Basic International Trade Terms Explained

Published: May 23, 2024

Understanding the fundamental terms used in international trade is crucial for anyone involved in global commerce. These terms not only help in smoothing the process of trade but also in avoiding misunderstandings and disputes. Here, we define some key international trade terms, starting with Delivery Duty Unpaid (DDU).

Delivery Duty Unpaid (DDU)

Delivery Duty Unpaid (DDU) is a shipping term that indicates that the seller is responsible for delivering the goods to the named place of destination. However, the seller does not cover the cost of import duties, taxes, or other official charges upon importation.

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The buyer is responsible for all these costs. This term is often used to clarify responsibilities and liabilities between the buyer and the seller regarding the costs associated with the transportation and importation of goods.

Delivered Duty Paid (DDP)

Delivered Duty Paid (DDP) is the opposite of DDU. Under DDP terms, the seller assumes all the risks and costs associated with transporting goods to the buyer’s destination, including import duties, taxes, and other charges. This term maximizes the seller’s obligations and minimizes the buyer’s responsibilities.

Free on Board (FOB)

Free on Board (FOB) is an Incoterm where the seller’s responsibilities are fulfilled once the goods have passed the ship’s rail at the port of shipment. The buyer assumes all responsibility for the goods from that point, including transportation costs, insurance, and unloading. FOB terms are crucial for determining when the risk transfers from the seller to the buyer.

Cost, Insurance, and Freight (CIF)

Cost, Insurance, and Freight (CIF) requires the seller to arrange for the carriage of goods by sea to a port of destination and provide the buyer with the necessary documents for obtaining the goods. The seller must also procure insurance against the buyer’s risk of loss or damage to the goods during the carriage. However, the risk transfers to the buyer once the goods are loaded onto the vessel.

Ex Works (EXW)

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Ex Works (EXW) is an Incoterm that places the maximum obligation on the buyer and minimal obligations on the seller. Under EXW terms, the seller makes the goods available at their premises, and the buyer bears all costs and risks involved in taking the goods from the seller’s location to the desired destination. This term is often used when the buyer has more control over the transport arrangements.

Letter of Credit (LC)

A Letter of Credit (LC) is a financial document provided by a bank that guarantees the seller will receive payment as long as certain delivery conditions have been met. It is a widely used instrument in international trade to mitigate the risk of non-payment, ensuring that the seller receives payment upon presenting the required documentation that proves shipment of the goods.

Bill of Lading (B/L)

A Bill of Lading (B/L) is a legal document issued by a carrier to a shipper, detailing the type, quantity, and destination of the goods being carried. It serves as a shipment receipt when the carrier delivers the goods at a predetermined destination. The B/L also acts as a title of ownership, allowing the holder to claim the goods.

Harmonized System (HS) Code

The Harmonized System (HS) Code is an internationally standardized system of names and numbers for classifying traded products. Developed and maintained by the World Customs Organization (WCO), these codes are used by customs authorities worldwide to identify products and apply tariffs and trade statistics.

Conclusion

Familiarity with these basic international trade terms is essential for ensuring smooth transactions and avoiding disputes in global commerce. Each term specifies the responsibilities of buyers and sellers, covering various aspects of shipping, payment, and risk management. By understanding terms like Delivery Duty Unpaid (DDU), Free on Board (FOB), and Delivered Duty Paid (DDP), businesses can more effectively navigate the complexities of international trade.