Chapter 2 Trade Terms

By Alvin Arnold,2014-12-31 19:23
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Chapter 2 Trade Terms

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    Chapter 2 Trade Terms

    Trade Terms

    All companies have experienced a dynamic China market in the last five years, but this is just a starting point.



    Former Minister of Commerce of the (贸易?商贸)


    Price of goods in international trade is one of the main provisions in the sales contract. It is the crux(款)(贸贸?

     matter in business negotiations. The buyer and 贸贸)(磋商?贸判)

    the seller have to reach an agreement on price before a contract is signed. Therefore, price is not only the essential condition in concluding a business contract but also the core provision in the sales contract.(核心)

    In international market, prices are affected by various factors. Companies should do market research and make investigations in order to fix properly the prices of imports and exports, because whether the price is fixed appropriately or not relates directly to the economic policies of a country. Therefore, great importance should be attached to the price provisions in the contract. Nevertheless, a sales contract should be based on the principle of equality and mutualbenefit so that (相互的?彼此的)

    international trade can develop soundly.(健全的?贸健的)

    Price of goods in world trade generally refers to the unit price. It is much more complicated than that (贸位)(贸贸的)

    in domestic trade. A unit price consists four parts: (的国内)

    the measuring unit, name of currency, trade terms, and port of destination or shipment.(贸的贸物)

    Section 1 Definition and Function of (功能)

    Trade Terms?贸易贸贸?


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    A: The buyer and the seller in international trade are usually far apart in two different countries or areas. The process of delivering goods and receiving goods (贸送)

    involves a lot of paper work and expenses. For (贸支?贸用)

    example, who will be responsible for inspection, obtaining the import or export license, booking shipping space, taking out insurance and paying relevant charges or expenses? Who will be responsible for the risk of damage to or loss of goods during transit? If the buyer (贸?送运运)

    and the seller, for every transaction, have to negotiate repeatedly about the above-mentioned formalities, expenses will occur and time will be wasted. Consequently, conclusion of the transaction will be postponed, delayed or even cancelled.

    However, through the past practices in international trade for over two thousand years, some basic trade terms have been set up to define the buyer’s and the seller’s respective responsibilities and eliminate any possibility of misunderstanding and subsequent(后的?后的来随)


    Q: Shall the seller and the buyer get familiar with the trade terms?

    A: Yes, exactly.(正地)

    Q: Please explain what the main function of trade (功能)

    terms is.

    A: The main function of trade terms is to facilitate(促

     and promote conclusion of transactions.贸?助)

    Q: What are trade terms?

    A: Trade terms are also called price terms. They are brief expressions or abbreviations. For example, (贸短的)(贸)

    FOB stands for “Free on Board” and CIF stands for “Cost, Insurance and Freight”. They indicate(贸)(指出?表明)

    the formation of the unit price and determine the 2

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    responsibilities, expenses and risks borne by two parties. Furthermore, they also state the time of (贸定?明)

    transferring from one party to the other the risk of, loss of, or damage to the goods.

    Section 2 International Customary(通常的?贸贸

    ?贸贸例? Practices Concerning Trade Terms的)

    Q: What are International customary practices?

    A: International customary practices refer to a set of customary practices and explanations that are (解贸?贸明)

    formed in the long-term processof foreign trade ?贸程?

    transactions and commonly accepted by business people all over the world. International customary practices play a very important role in handling trade disputes?端?贸

    because they can help traders in different countries or ?

    regions avoid or dispel different international of trade ?消除?


    It must be pointed out that up to the present international customary practices are not yet unified(贸一的?一

     as one single law. Therefore, the parties concerned 致贸准的)

    in the contract should specifythe applicable?指定?列贸? ?合适的?

     customary practices which shall have legal effect.适用的?

    Q: How many international customary practices are there?

    A: There are three influential international ?有影的响?

    customary practices concerning trade terms(

    1Warsaw-Oxford Rules 1932

    It explains in detail the nature and characteristic of

    CIF contract and specifies the expenses, responsibilities

    and risks the two parties concerned should bear.

    2Revised American Foreign Trade Definitions (改贸的)


    It defines respectively six trade terms:

    (1)Ex(Point of Origin)


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    (2)FOB(Free on Board)

    (3)FAS(Free along Side)


    (5)CIF(Cost, Insurance and Freight)

    (6)Ex Dock

    3International Rules for the Interpretation of

    Trade Terms 2006 (INCOTERMS2006)

    INCOTERMS 2006 is one with largest contents, widest range of application and biggest impact which clearly stimulatesthe rights and (刺激?鼓舞)

    responsibilities of the seller and the buyer. According

    to INCOTERMS 2006, trade terms are grouped(分贸?分贸)

    into four different categories: E, F ,C, and D.(分贸?贸贸)

    Q: Can you explain in detail the differences between then?

