Explained about basic INCOTERMS for beginners! EXW/FOB/CFR/CIF/DAP/DDP.

📝Introduction

This video is presented by HPS Trade, a Japanese freight forwarder in Thailand. In this session, we will explain Incoterms to help you understand them better. Incoterms are trade terms and conditions represented by three-letter abbreviations, such as CFR and FOB. There are a total of 11 Incoterms. It may not be easy to remember all of them, but don’t worry—this beginner course will focus on the six most commonly used Incoterms. It’s okay to learn the remaining terms after you’ve mastered these six basics.

❓What’s INCOTERMS?

First of all, what are Incoterms? It’s crucial to understand this concept. Incoterms clearly define who pays the freight at different stages of cargo delivery and who is responsible for the cargo during those stages between the sellers and buyers. Understanding these two points is essential.
In international trade, there are various steps and procedures involved in the delivery of cargo. Incoterms help outline the scope of payment and the timing of cargo release during these steps. When cargo issues arise, it can be challenging to have a successful business deal unless both the seller and buyer mutually recognize and adhere to clear rules to avoid disputes. For this reason, deals must be made based on international rules.

🔄6 INCOTERMS to be used often

In this session, we will explain six basic Incoterms commonly used in trade business: EXW, FOB, CFR, CIF, DAP, and DDP. These six terms will be our focus today, and we will explain each one in detail.

🏭EXW (Ex-Works)

First, let’s discuss EXW, also known as Ex Works. In this term, the seller passes the cargo to the buyer at the factory in the exporting country. The buyer, or importer, is responsible for all payments, such as transportation fees, from the factory to the delivery location at the importing site. The responsibility for the cargo shifts from the seller to the buyer as soon as the seller loads the cargo from the factory into the containers. In other words, Ex Works is the simplest trade condition for the seller.

🚢FOB (Free on Board)

Next is FOB. Under FOB, the responsibility for the cargo transfers from the seller to the buyer once the cargo is loaded onto the vessel at the exporting side. The seller pays for local transportation costs on the exporting side, while the buyer pays the ocean freight and delivery fees at the importing side. In these terms, the next one to consider is CFR.

💰CFR (Cost and Freight)

CFR, short for “Cost and Freight,” is a term where the seller pays all freight costs from the factory at the exporting side to the port at the importing side. The importer pays the remaining costs, such as the shipping fee and transportation fee from the importing port to the delivery place. Before discussing the shift in cargo responsibility under CFR, let’s move on to CIF.

💼CIF (Cost, Insurance, and Freight)

CIF is similar to CFR, where the seller pays all freight costs from the factory at the exporting side to the port at the importing side. The difference between CFR and CIF lies in insurance. In CIF, the “I” stands for insurance, meaning the seller must arrange insurance for the cargo delivery.
When discussing the cost and cargo responsibility under CFR and CIF, both terms require the exporter to cover the delivery cost from the factory at the exporting side to the port at the importing side. However, the responsibility for the cargo, like under FOB, shifts from the exporter to the importer once the cargo is loaded onto the vessel. This point can lead to confusion, so please be careful to remember it.
Regarding insurance, in international logistics, cargo is handled by cranes, swung onto vessels, and takes a long voyage to reach the importing side. In container vessels, there are often containers carrying dangerous goods. We’ve occasionally heard stories about dangerous cargo catching fire and burning other containers. Unfortunately, no one guarantees the cargo if insurance is not obtained. It is much more secure to have insurance, as no one can predict what might happen in international logistics. We strongly recommend our customers always get cargo insurance.

📍DAP (Delivered at Place)

The fifth term is DAP. Under DAP, the seller pays all costs and takes all responsibility for the cargo until it is delivered to a specified location. This trade term is also known as “door-to-door.”

🏁DDP (Delivered Duty Paid)

Finally, let’s look at DDP. DDP is similar to DAP in that the seller arranges all logistics from the factory on the exporter’s side to the specific delivery place on the importer’s side. The seller, or exporter, covers both delivery costs and cargo responsibility until the cargo reaches the specific delivery place in the importing country. The main difference between DAP and DDP is the payment of import taxes—whether they are paid by the exporter or the importer.

⚖️Payment and Responsibility

In DAP, import customs taxes and consumption taxes are paid by the importer. On the other hand, under DDP, the seller, as the exporter, pays both import customs taxes and consumption taxes. The seller bears all transportation costs, including taxes.

📚Summary

Now, let’s summarize the cost and responsibility in Incoterms:
📝 Ex Works (EXW): The importer arranges all logistics from picking up the cargo at the factory to delivery at the importer’s location. The importer pays all delivery costs and takes full responsibility for the cargo.
📝 Free on Board (FOB): The exporter covers the cost and responsibility until the cargo is loaded onto the vessel at the exporting side. The importer then handles all costs, including ocean freight and delivery fees to the importing site, and assumes responsibility for the cargo.
📝 Cost and Freight (CFR) / Cost, 📝 Insurance, and Freight (CIF): The exporter pays all costs for the cargo until it reaches the importing port. The importer pays the local costs in the importing country until the cargo reaches its final destination. The responsibility for the cargo shifts from the seller to the buyer once it is loaded onto the vessel.
📝 Delivered at Place (DAP) / 📝 Delivered Duty Paid (DDP): The exporter takes on all delivery costs and cargo responsibility until the cargo is delivered. Under DAP, the importer pays the taxes, while under DDP, the exporter covers the taxes.

📚Conclusion

How was our explanation of Incoterms? These six Incoterms are very commonly used. The decision to use a particular Incoterm depends on the agreement between the seller and buyer in all trade terms and conditions. If you work at a manufacturing or trading company, you need to consider which trade terms offer the most advantages for your logistics. If you work at a forwarding company, it’s crucial to understand these trade terms and conditions thoroughly so you can make the best suggestions to your customers.
Understanding these concepts isn’t too difficult once you grasp them. On this channel, I explain international logistics knowledge to enhance your understanding. I hope this video will support your logistics job. If you have any shipments from or to Thailand, please feel free to contact me. I’m also motivated to keep updating these videos, so if you subscribe, press like, or leave a comment, it would be much appreciated. Thank you, and see you next time!

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