Demystifying Shipping Terms

Shipping terms (or Incoterms) are used when shipping cargo internationally to outline the responsibilities of suppliers and buyers. These terms include FOB, EXW and CIF/CFR. These are all abbreviations and have very different meanings…

FOB – (Free On Board) When using these terms it is essentially “free” for the buyer to get the goods on board the ship as the supplier pays all the charges in the country of origin.  Your supplier will add these costs into the price of the goods.

Shipping on FOB terms is the often easiest way to import goods from Asia as you are in control of your costs.  You pay your supplier for the goods, on FOB terms, and then a shipping company (such as us) to get them to your door, with no hidden fees.

EXW – (EX-Works) When using these terms the buyer is responsible for all the costs and risks from their supplier’s door, to their door in the UK. You (as the buyer) would pay all the costs to the shipping company to make the arrangements.  It’s slightly harder than on FOB terms to get an exact quote until we’ve spoken with your supplier as the licenses they have in place and their distance from the port add variables. When working on EXW terms your costs are clear and there should be no hidden costs but it may take slightly longer to establish them.

CIF/CFR (Cost, Insurance & Freight or Cost & Freight) – Both are very similar the only difference being is that on CIF shipping terms the supplier pays for the insurance as well. On these terms the supplier will pay for all the cost to get the goods to Canada. The buyers responsibilities begin once the goods are in Canada Port.

Shipper: Shipper is a businessman or a merchant who acts as a consignor and/or a consignee of freight delivered by sea or by any other mode of transport. Shipper is a CONSIGNOR if he dispatches cargo and a CONSIGNEE if he receives cargo. In both cases he is considered by the carrier as a client.Carrier: Carrier is an individual person or a company that performs or undertakes to perform transportation of cargoes. Carrier may be an operator of any mode of transport possessing or hiring a vehicle or sign a contract for carriage with subcontractor. He always acts as a principal issuing transportation document and undertaking responsibility for the accepted cargo (possibly with some limitations of responsibility).

Consolidator: Consolidator is an agent that groups freights of several clients (less-than-container load – LCL) for container transportation. International Consolidator usually books slots at air or sea carriers at preferential rates in exchange for guarantee of providing the carrier with a definite number of cargoes. In case of sea transportation there’s no significant difference between a consolidator and an operating carrier that does not operate sea vessels (non-vessel operating common carrier – NVOCC). On the other hand air carriage Consolidator often provides both establishing of his own tariffs and services of an airline agent.

Customs brokers: In the majority of states customs brokers have license issued by governmental authorities (usually by the Ministry of Finance) and are subject to the control of customs authority. Customs brokers make the execution of import documents easier They are usually more aware of technical requirements for shipment of consignments than foreign forwarding agents. Customs brokers greatly influence the activity of importers. Importer and customs broker should establish close and trust-based relations. Brokers carry out most different services. Some of them include a full service and represent a direct continuation of the company’s import-export department activity. Other brokers only provide services of documentary traffic and have little knowledge related to the problems of transportation and distribution. As a rule, consignors should not trust brokers’ instructions too much, especially if it concerns transportation of goods liable for high duties. Brokers usually work from deal to deal being governed only by HERE-AND-NOW interests. That is why they should be clearly instructed and required to stick to the standards. Though a broker must have a license it cannot guarantee the quality of his services. A licensed broker may hire as many unqualified and uncertified employees as he would like to. It is sufficient that only one person is licensed.

Export company is a company which acts as a marketing and sales department for industrial enterprises that cannot perform such functions. Export companies can represent interests of different clients providing that they are not rivals on the sales market. Export company can carry out business activity in its own name or in the name of the manufacturer depending on the client’s wishes. It can work for specified fee or commission charges, as well as for variation in prices plus commission. An export company occasionally purchases goods for the sale abroad. Using services of such a company provides a number of advantages. They usually have an established network of foreign contacts and are well informed on goods and foreign markets. Their services are the first step to develop international sales for the companies which haven’t set their foreign marketing and logistics yet. The most important disadvantage of working with these companies is lack of manufacturer’s monitoring of foreign sale. To make sure that an export company will always be a good representative of the producer’s interests they should agree in writing all the key points concerning marketing and services before signing a contract. Export company must regularly deliver reports on its marketing activity. In case of selling a product which demands a definite concern after sale, there are some disadvantages related to the services provided by an export company because it is targeted at selling the product, not maintaining it.

