Incoterms

If we look at the extreme ends of the range of terms offered under Incoterms, it seems clear that to expect one party or the other to deal with all aspects of international transport must have its drawbacks. If, for example, you are based in Canada and wish to purchase a consignment of washing machines from a manufacturer in Korea, your obligations under an EXW contract would be quite daunting. You would be responsible for arranging and paying for every stage of the transport chain, even the labour and equipment to load the goods at the manufacturer’s factory. All the risks involved would be your responsibility, and you would be expected to sort out customs formalities for both exporting and importing countries with a minimum of assistance from the seller. Given this burden of cost, responsibility and risk, one might assume that all sellers would prefer to sell on EXW terms and that buyers would refuse to accept any terms other than DDP. The reality is that most goods are sold on terms where both parties have some responsibility for their end of the transport. In the last example, it would almost certainly be easier (and probably cheaper) for the Korean manufacturer to arrange and pay for forklift trucks to load the washing machines on to vehicles and deliver them to the nearest port than for a non Korean-speaking buyer based in a distant continent and time zone to accomplish the same exercise. At the other end of the journey, our Canadian buyer will be in a much better position to deal with import customs entry, duty payments and to co-ordinate delivery to his depots in Toronto and Vancouver than the seller. In addition to purely practical considerations, there may well be advantages to one party or the other in controlling the sea transport leg, cargo handling and insurance. An international seller of goods may well find that the buyers regard his arrangements for all aspects of shipment through to a port in their country to be a valuable service, leaving them only with local arrangements to be made. On the other hand, he can often enhance his profit by his ability to earn additional profit, or at the very least a share of commission on the arrangement of insurance cover and on the sea-freight, especially, if he is used to making such arrangements and has his own shipping department. Never underestimate the power of market forces, however! Under normal, stable market conditions trading partners may well be used to dealing on FOB or CIF terms as a matter of course. A sudden swing in the market for those good may however have a marked effect on the basis of sale. In a sellers’ market the producer is in a position to dictate the terms upon which he is prepared to sell his goods – which will probably be those which will involve the minimum of risk for him and ensure the best and fastest payment method. In a buyers’ market, a seller will be forced to adapt his terms of sale to the buyer’s requirements if he is to stand any chance of doing business. So at the end of the day, the terms on which goods are sold in international markets are a compromise, negotiated in the same way as all the other aspects of the business, between the parties who make the deal.