Ex works (EXW) is one of 11 International Commercial Terms (Incoterms), a set of globally recognized rules used in international trade. Under EXW terms, the seller must ensure that items being shipped are safely packaged, labeled, and made available for collection at their premises or another agreed place. The buyer takes full responsibility for shipping the goods from their origin to their final destination. The buyer therefore has the majority of the responsibility and is obligated to load the goods, export procedures/export licenses and transportation costs as well as any associated goods in collecting the cargo, customs clearance and delivering the goods.The supplier isn’t on the hook for any aspect of the shipping process. EXW can benefit sellers, because they have minimum obligations in the transaction and therefore take on less risk. In some cases, EXW can also serve buyers by helping them save money on shipping costs, since they can shop around for a logistics provider.
What are Incoterms?
Incoterms is the short form for International Commercial Terms. These are terms used by the business community and cargo transport operators in the sale and the subsequent transport of goods by land, sea, or air.
The Incoterms are updated and published by the International Chamber of Commerce once every 10 years. They help make communication between the different parties to trade and transport easy and unambiguous. Incoterms is accepted universally by trading communities, transporters, government bodies, etc.
The current version that is used is the Incoterms 2020. It has 7 rules that cover all the modes of transport and 4 that are specific to the transport of cargo over water. These rules are as follows:
- EXW – Ex Works (showing the place of delivery)
- FCA – Free Carrier (showing the place of delivery)
- CPT – Carriage Paid to (showing destination)
- CIP – Carriage and Insurance Paid To (showing destination)
- DAP – Delivered at Place (showing destination); replaces Delivered Duty Unpaid or DDU.
- DPU – Delivered at Place Unloaded (showing destination); replaces Delivery at Terminal or DAT.
- DDP – Delivered Duty Paid (showing destination)
The Incoterms that are specific to water transport are the following:
- FAS – Free Alongside Ship (port of loading has to be mentioned)
- FOB – Free on Board (port of loading to be mentioned)
- CFR – Cost and Freight (show port of discharge)
- CIF – Cost Insurance and Freight (port of discharge to be shown)
Ex Works Responsibilities and Risk
Under the Incoterms 2020 rules, EXW means the seller has fulfilled its obligation when the goods are made available to the buyer, usually at the seller’s location. The seller should package the goods appropriately or as specified in the agreement between both parties. The buyer is responsible for loading the goods on their transport and everything else necessary to get the goods to the final destination.
The risk or liability for the goods transfers from the seller to the buyer when the goods are made available at the named place. That means that if damage occurs while the goods are being loaded on the buyer’s transport, the buyer is at risk even if the seller is assisting with the loading.
Ex Works and Routed Export Transactions
Although the U.S. Foreign Trade Regulations (FTR) don’t reference Incoterms and the Incoterms 2020 rules don’t reference any countries’ specific trade regulations, Ex Works is the trade term that is often used during a routed export transaction.
According to the FTR, a routed export transaction occurs when the foreign buyer of the goods contracts with a freight forwarder or other agent to export the merchandise from the United States. That arrangement works with the Incoterm EXW, although it could work with other terms, namely FCA (Free Carrier).
Sellers in the United States often choose EXW because they think it minimizes their responsibilities and risk. EXW is the only term that says the buyer is responsible for export clearance. However, under the FTR and the Export Administration Regulations (EAR), they do not escape their responsibilities for export compliance and the requirement that they provide required data elements to the buyer’s agent (usually a freight forwarder) that has been authorized to submit the electronic export information through AESDirect.
Ex Works Transportation Options
The ICC has divided the 11 Incoterms into those that can be used for any mode of transportation and those that should only be used for transport by “sea and inland waterway.” That’s because companies were too often choosing Incoterms where risk and responsibilities were transferred at a point that made no sense in a non-ocean journey.
Under Incoterms 2020, EXW can be used for any mode of transport.
Using Ex Works
Although EXW is frequently used for exports from the United States, it is almost universally reviled by those who make a living at training others about the use of Incoterms. In most cases, FCA would be a better alternative for these folks, although one of the four C-terms—Cost & Freight (CFR), Cost Insurance & Freight (CIF), Carriage Paid To (CPT), and Carriage Insurance Paid To (CIP)—may be even better.
For sellers, using EXW means they give up control of the goods almost immediately at the risk that export controls aren’t being followed or that the goods never actually leave the country.
Some companies insist they use EXW because they want to be able to recognize the revenue for the sale immediately. However, the ICC’s Incoterms 2020 book clearly state that the recognition of revenue is independent of any Incoterm rule:
Perhaps most importantly, it must be stressed that the Incoterms rules do NOT deal with the transfer of property/title/ownership of the goods sold. These are matters for which the parties need to make specific provisions in the contract of sale.
From the seller’s standpoint, EXW may not be a good choice if a letter of credit is involved. Because the freight forwarder follows instructions from the buyer, the seller may run into trouble satisfying the letter of credit.
For the buyer, using EXW means they not only have to deal with a foreign country’s export requirements, they also have to arrange to have the goods loaded on a carriage from the seller’s location or another named place.
Seller's Responsibility
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.
Buyer's Responsibility
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.
Seller's Benefits
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.
Buyer's Benefits
Despite 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.
Bottom Line
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.
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Tags: Incoterms, International
