Importing from China: Incoterms – What are they, what do they mean, and which one should I use?

Buying terms or incoterms essentially dictate who controls and pays for each part of the international shipping process.

In order to move anything internationally, there is going to be a myriad of costs across multiple countries to complete the entire movement. There is the trucking cost to collect the goods from the suppliers warehouse and to deliver them to the port, there are port charges for loading the shipment on to the vessel, there are Chinese export customs clearance fee’s and associated documentation charges, there is the ocean Freight component between the origin port and the destination port in Australia, then there are the local Australian port charges, customs and quarantine clearance fee’s, import taxes and duties and the delivery fee’s that all need to be factored in in order to get the goods delivered to you at the final destination. Incoterms dictate which of these fee’s the supplier pays for and organises, and which of these fee’s you pay and organise as the importer.

Let’s go through a few of the most popular buying terms – the first is ‘Ex Works’.

Ex works buying terms means that you as the buyer organise everything including the pick up from the supplier’s factory in China as well as all the Chinese local charges, ocean freight to Australia, as well as the clearance and delivery. Essentially you only pay the supplier for the cost of the goods themselves, and you organise everything else from there via a local freight forwarder that you choose and can trust.

FOB or ‘Free on Board’ Buying terms is the most popular way to buy from China, this means that the supplier covers the costs to get the shipment to the port in China, and you take control of the shipment from there, meaning you pay for the ocean freight to your nearest port, as well as the local port charges, customs clearance, import taxes and duties and delivery.

CFR or CIF buying terms stands for cost and freight (CFR), or cost and insurance and freight (CIF), this mean that the supplier charges you for the cost of the goods, plus the Chinese local charges, plus the ocean freight to the destination port. You basically pay the supplier to get the cargo to your nearest port and the control and responsibility shifts to you from there. We wouldn’t generally recommend this method as this removes your ability to control the local charges here in Australia, and it also opens up the door for the supplier to be able to hold the shipment, request more money, and essentially to be able to control the shipment often at the detriment to you as the importer.

Lastly you have DDU or DDP terms, DDU stands for delivery, duty unpaid. DDP stands for delivery, duty paid. This is when you pay your supplier for the cost of the goods as well as for all of the costs to move it from their factory through to your final address in Australia. Buying on DDP terms also means that your import tax is also billed by your supplier. We would strongly recommend never ever considering this as an option if you’re thinking about buying from China, having someone in a different country, who speaks a different language control your shipment right to your door, including payment of import taxes is very risky and it opens the door to a myriad of problems and significant extra costs when things go wrong, and they usually always do. Chinese suppliers really have no business in trying to assess and bill for Australian import taxes and associated charges and this should never be left up to them.

While China has come a long way over the last 20 years, some suppliers still use cash rebates and other arrangements that don’t work in the buyer’s favour. They may try to talk novice importers into buying on CIF, CFR, DDU, or DDP buying terms, because they can receive kickbacks from shipping lines or have arrangements with a local Australian freight forwarder that gives them control of your shipment. You can then receive large bills and be pressed for payment once it’s too late to do anything about it, the easiest way to avoid any risk of this is to simply buy on FOB or Ex Works buying terms.

You as the importer want to retain as much control over the shipment as you can and you can do that by making sure you buy on the correct terms, and then using a local Australian freight forwarder that has a trusted network to organise the shipping, clearance and delivery.

If you have any questions about Incoterms and what will work best for you, please feel free to get in touch.