Shipping 101: Incoterms for Importers
If you’re importing goods from one country to another, it’s vital that you know about Incoterms, i.e. the different shipping options available to you.
You might be working with an experienced supplier or agent who will manage everything for you, but it’s worth being aware that this does not happen with everyone.
And this is particularly important to be aware of when you’re working with new suppliers from sites like Alibaba or DHGate.
When you’re building a relationship with a new supplier, it’s worth being cautious and checking that everything is sorted – from the moment your products leave the factory, to when it will arrive at your chosen destination.
Because if you don’t have everything confirmed, you risk your products getting stuck in customs, incurring fines, and being shipped back to the origin.
So in this article, you’ll learn about the different shipping methods, what Incoterms are, and the three most popular Incoterms for importers – along with their pros and cons. It aims to equip you with the knowledge you need to confidently negotiate your shipping options and costs, and ensure your products arrive safely.
So, let’s get into it!
What are Incoterms?
Incoterms (International Commerce Terminology) are internationally-recognized terms used by all importers and exporters throughout the world.
The main purpose of these Incoterms is to define the roles of the buyer and seller in each individual transaction.
Simply put, Incoterms are the shipping terms that you agree upon with your supplier.
They lay out the responsibilities of the buyer and seller, i.e. you as the buyer, and your supplier who is the seller. They define when the ownership and responsibility transfer from the seller to the buyer. This is crucial because you need to know who is responsible for the cargo at which stage of the shipment.
Negotiations on the Incoterms and prices are usually done when the supplier sends the quotation for your products.
If your supplier doesn’t mention how they will ship the goods, make sure you ask so that you know your stock will safely arrive.
There are 12 Incoterms available – however, this article will discuss just the three most popular Incoterms for importers: EXW, FOB, and DDP. We’ll also share the pros and cons of each, to help you make the best decision for your importing needs.
EXW – Ex Works
The first and most basic Incoterm is Ex Works (EXW). With this one, the buyer is completely responsible for the shipment.
The factory gets the goods ready, places it in their loading dock, and informs you that the goods are ready for pick up. Their responsibility ends there – from there on, you are on your own.
In short, EXW places the maximum obligation on the buyer and the minimum obligation on the seller.
The ownership of the goods transfers when you pick up the goods in their factory. You are then responsible for:
- Getting it from the source to the country’s port
- Handling air or sea freight (including paying for the corresponding duties and taxes)
- Monitoring its’ arrival in your country’s port
- And getting it to your warehouse.
- You get the lowest price from the supplier, precisely because you hold the responsibility and do all the work for the shipment.
- Most experienced importers might get EXW, because they already have the contacts in the country of source, so they have more control over the shipping costs.
- If you work with a reputable and experienced freight forwarder, EXW has the lowest risk for shipment. This is particularly useful if you are not sure if the supplier has any exporting experience. You know that your order is in good hands.
- It gives you the most control – if you want it. If you’re moving large amounts of goods anyway, you might want to consider EXW to get the best bottom line price from your supplier.
- Having the most control means you do all the work. You are responsible for getting the goods from their warehouse to yours. This could be difficult if you do not have any contacts in the source country.
- The bottom line price is cheaper, but all trucking and shipping costs will be shouldered by you (or will be billed to you by your forwarder). This includes everything needed to get it out of their country into yours, including the paperwork. Aside from freight costs, you will be paying for port fees, customs and export fees, etc., not to mention you’ll be the one dealing with the ports and customs officials.
- You also shoulder “export risk”. If you’re not careful, and you haven’t done your research, you might be surprised that what your importing is a regulated commodity, meaning the local government could have tight controls on the product. This would result in exorbitant fees that your supplier might have not mentioned to you.
2. FOB – Free/Freight on Board
Free on Board (sometimes Freight on Board), or FOB, means that the seller is responsible to deliver the goods to the port, usually within their own country.
The Incoterm will also include a reference of the major port it will be delivered to. For example, if you are importing from China, some Incoterms could be FOB Shanghai, FOB Ningbo, etc.
Basically, the supplier is responsible for:
- Taking the goods to a port of your choosing
- Paying the export licenses and all associated fees for the shipment
- Paying the fees and labor to get the goods on the container.
Under this term, the seller shoulders all costs and risks up to the point the items are loaded onto the vessel.
