FOB and EXW are frequently used Incoterms in transport logistics. But what exactly do we mean by FOB and EXW and what actually are Incoterms?
The term Incoterms stands for International Commercial Terms and refers to the terms of delivery commonly used in international trade. As a supplement to the purchase contract, they regulate the cost distribution and transfer of risks during transport as well as the obligations of the contracting parties. They ensure that the obligations, costs and risks during transport are distributed between the seller and buyer accordingly. Among other things, they answer the following questions: Who organizes the transport? Who is liable up to where and who assumes the transport costs and customs clearance?
Incoterms are recognized worldwide and serve to avoid misunderstandings from the outset through clearly defined regulations. They were first drawn up by the International Chamber of Commerce in 1936 and were last amended in 2020. However, they are not mandatory. Rather, they serve to simplify transportation. The contracting parties can therefore also agree on their own clauses. In practice however, it is generally common to apply the Incoterms.
What exactly is meant by the transfer of risks and cost distribution?
The transfer of risk defines which contract partner covers which risk at which moment in time. The Incoterms also define exactly who bears which costs and when. Let us illustrate exactly how this can be regulated using two common Incoterms.
The abbreviation EXW defines the “Ex Works” delivery. Thus, if one decides to use the EXW clause as an addition to the purchase contract when importing goods, the buyer assumes the risk of loss and damage as well as the organization of transport, the customs clearance and the transportation costs. The supplier only has to make the goods available at an agreed place, e.g. at the factory or warehouse. From here onwards, the responsibility is transferred to the buyer.
FOB stands for “Free on Board”. According to this clause, the seller bears the responsibility and costs of transportation from the factory to the port including the loading on a shipment vessel. From here onwards it is not the seller, but the buyer who bears both the costs and the responsibility for the shipment. That means, the buyer also bears all customs and import modalities.
Advantages and disadvantages of FOB and EXW
Basically, both trade clauses have their advantages and disadvantages. One advantage of FOB, for example, could be that the supplier can often deliver the goods to the port at a lower price. In addition, the supplier also handles the export clearance which could be beneficial for the buyer. On the other hand, the transport costs sometimes have such an impact on the total costs that it may be the better choice to handle the entire transport yourself or via a freight forwarder especially if the forwarder offers transportation on favorable terms. In this way, the buyer also has better control over the delivery. After all, which Incoterms are appropriate and when depends on the individual shipment and how the Incoterms are negotiated.
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