    A: Sure, let’s look at Chart 1.

    Chart 1 INCOTERMS 2006

    Group EEXEX Woks?工厂交?货货Departure(起运)W

    Free Carrier(交承运人)FCAGroup F

    Free Alongside(装运港船交货货货)FASMain carriage unpaid(主运

    未付)FOBFree On Board装运港船上交)

    Group CCFRCost and Freight(成本加运)

    Main carriage unpaid(主运CIFCost Insurance and Freight(成本保加运货货货货货)

    已付)CPT Carriage and Paid To(运付至货货货)

    CIPCarriage and Insurance Paid To(运保货货货货


    Group DDAFDelivered At Frontier(境交易)

    Arrival(到达)DESDelivered Ex Ship(目的港船上交)

    DEDelivered Ex Quay(目的港交货货货货)

    QDelivered Duty Unpaid(未完税交)

    DDDelivered Duty Paid(完税后交)



    1Group E: EXW

    EXW is the only one term in Group E, under which the seller makes the goods available to the buyer at


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    the seller’s own premises such as warehouse, (贸贸贸址)(贸贸)


    2Group F: FCA, FAS and FOB

    The second group (“F” terms) whereby the (什贸)

    seller is called upon to deliver the goods to a carrier(承人)

    appointed by the buyer. According to INCOTERMS 2006,

    each trade term has its “critical points”.

    The “critical points” can be differentiated(分化贸)

    “point for division of risk”, i.e. , “point of delivery” and “point for division of costs”. The “point for division of risk” of the trade terms in Group F coincides with the “point for division of costs”. For example, the “point for division of risk” of FOB term is at the ship’s rail appointed by the buyer at the shipping port, and its “point for division of costs” is also at the above ship’s rail.3Group C: CFR, CIF, CPT and CIP

    The “C” terms whereby the seller has to contract for carriage, but without assuming the risk of, loss of, or damage to the goods or additional costs due to events occurring after shipment and dispatch. Under CIF and CIP terms, the seller has to cover insurance and pay insurance premium. The “point (保贸贸?贸外贸用)

    for division of risk” and “point for division of costs” of the trade terms in Group C are separated, i.e. , “point for division of risk” is at the shipping port(place),while “point for division of costs” is at the destination. However, it must be emphasized that the trade terms of Group C and Group F are the same in that the seller has to fulfill his (履行)

    obligation of delivery at the shipping country or (贸贸?贸贸)

    country of delivery.

    4Group D: DAF, DES, DEQ, DDU and DDP


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    Finally, the “D” terms whereby the seller has to bear all costs and risks needed to carry the goods to the country of the destination.

    Q: What do you mean by “with the exception of EXW and DDP”?

    A: I mean under EXW terms, it is the importer not the exporter who should be responsible for export clearance; under DDP terms, import clearance is the (除)

    seller’s responsibility rather than the buyer’s.

    Q: Thank you.

    Section 3 Six Main Trade Terms in

    INCOTERMS 2006

    Q: According to the above chart, there are altogether 13 trade terms. Which of them are most often used in international trade?

    A: Among the 13 trade terms, FOB, CFR, CIF, FCA, CPT and CIP are the most important and most often used terms in international trade. FOB, CFR, CIF are suitable for sea and island waterway transport; FCA, CPT and CIP are used irrespective of modes of transportation.(不贸的?无贸的)

    Q: What is FOB price?

    A: FOB (Free on Board… named port of shipment), a pricing term under which the seller must deliver the goods on board the ship nominated by the buyer at (被任命的)

    a specified port of shipment within the agreed period. The risk of, loss of, or damage to the goods is transferred from the seller to the buyer when these goods pass over the ship’s rail. The seller should supply the goods in accordance with the contract and provide at his expense any export license or other governmental authorization necessary for the export of goods.

    Q: What is the obligation of the buyer under FOB terms?


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    A: The obligation of the buyer mainly include the


    1.Contract for the carriage of the goods;

    2.Obtain import license;

    3.Cover cargo insurance;

    4.Pay the price as provide in the contract of sales

    and take delivery of the goods.

    Q: What is CFR price?

    A: CFR (Cost & Freight…named port of

    destination ) indicates that the seller will deliver the goods onto a vessel and pay all costs relating to the goods until they have been delivered in accordance with the contract as well as the normal charge to get the time the cargo is placed onto the vessel at the seaport of loading. It is the buyer’s responsibility to cover insurance from the port of origin or port of shipment to buyer’s door.