- The most cost-effective, and most value for your money, since you will only be dealing with getting the goods when it reaches your home country. Most of the time, the supplier has contacts in their own country that would move the goods from their factory to the ports.
- If you work with a forwarder, they will be charging you less because they will be splitting the freight cost with the supplier, but you’ve still got the assurance that your shipment will be taken care of.
- You don’t have to deal with the source country’s government, and you will be spared all the necessary paperwork on their end.
- This Incoterm adds an extra layer of responsibility for the supplier. Yes, you will be paying them to handle it, and most suppliers are experienced with shipping so you shouldn’t encounter too many problems. However, this means you need to be in close coordination with the supplier as they ship your order.
- You have to be sure that they know what they are doing and have the experience – or you could encounter unnecessary delays with your shipment.
- You will be losing a little bit of control over the shipment. You just have to wait and trust your supplier and/or your forwarder.
- You have to be wary of the “haggling culture” of the source country. If you’re not used to it, it could be confusing. China is a good example of this, the Chinese love to negotiate. Since they’re paying for the labor to load the shipment, they will sometimes haggle with you or your forwarder so they can increase their profit. Nothing to worry about, just don’t be surprised if they do this. You can haggle back if you think what they’re asking for is too much!
3. DDP – Delivery Duty Paid
Probably the most convenient, especially if you’re working with a very competent supplier, is Delivery Duty Paid (DDP). For this Incoterm, the supplier is responsible for the entire shipment.
In contrast with FOB, DDP means that the supplier will pay even for the taxes and duties of the shipment when it arrives in your country. Depending on the negotiation, the supplier could even shoulder shipping from your country’s port to your own warehouse.
Under DDP, the supplier processes all the export and import customs, ensuring that the product will be unloaded at the agreed-upon place. All you have to do then is to just get the shipment (if it’s not going to be delivered to your warehouse already).
In short, DDP places the maximum responsibility on the seller and the minimum responsibility on the buyer.
- The easiest arrangement, especially for importers who have little to no experience.
- The best customer experience, as DDP is a cross-border option that takes all fees into consideration upon negotiation with the supplier for the goods. All shipping costs are included in the agreed-upon price in the contract of sale.
- It provides the most protection for the buyer, as the seller assumes all risks and shipping costs of the products. All international fees are to be shouldered by the seller.
- It is in the supplier’s best interest to make sure that the customer actually receives what they ordered, as ownership of the goods only transfers at the named destination. If it doesn’t get to the agreed-upon destination (due to any mishap), the seller will shoulder the loss.
- As the supplier shoulders all costs, DDP will probably be the most expensive arrangement. To avoid unnecessary charges, ask for a breakdown of charges so you know exactly what you are paying for.
- If you’re shipping to Amazon, make sure you are working with a capable seller. Amazon has a specific process for shipping. Be wary of some Chinese companies who do not include customs clearance and port fees at the destination, as well as those who do not have experience with shipping direct to the Amazon FBA warehouse.
- Since you place the maximum responsibility on the seller, you have to be extra careful that you are working with a company that is reputable and experienced. You run the risk of not getting your shipment on time (or not at all).
An additional note on DDP – yes, it is the most convenient, but make sure that all costs are clearly defined in the contract so you don’t get surprised with additional charges.
The other thing to mention is if you’re willing to get DDP, a close alternative is Delivery Duty Unpaid, or DDU. It’s like DDP, but you shoulder the customs duties and taxes when it reaches your country. Customs will contact you to get the shipment. This might be worth exploring if you can handle the customs duties and paperwork on your end.
Here’s another table explaining the point of delivery & transfer of risk relating to all the different 12 Incoterms:
The 3 Incoterms discussed above are the most popular and the most convenient for importers.
For importers, the simplest Incoterm is DDP, if you can afford it and if you are sure you are dealing with a credible supplier who can handle the shipping process.
Also, if you can afford it, it’s best to work with a reliable freight forwarder in your country. They are experienced in dealing with suppliers, and they know the customs regulations of your country. A good forwarder should handle everything for you – all fees are laid out upfront, ensuring that you avoid any additional costs.
Whatever you choose, make sure everything that every single arrangement with your suppliers and forwarders is clear. It’s best to be explicit and black and white with everything, and demand the same from them. It’s just good business practice to be clear about expectations.
Hopefully, this crash course on Incoterms helps you negotiate better and with more confidence!