one of the categories within the incoterm groupings and is highly recommended for use by exporters.
In 2010, international incoterms were updated and organized by the various modes of transportation used to transport goods. These guidelines for both domestic and international shipping were designed to simplify the language in shipping contracts and to clearly define the obligations for sellers and buyers.
What are Incoterms?
The International Chamber of Commerce (ICC) was founded in 1919, and with it, the goal of facilitating a sales contract for international trade. The acronym Incoterm refers to International Commercial Terms and is a trademark with the International Chamber of Commerce. These rules were established in 1936 because there was no common language to clarify the contracts and shipping agreements among different countries in the world. Since then Incoterms have been used worldwide and have been updated as the need arose. The 100th anniversary of the ICC is this year, and the newest version of the Incoterm rules will be available in 2020.
Icoterms are organized by the mode of transportation, and there are two main categories. In Group I the Incoterms apply to any mode of transportation while in Group II the Incoterms apply only to the movement of cargo on the sea and inland waterways.
The degree of responsibility of the part of the seller and buyer changes in regard to each different incoterm, so each must be aware of these changing obligations. The shipping company of Asiana USA has a great deal of experience with international shipping, and we are an excellent resource for identifying which incoterm is right for the exporter.
Group I Incoterms
EXW (X Works)
X-works is where a buyer receives the goods at the seller’s warehouse. Once the buyer has possession of the goods that have been purchased, the buyer has the sole responsibility of the safe delivery of the cargo to the designated location. This includes all the shipping costs, taxes, and customs fees. The buyer who is very knowledgeable of the shipping business can sometimes save a lot of money if they can employ lower cost shippers than what the seller uses. In this Incoterm the buyer has all of the control but at the same time assumes all of the risks in shipping the product.
FCA (Free Carrier)
When the buyer wants the seller to deliver the goods to a particular location and be responsible for the goods until they arrive then they will use the FCA Free Carrier Incoterm arrangement. Under this agreement the seller transports the goods regardless of the number of different modes of transportation. He must deliver the goods to the designated location, but he does not have to unload the goods. The designated location for delivery must be within the seller’s home country. If the goods have been imported from the U.S, the seller usually assumes the import taxes and fees.
CPT (Carriage Paid To)
If an importer has sufficient resources to handle all of the internal shipping needs, then this Incoterm solution might be used to complete the shipping agreement. With CPT the seller is responsible for the cost of transfer of the goods until they reach the warehouse or other destination the buyer dictates. The seller is also responsible for all of the import taxes and fees, but the seller is not responsible for insuring the goods while in transit. The seller is relieved of all risk for the shipment once the cargo leaves the seller’s country. CPT is a common practice for large importers who have their own network of port transportation resources.
CIT (Carriage and Insurance Paid To)
Like CPT, with this Incoterm, the seller is responsible for the shipment of goods until they leave the port of export. The seller is also responsible for the cost of shipping. The difference between CPT and CIP is that with CIP this requires the seller to assume the cost of the insurance as well. This Incoterm arrangement is ideal for shipping goods in containers, and it can be extended for intermodal shipping where a container might arrive by ship and then be transferred to a truck or a rail car for the next phase of the journey. Intermodal shipping is the term used to describe the use of several different modes of transportation with several different carriers.
DAT (Delivered at Terminal)
A “terminal” under the Incoterm guidelines is any place where goods can be unloaded. This includes a structure built parallel to a waterway (quay), a warehouse, container hub, or container yard. In using the DAT Incoterm arrangement, the seller absorbs the cost of delivering the cargo to the terminal, and he is also responsible for unloading it. On the other hand, the buyer covers the costs associated with the insurance and related shipping fees like taxes and customs fees. In this type of transaction it is very important to identify the exact location of the terminal to ensure the validity of the contract.
DAP (Delivered in Place)
The DAP Incoterm establishes a small difference from the DAT Incoterm. In this agreement, the seller still has the responsibility to transport the goods from the exporter to the port of entry, and then move the goods to the terminal of destination. However the seller does not have to be accountable for unloading the cargo as in the DAT arrangement. Once the shipment is ready for unloading, the risk for the goods transfers to the buyer. The buyer is also billed for the import clearance and any applicable taxes and import fees. Complications with this approach can arise when the goods need to pass through a clearance point at the import location before shipping to the terminal. There is the added risk to the buyer that the cargo will be billed in durrage, which is the extra time it has to sit in port waiting to be shipped.