    Q: What else does the seller have to do under CFR terms?

    A: One more important thing that the seller has to do is to give the buyer sufficient notice that the goods have been delivered on board.

    Q: What is CIF price?

    A: CIF (Cost, Insurance and Freight…named port of destiantion) means the seller pays all the expenses involved in the placing of merchandise on board a vessel and in addition, prepares the freight and insures the goods to an agreed destination.Q: How about the obligations of the buyer?A: Under CIF terms, the buyer’s obligations mainly include the following:

    1.Pay the price against the documents presented by

    the seller;


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    2.Obtain import license;

    3.Bear all risks of the goods from the time when

    they have passed the ship’s rail at the port of


    4.Receive the goods at the agreed port of destination

    and pay additional insurance premium.

    Q: What is FCA price?

    A: FCA (Free Carrier…named place), under this term, the seller must clear the goods for export, and deliver them to carrier at a specific point (特定的?明的)

    determined by the buyer. The buyer then bears all costs and risks of transporting the goods to the desired destination.

    Q: What is the different between FOB and FCA?A: FCA differs from FOB in that the seller fulfils his obligations when he delivers the goods into the custody of the carrier at the named point instead of “at the named port of shipment”.

    Q: So, if the mode of transport is something else rather than by sea, FCA is more suitable than FOB, isn’t it?

    A: Yes, you are right.

    Q: Then, what is CPT price?

    A: CPT (Carrier Paid to…named place of

    destination)means that the seller pays the freight for the carrier of the goods to the named destination. However, the risk of, loss of, or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered to the carrier, are transferred from the seller to the buyer when the goods have been delivered into the custody of the first carrier and not at the ship’s rail.


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    Q: And CIP price?

    A: CIP(Carrier Insurance Paid to…)means that the seller has the same obligations as under CPT terms but in addition to that the seller has to procure transport insurance against the risk of, loss of, or damage to the goods during the carriage. The seller contracts with the insurer and pays the insurance premium.

    Q: I have noticed that the above six terms have many similarities. Am I right?

    A: Yes. That’s because FCA, CPT and CIP are developed based on FOB, CFR and CIF. The basic principle of division of the duty is the same. But, are you clear about their differences?

    Q: No. Please explain.

    A: The differences of FCA, CPT, and CIP can be explained in the following aspects:

    1.Different applicable modes of transportation: FOB,

    CFR and CIP are suitable for any mode of

    transport while FCA, CPT and CIP are suitable for

    any mode of transport including multimodal

    transport such as container or “roll-on-roll-off”

    traffic by trailer and ferries.

    2.Different places of delivery and transfer: under

    FOB, CFR or CIF terms, the “point of delivery”

    is at the ship’s rail which is also the “point for

    division of risk”. Because after the goods have

    passed over the ship’s rail, the risk of, loss of, or

    damage to the goods is transferred from the seller

    to the buyer. But under FCA, CPT or CIP terms,

    the “critical point for division of risk” shall be

    determined according to different modes of



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    3.Different loading and unloading expenses: under

    FOB, CFR or CIF terms, the seller shall bear all

    the expenses, where necessary, until the goods pass

    the ship’s rail at the port of shipment. But in

    FOB, CFR or CIP contracts it should be stipulated

    clearly who shall bear the loading or unloading

    expenses. However, under FCA, CPT or CIP terms,

    it is clear that the loading and unloading expenses

    are include in the freight paid by the seller when

    delivering the goods to the carrier(CPT, CIP) or

    the freight paid by the buyer(FCA).

    4.Different shipping documents: Under FOB, CFR or

    CIF terms, the seller is required to provide the

    buyer with a “clear bill of lading”, while under

    FCA, CPT or CIP terms, the shipping documents

    that the seller has to provide are determined

    according to different modes of transportation.Q: Please give an example.

    A: Sure. If the goods are transported by sea or inland waterway, the seller shall provide a liner B/L or charter party B/L. He may also provide a non-negotiable bill of lading. If the mode of transport like rail, road, air or multimodal transport is used, the seller shall provide a railway bill, road bill, airway bill or multimodal transport documents respectively.

    WORDS AND PHRASES terms 货货货货货货货货货货货易?又称价格?price term?

    2.economic interest 货货利益

    3.crux matter 重要的事情

    4.the point at issue 争的焦点货货货货

    5.constitute 构成

    6.conclude a contract 达成合同


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