How to choose the right trade terms to avoid risks in international trade?

When it comes to international trade, choosing the right trade terms is indeed a significant step in avoiding risks. Trade terms, also known as price terms, are short phrases used in international commerce to determine the rights and obligations of both the buyer and the seller, including the transfer of risks, costs, and the division of responsibilities.

First, it's essential to understand some common trade terms. For example, in the Incoterms 2020 rules, FOB (Free on Board), CIF (Cost, Insurance, and Freight), and FCA (Free Carrier) are frequently used. FOB means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. The risk of loss or damage to the goods passes from the seller to the buyer when the goods are on board the vessel. This term is often used when the buyer has more control over the shipping process.

CIF, on the other hand, requires the seller to pay the costs and freight necessary to bring the goods to the named port of destination. In addition, the seller must procure marine insurance against the buyer's risk of loss of or damage to the goods during the carriage. The risk transfer also occurs when the goods pass the ship's rail at the port of shipment.

FCA is more flexible as it can be used for any mode of transport. The seller delivers the goods to the carrier or another person nominated by the buyer at the named place. The risk passes to the buyer at that moment.

To choose the right trade term, you need to consider several factors. The mode of transportation is crucial. If you are shipping by sea, FOB, CIF, or CFR might be suitable. But if you are using multiple modes of transport or just land - based transport, FCA, CPT (Carriage Paid To), or CIP (Carriage and Insurance Paid To) could be better choices.

Another factor is the control of goods and costs. If you want to have more control over the shipping and insurance arrangements, you might prefer terms where you act as the shipper. For example, using FCA if you can arrange the carrier more conveniently.

You also need to assess the risks in different regions. Some areas may have higher risks of natural disasters, political unrest, or piracy. In such cases, choosing a trade term that allows you to transfer the risk to the other party earlier can be a wise move.

In conclusion, choosing the right trade terms in international trade requires a comprehensive consideration of various factors. You should carefully analyze your specific situation, understand the rights and obligations under each trade term according to relevant international trade rules like Incoterms 2020, and make a well - informed decision to effectively avoid risks.