Chapter 15: Pricing Strategies and Cost Analysis
15.3 Terms and Codes Used in International Trade
There are two accepted systems of terms and codes used by everyone involved in international trade: Incoterms® and the Harmonized Commodity Description and Coding system.
Incoterms
Incoterms stands for “International Commercial Terms,” which were created to minimize trade disputes due to misinterpretation and miscommunication when doing business internationally. These terms are developed by the International Chamber of Commerce and are the only internationally recognized trade terms.
Companies involved in international trade use Incoterms to understand the exact terms of their business contract — the exact rights and responsibilities of both parties, the seller and the buyer.
There are two groups of Incoterms. The first group applies to any mode of transportation. The second group applies to transportation across water, sea, and inland waterways.
Incoterms define seller and buyer responsibilities related to shipments of goods. These responsibilities include the following:
- Liability transfer point from the exporter to the importer
- Insurance obligations of each exporter and the importer
- Custom duties payment obligations
Figure 15.1: Incoterms 2020
| Abbreviation | Name | Description |
|---|---|---|
| EXW | Ex Works | The seller is responsible only for having the goods ready for pick up at his location. |
| FCA | Free Carrier | The seller is responsible for delivering the goods to an agreed-upon location. |
| CPT | Carriage Paid to | The seller is responsible for delivering the goods to an agreed-upon location and paying for transportation. |
| CIP | Carriage and Insurance Paid to | The seller is responsible for delivering the goods to an agreed-upon location and paying for transportation and insurance. |
| DAP | Delivered at Place | The seller is responsible for delivering the goods to the buyer’s destination without unloading. |
| DPU | Delivered at Place Unloaded | The seller is responsible for delivering the goods to the buyer’s destination and unloading the goods. |
| DDP | Delivered Duty Paid | The seller is responsible for delivering the goods to the buyer’s destination, unloading and import duties. |
| Abbreviation | Name | Description |
|---|---|---|
| FAS | Free Alongside Ship | The seller is responsible for placing the goods alongside the vessel. |
| FOB | Free on Board | The seller delivers the goods and boards them on the vessel. |
| CFR | Cost and Freight | The seller is responsible for delivering the goods to the port of destination and paying for transportation. |
| CIF | Cost, Insurance, and Freight | The seller is responsible for delivering the goods to the port of destination and paying for transportation and insurance. |
Source: Based on Thompson, B. (2024, May 28). Incoterms® 2020 explained – the complete guide. IncoDocs. https://incodocs.com/blog/incoterms-2020-explained-the-complete-guide/
Think About It: Incoterms 2020
Watch this video to learn more about the Incoterms, which were updated in 2020 by the International Chamber of Commerce.
Source: Inco Docs. [2020, February 2]. Incoterms® 2020 explained for import export global trade. [Video]. YouTube. https://www.youtube.com/watch?v=7g7IC4IzjDM
Questions
- What are Incoterms?
- Which international body is responsible for publishing them?
- How many groups of Incoterms are there and what is the criteria for dividing them?
- Are Incoterms rules binding for companies around the globe, if so why and how?
The Harmonized Commodity Description and Coding System
The Harmonized Commodity Description and Coding System is an international product code that contains over 5000 thousand commodity groups. The Harmonized System, or simply the HS code system, was developed by the World Customs Organization (WCO) to standardize the coding structure and product descriptions that are used in international trade. These codes are used by over 200 countries around the world for determining duties, tariffs, and taxes on imported and exported goods. Compliance with HS codes is mandatory and enforced by governments of all countries (Canada Border Service Agency, n.d.).
Let’s Explore: HS Codes
To learn more about the Harmonized Commodity Description and Coding System, visit the World Customs Organization website.
Did You Know? The Difference Between Duties, Tariffs, and Taxes?
Duties
Custom duties are fixed fees that the government of a country puts on all products imported from other countries. The rate of duties applied to products is determined based on the need for those products and the impact they have on the economy. The lower the economic impact, the lower the rate of customs duties. Duty rates range from 0 to 40%. Duty rates are negotiated and determined based on trade negotiations between countries (Descartes, n.d.).
Tariffs
Fees are imposed by governments on certain imported products or categories of products at a given time to protect domestic industries. For example, in 2018, the Trump administration imposed 25% tariffs on steel imported from China to protect the interests of US steel industries (Sherman & Josephs, 2022).
Taxes
While duties and tariff fees apply to imported goods, taxes are applied to all products sold in a country. Taxes may be called Value-Added Tax (VAT) or Goods and Services Tax (GST), based on a country. Different countries have different tax rates; for example, Canada has a GST rate of 5%, while the UK has a 20% VAT rate.
References
Canada Border Services Agency. (n.d.).Facilitating trade: Harmonized commodity description and coding system. https://www.cbsa-asfc.gc.ca/trade-commerce/tariff-tarif/hcdcs-hsdcm/menu-eng.html
Descartes. (n.d.). Import compliance FAQ: What is customs duty? https://www.descartes.com/resources/knowledge-center/what-is-customs-duty
Sherman, N. & Josephs, J. (2022, December 9). WTO says Trump’s US steel tariffs broke global trade rules. BBC. https://www.bbc.com/news/business-63920063
Thompson, B. (2024, May 28). Incoterms® 2020 explained – the complete guide. IncoDocs. https://incodocs.com/blog/incoterms-2020-explained-the-complete-guide/
World Customs Organization. (n.d). What is the Harmonized System (HS)? https://www.wcoomd.org/en/topics/nomenclature/overview/what-is-the-harmonized-system.aspx
fixed fees that government of a country put on all products imported from other countries
fees imposed by governments at a give time on certain imported products or categories of products to protect domestic industries
fees applied to all products sold in a country
