International trade terminology consists of standardized terms used in global commerce to clearly define the responsibilities of buyers and sellers in transactions. These terms help avoid misunderstandings and disputes by establishing clear rules for delivery, payment, and risk transfer.
Trade terms serve several key purposes. First, they clarify delivery obligations between parties. Second, they define exactly when risk transfers from seller to buyer. Third, they specify payment terms and conditions. Fourth, they help reduce transaction costs by providing standardized frameworks that eliminate the need for complex negotiations.
Trade terms are grouped into four main categories based on transportation mode. E terms, like EXW or Ex Works, require the buyer to arrange all transportation. F terms, including FCA, FAS, and FOB, require the seller to deliver goods to a carrier. C terms, such as CFR, CIF, CPT, and CIP, require the seller to contract for carriage. D terms, like DAP, DPU, and DDP, require the seller to bear all costs and risks until delivery.
EXW, or Ex Works, is the simplest trade term where the seller makes goods available at their premises. The buyer is responsible for all costs and risks from that point, including loading the goods onto their transport vehicle. This term places maximum obligation on the buyer and minimum obligation on the seller.
FOB, or Free On Board, requires the seller to deliver goods on board the vessel at the named port of shipment. The risk transfers to the buyer once the goods are on the ship. The seller is responsible for all costs and risks until the goods are loaded onto the vessel, including export clearance.
CIF, or Cost, Insurance, and Freight, requires the seller to pay for costs, insurance, and freight to bring goods to the named port of destination. However, risk transfers to the buyer at the ship loading point in the port of shipment. The seller must also obtain minimum insurance coverage for the goods during transportation.
DDP, or Delivered Duty Paid, requires the seller to deliver goods to the named place in the buyer's country, paying all duties and taxes. The seller bears maximum responsibility, covering all costs and risks until the goods are delivered to the buyer's specified location. This term is often used when the seller has expertise in importing procedures.
Trade terms are crucial for several reasons. They provide legal protection by clearly defining obligations. They help with accurate cost calculation for both parties. They enable effective risk management through defined transfer points. They support efficient logistics planning. And they ensure international standardization, making global trade more predictable and reliable.