Incoterms for first-time food exporters

Incoterms (International Commercial Terms) are a set of rules published by the International Chamber of Commerce so that a buyer and a seller in two countries can agree on three things: who pays for which leg of the journey, at which point the risk of loss or damage passes from seller to buyer, and who handles export and import clearance. For a first-time food exporter, the four terms that come up most are EXW, FOB, CIF and DAP. For a first container, FOB or FCA is usually the easiest to understand and to run.

What Incoterms answer, and what they do not

An Incoterm is three letters followed by a named place, for example FOB and the name of the loading port. Those three letters answer:

• Cost. Who pays for inland transport, port charges, ocean freight, insurance and unloading.
• Risk. If the goods are damaged or lost in transit, from which point onwards is that the buyer's problem.
• Clearance. Who files the export declaration, and who files the import declaration and pays duties.

Incoterms say nothing about the price of the goods, the payment terms, when ownership transfers or the quality of the product. Those belong in the contract. A great deal of confusion comes from assuming the Incoterm covers everything.

The four common terms in plain words

EXW (Ex Works). The seller only has to make the goods available at its own premises. The buyer arranges everything from loading the truck onwards, including export clearance. It sounds light for the seller, but in practice a foreign buyer struggles to clear exports out of Vietnam on its own, so this term rarely suits exported food.

FOB (Free On Board). The seller handles inland transport, export clearance and loading the goods on board the vessel at the named port of shipment. From the moment the goods are on board, risk and cost pass to the buyer: ocean freight, insurance, unloading, import clearance. It is one of the most common terms for sea freight.

CIF (Cost, Insurance and Freight). Like FOB, risk passes when the goods are on board at the port of shipment. The difference is that the seller also pays the ocean freight and buys insurance to the named destination port. The buyer receives one price to its own port, but should remember that CIF insurance is only minimum cover, and that risk at sea is still the buyer's.

DAP (Delivered at Place). The seller carries cost and risk until the goods reach the named place in the buyer's country, ready for unloading. The buyer unloads, clears import and pays duties. It is convenient for the buyer but requires the seller to have reliable transport partners in the destination country.

One note on containers. For containerised goods the rules recommend FCA (Free Carrier) instead of FOB, because a container is handed over at the terminal rather than lifted on board by the seller. Many people still say FOB in practice, but the contract should state which is meant.

Who pays for what: follow the shipment

The easiest way to remember is to travel with the goods:

• Seller's warehouse to port of loading: buyer pays under EXW; seller pays under FOB, CIF and DAP.
• Export clearance: buyer under EXW; seller under the other three.
• Main ocean freight: buyer under EXW and FOB; seller under CIF and DAP.
• Marine insurance: buyer's choice under EXW and FOB; seller buys minimum cover under CIF; seller decides under DAP since it still carries the risk.
• Destination port to buyer's warehouse: buyer under EXW, FOB and CIF; seller under DAP to the named place.
• Import clearance and duties: buyer under all four.

Which term suits a first container

For a new exporter, FOB or FCA has three advantages. The seller handles only the domestic leg it knows best: trucking, export clearance, the port. The buyer uses its own forwarder and agents, who often have better rates. And quotes are easy to compare between suppliers.

CIF works when the buyer wants a single number to its port and the seller has a trustworthy forwarder in Vietnam. DAP should wait until the seller has experience with the destination country. EXW is best avoided for exported food, for the clearance reasons above.

How we quote at Color of Vietnam

We are preparing for export and have not announced a market. When an importer asks for a price on PLAY Nutrition energy bars, we do not send a price list straight away. We ask: which port are you receiving at, who would you like to book the vessel, do you want us to arrange insurance? Only then do we quote on that term, stating the port, the currency and how long the quote is valid. If the buyer is new to Incoterms, we explain using the same journey above. Being honest about what we can and cannot yet do is, for us, part of the quote.

If you are an importer or distributor interested in snacks and nutrition bars from Vietnam, get in touch and tell us your receiving port and the term you usually work with. The conversation is much shorter when both sides speak the same language.