Export trading companies: An export trading company is an organization founded for simplifying the process of product export. Such companies usually work in the USA. It can be an intermediate party providing a producer with export services. As well as an agency established by the producers. They more frequently than the previous type of companies acquire title to goods. Though it is considered that an export trading company can offer a wider range of services that an export company in practice there’s little difference between them. When an Act on export trading companies was passed in 1982 in the USA it was hoped that it will slow down the reduction of the USA export. The results were disappointing. When ill luck came to the export trading company established by Sears it General Electric, it scared away other companies which adopted wait and see attitude. In spite of the fact that export financing was backed by a permit for holding banking companies to invest in export trading companies without traditional restrictions the success was not big. Such a failure could be explained by the fact that money was spent to support depressed export instead of trying to understand details of international marketing and logistics.

Packaging Companies: These are companies providing secure packaging of cargoes for international deliveries. Most of big and middle-sized companies handle this task using their own facilities. But for small companies this type of service could be extremely important, especially if the freight is fragile or valuable, or when the climate of the place of destination is a significant factor. Performing international transportation it must be considered that the goods are transported not only from one port to another. They may be dispatched by jet propelled airplane and reach its place of destination on the back of a camel.

Clear Zone (CZ): territory at which imported goods can be kept for quite a long time without paying customs duties, excise duties and depreciation tax. CZ gives shipper freedom of choosing time for the execution of customs formalities. In a clear zone goods can be manufactured free of care for the disposal of production wastes. Only traded commodity imported after final assembling in the CZ are liable for duties. Other taxes are not paid as the shipper can write off fourth rate goods not paying duties for them. It also concerns drying loss, vaporization, diffusion and other losses, etc. Customs evaluation and classification of goods can be done if so desired by the producer or at the moment of entering CZ, or at the moment of launching of a product. Duties are paid only when the goods enter customs territory. Time of storage is not limited. Without paying further customs duties operator can store, sell, expose, liquidate, change package, collect, push off, segregate and sort out, clear, mix with foreign and national products, dispose of, mark and produce goods within the territory of the clear zone.

Forwarding agent: International forwarding agents act as agents for delivery of consignor’s/trader’s goods to the place of destination abroad. Forwarding agents must be well informed about the rules and legislation of foreign states in respect of import, delivery methods, export regulations and all documents concerning foreign trade. Before the delivery a forwarding agent must agree with the consignor on the cost of transportation, port services, consular duties, charges for drawing up the documents, insurance cost and charges for cargo processing performed by it – all the points included in consumer price quoted by the consignor. Thus close cooperation with the forwarding agent is extremely important because all the points must be concerned. At the dispatch forwarding agent should study letter of credit, all the commercial invoices, packaging lists, etc. Forwarding agent for sea and air transport usually charters space in the carrier’s transportation facility. In the point of destination forwarding agent can also act as a broker, providing the compliance of export documents with relevant customs regulations of that state. Forwarding agent transfers all the documents to the consignor or paying bank (if so required by the consignor). Forwarding companies can be represented by large multinational branchy enterprises or by small operators that only have a table and a telephone in possession. Small companies sometimes cannot ensure an urgent dispatch. On the other hand a large forwarding company cannot always pay proper attention to each minor customer. All these details should be considered while choosing a forwarding agent.

Multimodal Transportation Operator (MTO): multimodal transportation operator sets up a contract with a shipper in its own name, is a principal and bears responsibility for the whole transport operation which is specified in a transportation agreement. MTO is a CARRIER because it directly undertakes responsibility for the provision of international multimodal transportation or for the insurance of its performance by another carrier (or carriers) and takes liability for any damage to and loss of the freight in the course of transit. There are several types of MTO. They can be divided into MTO operating sea vessels and those which don’t operate sea vessels.

