All international trade transactions have two key parties: the buyer and seller. Depending on which side of the trade you’re standing on, you have your own interests to look out for and protect, which means you’ll want to trade under conditions that are favorable to you.
In any international commercial contract, an Incoterm under which the transaction will take place must always be defined. Incoterms are are a set of pre-defined international rules published by the International Chamber of Commerce which determine the contractual clauses to be used. In other words, they define the conditions of the transport of cargo, including the varying degrees of responsibilities of the buyer and the seller.
There are a total of 11 Incoterms to choose from. But if you are a cargo buyer/importer, there are certain Incoterms that play in your favor. You should choose the Incoterm that provides you the greatest control over shipping costs. Choosing the best Incoterm for a buyer may be tricky as the ultimate decision will depend on many factors, including your relationship with your seller and the resources you have.
Here are the best Incoterms for buyers.
Under the FOB Incoterm, the seller/exporter will leave the goods at the port of origin, prepared and ready for international transport. The exporter will have taken care of all formalities and paperwork. You, as the buyer, will be in charge of hiring the international shipping services. This gives you absolute control of all expenses and coordination of the cargo delivery to your final destination. One strong advantage of choosing the FOB Incoterm is the flexibility it gives you. You will be the one to choose the shipping routes and times and are able to negotiate prices with your freight forwarder. This is the most recommended Incoterm for importers and buyers.
The EXW Incoterm is another good option for buyers. However, extra care should be taken when trading under this Incoterm as it should be used only in cases where the buyer is familiar with the import laws of the country. Your freight forwarder should also be present in the country to prevent complications. If you’re not 100% comfortable and familiar with the laws and regulations, you should avoid using the EXW Incoterm. In such a scenario, the better option would be to have the goods to delivered at port, from where you can work with an agent of your provider to get them delivered to the final destination.
The DAP Incoterm allows you to buy/import as cheaply as possible and it involves few responsibilities and risks in general for the buyer. However, the disadvantage lies in not having much control over the ocean freight. As a buyer, having the liberty to decide puts you in the driving seat and allows you to save costs. Weigh the pros and cons properly before deciding on whether this Incoterm is the best option as you may end up losing more than you gain simply due to the lack of control.
When negotiating an Incoterm with your supplier, keep in mind that whatever Incoterm is best for you is probably the worst for him and vice versa. Your supplier will likely also be fighting for the best Incoterm for his role as a seller. Try to come to a mutual understanding and make sure all points are clearly defined to avoid problems.
"The problem with these costs is that they’re often impossible to predict and are thus hardly ever considered when analyzing and comparing ocean freight rates"
Klaus Lydsal, vice president of operations at iContainers