Once a sales agreement has been established between a seller and a buyer in two different countries, there’s another important aspect that needs to be carefully addressed: what is the best way for goods to be transferred from A to B and who pays for what?
There are different factors to look at including the choice of the mode of shipping based on required delivery date and budget, fulfilment duration, pricing, insurance of goods, loading/unloading, import/export duties and the possibility for tracking your package throughout.
There are 4 modes of shipping:
Shipping by sea has been the most popular shipping mode since antiquity. It’s the most affordable yet most time-consuming way of transferring your goods. Maritime trade represents 90% of all international trade, making it a vital aspect for most countries’ economies. Based on the International Chamber of Shipping, there are more than 50.000 ships trading internationally, carrying all types of cargo. This world fleet is registered in more than 150 countries and served by more than 1 million workers and experts of every nationality.
Shipping by land is executed by trains or trucks and it’s usually a relatively faster way than sea transportation and more affordable than air transportation. It’s mainly used between countries in the same continent or large countries like Russia with long rail routes.
Shipping by Air is the fastest and most expensive method of shipping goods. It’s mostly suitable for long distances between continents, when there is a requirement for immediate delivery and when the buyer’s budget allows it.
The combination of the above methods is called inter-modal shipping and is a great way to cut costs and speed-up the process if you use clever combinations.
Since 1936, international commercial terms have been developed by the International Chamber of Commerce (ICC) to be used for international and domestic contracts with the purpose to ease the process of trade between sellers and buyers.
Some of these terms can be used for any mode of shipping (land, sea, air) while others are more commonly used for sea freights. Since 2010 we have the latest edition of the 11 Incoterms used internationally by exporters, importers, transporters, insurers and lawyers. Find below some of the most common ones:
FOB or Free-on-Board: means that the seller/exporter is responsible for carrying the goods to the shipping point and loading them on the vessel at his own expense while clearing the goods for export. Thereafter all costs and risks lie on the buyer who’s responsible for unloading, payment of import duties and other relevant taxes. FOB is mainly applicable for maritime transportation and not for multimodal transportation.
CIF or Cost Insurance and Freight: is a term used in the case that the seller carries the goods and loads them on a vessel while covering the insurance up to that point. From then onwards, costs and risks are all associated to the buyer. It may sometimes mean goods delivered to the destination port, with insurance covered, this is why it’s best to always clarify the terms.
DAT or Delivered at Terminal: The exporter delivers the goods at a terminal bearing all risks and transportation costs. Thereafter the buyer assumes all costs and risks of transportation until the final destination.
DDP or Delivery Duty Paid: In this case the seller bears all risks and transportation costs as well as clearing the goods for both import and export and covering associated duties in both cases.
EXW or ExWorks: Here, the seller renders the goods available for pickup at a specified location, usually their factory or business location and from then on all responsibility and costs lie on the buyer.
It's important for both parties to have a clear view of the exact point in the whole process at which risk and responsibility change hands from seller to buyer.
Each case can be different and there are some other factors that play a role like for example the buyer’s experience in finding suitable shipping partners in other countries and the size of cargo.
In general, an experienced buyer/importer expecting volumes of goods to be delivered might prefer FOB because of the freedom to choose shipping partners based on pricing, modes of shipping and routes as well as preferred insurance partners.
An exporter would generally prefer CIF as it enables them to make additional profit with a price markup on the shipping and insurance services. The benefit here for the buyer is that they don’t have to deal with any complications that may arise during the whole process and simply wait for the goods to be delivered at their door, at a higher cost.
Import tax (or duty) is a fee paid to the local authorities based on the value of imported goods and possible rates that may apply according to the category of goods. When imported goods first enter a country, the owner or buyer of the goods must file entry documents in order to pay the associated duties and clear the goods. Often a similar tax must be paid during the export of certain goods in order to clear them exporting.
The function of these duties is first to enhance the tax income of governments and at the same time give an advantage to locally produced products of the same type since they are sold at better prices than their imported competitors.
A global effort to promote free trade has been led by different organisations around the world whose aim is the reduction or elimination of these taxes. A great example is the North American Free Trade Agreement (NAFTA) between United States, Canada and Mexico that has eliminated import duties since 2008.
Many shipping providers offer the option of tracking your order online in order to find out at which stage of the process it currently is. This is usually provided for smaller packages fulfilled by worldwide parcel carriers such as UPS and FedEx.
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