Vessel Operating Multimodal Transport Operators (VO-MTO): Vessel owners traditionally confined themselves to transportation of cargos from one port to another and their responsibility for the freight was limited by the time of the cargo being on board the vessel. At present their services cover deliveries of cargo by road and even by air. Such combination of transport modes is typical for Vessel Operating Multimodal Transport Operators. They can or cannot be owners of other modes of road, railway or air transport. In case if they are not then they enter into agreements with carriers working with those means of transport. Besides contracts with subcontractors working with some kind of transport, they usually conclude contracts with stevedoring and warehousing companies as well as with other intermediate companies. From all the MTO Vessel Operating Operators are the largest if fixed assets are regarded as key criteria for assessment.

Non-vessel operating common carriers – (NVO-MTO): Apart from sea carriers there are also other transport operators which can provide a DOOR-DOOR delivery using more than one mode of transport. Besides the conclusion of subcontract with inland and air carriers they can also sign contracts with sea carriers, i.e. they do not possess or operate vessels performing a sea delivery. That’s why they are called Non vessel operating MTO – NVO-MTO or Noт-vessel operating common carriers – NVOCC. These companies issue their own transportation documents and undertake the responsibility of a carrier. They announce their own transportation tariffs but do not operate vessels. They grossly charter slots at sea line carriers (and other types of carriers), and than sell them to the shippers by retail and earn from the variation in prices. For small consignments dispatches they may consolidate freights in order to provide lower tariffs than those which a direct carrier can offer. Using the services of those companies, small shippers can get preferential transportation tariffs that they couldn’t achieve acting on their own. Non-vessel operating multimodal transport operators often possess only one mode of transport, e.g. trucks or in some rare cases airplanes and railways. However it should be noted that those transportation facilities are in their possession only in one end of the route.

Another type of operators includes those which do not possess any kind of transport. This category covers forwarding agents, customs brokers and even in some cases operators of warehousing premises or stevedoring companies, providing they execute their own transportation documents and undertake the responsibility of a carrier for the cargo (i.e. they are principals). Those operators must conclude contracts including all modes of transport. Considering the fact that they don’t own vessels, they are also regarded as non-vessel operating multimodal transport operators. Some of the leading forwarding agents deal with the same turnover as largest vessel operating multimodal transport operators; however not all their activities can be listed as multimodal transportation.

Another type of operators which greatly resembles the previous one is represented by companies established for only one purpose which is to provide multimodal transportation services. As they don’t own vessels, they are also regarded as non-vessel operating multimodal transport operators.

This type of operators will be able to compete in future with dominating vessel operating multimodal transport operators, and to provide developing countries and countries in transition with more opportunities of participating in multimodal transportation. Without resort to investing in different modes of transport (probably except for those meant for short haul deliveries) they at any time can choose an economical and effective mode of transport or a combination of different modes of transport that will meet consumers’ requirements. Thus operators of this type focus on their clients’ needs. This kind of activity requires efficient organization and reliable partners, with whom they can cooperate in performing the work. Such operators are to control a significant volume of cargoes in order to conclude contracts on competitive terms with sea, road, rail and air transport, as well as with warehousing and stevedoring companies. Without significant volumes of cargoes they will be unable to perform regular deliveries on competitive terms. But managing to deal with such volumes in most these operators can achieve this goal quicker than vessel operating multimodal transport operators or operator of the other types.

Shippers’ Council: These national organizations are usually established by consumers of transportation services or by sippers. Their role and field of activity may differ from country to country but they are all united by the idea of creating an effective and adequate transport market. The term Shippers’ Council generally concerns organizations performing international sea deliveries, though some of the councils pay more and more attention to land and sometimes air transportation. The prime objective of shippers’ councils is uniting of shippers for strengthening their position in negotiations in order to get adequate and effective services at minimum prices. The other aim is to give vessel owners, government agencies and ports’ management an opportunity to communicate with shippers and find out their views on different issues at first hand.

Customs warehouse: It is a warehousing premise governed by the customs. Sipper cannot produce, segregate, mark, repair or write off goods at the territory of the warehouse. Customs valuation and classification of cargo is required to be carried out immediately after its coming to the customs warehouse. Duties are to be paid right after the freight release. Customs regulations are applicable to the full extent. All the foreign goods fall within the jurisdiction of other authorities, not only custom authority. Goods can be stored at the warehouse within a limited period of time. Products meant for internal consumption are allowed to be stored, cleaned and repackaged. In some cases cargo segregation can be carried out at the expense of the shipper and under control of the custom.