“Incoterms” is an abbreviation for “International Commercial Terms.” These are published by the International Chamber of Commerce, and are used in commercial transactions between importers and exporters to prevent confusion when doing foreign trade. They help each party understand the exact terms of their business arrangement, and who is responsible for what during each part of a transaction. Here we’re reviewing the Incoterm “Ex Works,” abbreviated as EXW.
What is the Incoterm “Ex Works” (EXW)?
Of all the business shipping and logistics arrangements that exist, an Ex Works transaction is the easiest for the seller to perform. An Ex Works contract places the majority of the responsibility squarely on the buyer.
In an Ex Works agreement, the buyer agrees to pick up the goods at the manufacturer’s or trader’s warehouse or factory, and also deal with all paperwork relevant to the transaction. This paperwork includes customs clearance and insurance. The buyer is also responsible for the full cost of shipping and logistics.
With Ex Works, the responsibilities of the seller include properly labeling the goods to be picked up after packaging them properly. The seller is also required to see that the goods are delivered safely to a pre-agreed point of pick-up, which could be the seller’s factory, warehouse, local port, or another agreed-upon point. The seller may also be asked to help with the acquisition of paperwork such as export licenses, but this may remain the responsibility of the buyer. Regardless of this, it is the buyer who must pay the fees for any paperwork needed.
It is the buyer that carries the main responsibility for the goods and the transit of the goods with Ex Works. On receipt of the goods, the buyer is obligated to cover all expenses and suffer the risks. This includes any damage or losses that may be suffered in transit. It is also the responsibility of the buyer to deal with any shipping or air freight transfers. The buyer will also have to deal with the unloading and storing of the goods once they have reached his/her home port and also any logistics needed to take the goods to their final destination.
As detailed above, there are many benefits to Ex Works agreements for the seller. Ex Works puts the vast majority of the work and risk on the buyer. Even if the seller helps the buyer, it is still the buyer’s responsibility if anything goes wrong. The seller may help the buyer by loading the buyer’s goods onto the truck or ship, but is not required to do so.
Despite of all the extra work and risk, the buyer can maximize profit from an Ex Works agreement. Sellers that arrange overseas orders often also control the method of shipping to the customer. This means that the seller can make an arrangement with the shipping company to take a commission. Because of this arrangement, the shipping company may increase the price of their services. These increases will always be passed on to the buyer. By dealing with all the shipping arrangements in-house, the buyer can cut out the value that is added by the seller and add it to their own profit once the goods are sold.
It is essential to note that in some trading blocks (like the EU), export declaration documents have to be finished by a resident. If the buyer or the buyer’s representative in the country of receipt is not a resident of the country or block, he/she will not be able to finish the paperwork needed for receipt of the goods. Always check this rule before importing.
Ex Works compared to FOB and FCA
“Ex Works” is an Incoterm like “Free on Board” (FOB) and “Free Carrier” (FCA), which are methods of shipping that can differ drastically from Ex Works.
The main difference between Ex Works and FOB is that with FOB, the seller is responsible for the goods up until they reach the designated point of origin. After the goods reach that point, the buyer assumes all costs, responsibilities, and risks as with Ex Works.
A Free Carrier Agreement (FCA) is the complete opposite of the two methods listed above. In an FCA shipping arrangement, the seller is totally responsible for delivering the goods from the place of origin to the final customer. The seller will now take all the responsibility and risk for the safety of the goods as well as organizing all the paperwork needed to make the delivery.
For a buyer, entering into an Ex Works shipping agreement can be risky and time-consuming, adding to the workload. However, if the buyer has adequate knowledge and suitable organization and connections, they can save money with the Ex Works arrangement.
For the seller, the Ex Works agreement can be a good choice, as it saves the seller from the majority of the risk and responsibility. The only negative to this is that the seller will miss out on their commission from the shipping company.