DDP (Delivery Duty Paid)
As the final category in the Group I Incoterm definitions, the DDP Incoterm carries with it a maximum responsibility for the seller. Under DDP the seller assumes all of the costs and the risks related to shipping and bringing the goods to the buyer’s destination. The seller is also responsible for all the taxes and customs fees and formalities for both exporting and importing the cargo. It can be seen as almost the direct opposite of EXW where the buyer picks up the merchandise at the seller’s door and takes care of the delivery to the buyer’s destination.
The DDP solution is usually for the buyer who does not want anything to do with the costs or control of the entire shipping process. The control of the shipment from exporter to the buyer’s terminal rests with the seller. Unfortunately for the buyer, there may be a case where unexpected costs can be added to the original invoice because the seller lacks an efficient network for handling all of the shipping issues. In some cases, the seller may elect to use a freight forwarder and pass these costs along to the buyer.
Details of the DDP Solution
With a quick glance at the DDP Incoterm it is easy to see that this is the most involved and possibly the most efficient means that an exporter has of shipping cargo from the manufacturing floor to the buyer’s door. A further discussion of the elements of DDP may offer a deeper understanding of everything that is involved in this Incoterm and may also provide a platform for recognizing how the ICC has organized the Incoterms for clarity and logical use.
Under the DDP Incoterm, the seller has to take care of all the types of carriages used for the shipment of the goods. This can include many different modes to ensure that the goods arrive at the destination. In total, the seller covers all of the costs for shipping from the packaging of the goods to the final delivery. In addition, the seller assumes all of the risks for the safe delivery of the cargo.
The seller also has the complete responsibility to meet all export clearance formalities and all export fees and duties, quotas, and special documentation related to the goods being shipped.
Once the cargo is safely exported, the seller has the added responsibility of the import fees, taxes and any special documentation that the buyer may need to complete the import delivery. It should be noted that under a DDP Incoterm neither the buyer or the seller is required under the guidelines to obtain insurance, so it is necessary for this item to be negotiated outside of the DDP solution.
Group II: Incoterms that Apply to Sea and Inland Waterways
FAS (Free Alongside Ship)
In this method of shipping the seller assumes only some of the responsibility for the cost of shipping. Under this Incoterm, the exporter is responsible for clearing the cargo at customs and delivering it to the ship at the point of origin. This method is used for cargo other than containers because containers would be delivered to a warehouse or storage area. Goods like oil, grain, chemicals, liquids, and other bulk cargo would fall into this incoterm method of shipping.
FOB (Free on Board)
When the exporter has the ability to load the cargo directly onto the ship that is transporting it, the FOB Incoterm is employed. The risk for the shipment transfers once the cargo is loaded onto the ship. The key consideration with this Incoterm is the shifting of the liability for the goods from the seller to the buyer. This shift in liability needs to be carefully documented since the value of the cargo is at stake should there be a problem with the ship in transit or other problems unloading the cargo.
CFR (Cost and Freight)
The transfer of the appropriate documentation for the buyer to obtain the goods that have been shipped is the primary reason for the use of the CFR Incoterm solution. The seller is still responsible for transporting the goods to the buyer’s port, and the liability for the goods still remains with the buyer. However, the seller is absolved from the need to provide any insurance to protect the cargo.
CIF (Cost, Insurance, Freight)
At times, a seller will use the services of a freight forwarder to handle the shipping transaction. This CIF Incoterm approach can many times add extra costs to the shipment because of the charges incurred by the forwarder. In addition, the buyer may lose control of communication with the status of the shipment because the freight forwarder is working for the seller. The buyer also has to be aware of other fees that may be charged at the port such custom clearance fees and docking fees. In a CIF agreement the seller will pay for shipping and insurance and promise to deliver the goods to the correct destination. It is necessary to clarify whether the destination means delivery to the port or final delivery so that the goods are in the disposal of the buyer. This is a key consideration for this maximum obligation Incoterm.
The modern aspects of the updated Incoterm rules and regulations apply to all forms of domestic and international shipping. These rules facilitate the creation of contracts and shipping agreements among all of the countries in the world involved in trade. The various categories of these rules have their origins in the mode of transportation, and the originators of the Incoterm rules, The International Chamber of Commerce, has organized these rules in a logical progression based on the respective responsibilities of buyer and seller. At Asiana USA we have a thorough knowledge of how to employ these Incoterms in assisting our clients to choose the best way to ship their products. Call us at 855-500-1808 for a free estimate.