What is the Ex Works Incoterm? Is it beneficial for your business? Find out in this comprehensive guide the benefits and drawbacks of EXW.
The EXW or Ex Works incoterm places the minimum responsibility on the seller. The buyer is responsible for the obligations and costs associated with transport. For this reason, this incoterm is intuitively attractive to many suppliers. But is it really risk-free? In this article, you can find out about the advantages and challenges of the EXW Incoterm.
What is the Ex Works Incoterm? Definition
EXW is one of the eleven incoterms defined by the International Chamber of Commerce (ICC). Incoterms (International Commerce Terms) are the rules of national and international trade that define the obligations of the parties involved (seller and buyer). Revised every ten years, they codify the conditions of delivery of goods under a sales contract, such as the allocation of transport costs.
The EXW Incoterm is multimodal, i.e. it covers all types of transport. It is the abbreviation for Ex Works. According to EXW, the supplier makes the goods available to the buyer as soon as they leave the factory. His obligations are therefore limited to packaging and labelling the goods. What happens after that is entirely up to the buyer.
Ex Works is a good contract option for the seller, but not so good for the buyer.
The seller is only required to safely package the goods, appropriately label them, and deliver them to a previously agreed-upon location, such as the seller’s nearest port.
The seller must also assist the buyer in obtaining any necessary export licenses or paperwork, though the buyer must pay the actual fees for the documents.
Once the buyer has the goods, it is the buyer’s responsibility to cover any expenses and account for any risks associated with the goods.
Loading the products onto a truck, transporting them by ship or plane, collaborating with customs officials, unloading them at their destination, and storing or reselling them all pose risks.
Even if the seller assists the buyer by, say, loading the product onto a ship, the buyer is still obligated to pay if anything goes wrong during the loading.
With Ex Works, the seller may load the goods onto the buyer’s designated mode of transportation but is not required to do so; all the seller is required to do is make the product available at a specified location while the buyer pays for transportation.
Businesses that want to cut costs by removing the so-called seller’s value added for shipping calculate EXW costs.
Assume that company A has set a price of $4,000 for a pair of printers from company B, with an Ex Works shipping cost of $200.
Company A finds a third-party shipper who will deliver the printers for $170 to save money.
So, in order to save 30% on shipping, they strike a deal with company B, which is Ex Works.
An “Ex Works” agreement differs from a “free on board” (FOB) agreement in that the seller covers the cost of transporting its goods to a shipping terminal and pays all customs fees.
Meanwhile, the buyer must pay to find, contract with, and pay the shipping company, as well as any customs fees incurred when the goods arrive in their destination country.
The buyer is also responsible for the insurance costs.
In practice, due to the customs rules of certain jurisdictions, ex-works is sometimes a bad choice.
In the European Union, for example, a non-resident individual or corporation may be unable to complete the export declaration documents, leaving the buyer stranded.
In such cases, the term “free carrier” (FCA) is preferable.
Under the terms of free carrier, the seller is responsible for delivering goods to a specific location.
Risks of the EXW Incoterm
The International Chamber of Commerce’s Incoterms include terms such as “ex works,” “free on board,” and “free carrier.”
They are used in international trade contracts to specify the time and place of delivery and payment, the point at which risk of loss shifts from the seller to the buyer, and the party responsible for paying freight and insurance costs.
The Incoterms are not contracts and do not take precedence over the governing law in their jurisdiction.
Explicit clauses in a trade contract can modify Incoterms.
Incoterms were first used in 1936, and the current version, Incoterms 2020, contains 11 terms.
These are frequently identical in form to domestic terms, such as those found in the American Uniform Commercial Code, but may have different meanings.
Further, based on their Incoterms, different countries and the jurisdictions that govern import and export may have different methods of calculating duties on shipping.
As a result, contracting parties must specify the governing law of their terms. The term “Ex Works” refers to shipping arrangements in which the seller is only required to deliver goods to a predetermined location and the buyer is responsible for shipping costs.
Along with these costs, the buyer accepts responsibility for the goods’ associated risks, which can range from customs regulations to loading and transferring to other ships.
Ex Works falls under the umbrella of Incoterms (International Commercial Terms), which are a set of 11 standard terms designed to clarify various trade contracts.
The distinction between “free on board” and “ex works” in shipping arrangements is based on the transfer of goods liability.
The seller is responsible for transporting goods to a terminal, as well as customs duties and loading the goods onto the ship, in “free on-board” contracts between the buyer and seller.
Meanwhile, the buyer is responsible for all shipping, insurance, and customs fees at the final point of arrival.
In other words, once the goods are shipped, the buyer takes on liability and ownership of the goods, which is referred to as “fob origin” or “fob shipping point” in contrast the seller is only responsible for delivering goods to an agreed-upon location in.
An “ex-works” agreement saves the seller money on shipping and customs, as well as liability for damaged goods after they have been delivered, packaged, and labeled at the shipping terminal.
While this may be advantageous for sellers at times, it is not always possible due to customs requirements in some jurisdictions.
Consider the European Union, which prohibits non-resident corporations from completing export declaration forms.
In this case, an Ex Works contract would be disadvantageous to both the seller and the buyer whereas a Free Carrier contract, which places shipping responsibility on the seller, might be a better option.
What are the buyer’s obligations under the EXW Incoterm?
The buyer’s obligations under the Ex Works transport rules are manifold: they encompass everything related to the transport of goods and the associated risks. This includes the following activities:
- Organising the means of transport and delivery to the various points along the route
- Loading the goods on board the vehicle(s)
- Handling of all customs formalities and associated taxes
- Obtaining the necessary export and import licences and permits
- Assumption of transport risks (delays, losses, theft, damage)
- Unloading the goods at the final destination
In contrast, the seller’s obligations are as follows:
- Packaging and labelling of goods
- Provision of the goods
EXW can therefore be seen as the opposite of the DDP (Delivery, Duty Paid) incoterm. In a contract negotiated under DDP, the seller assumes maximum responsibility, while the buyer only handles the unloading of the goods at the agreed place. The responsibilities are reversed.
The benefits of transport by Ex Works
EXW is the preferred option for many companies, attracted by its apparent promise of ease. What are the advantages of this incoterm?
The lack of responsibility is a major factor in the popularity of EXW. Under this incoterm, the seller does not deal with anything, not even customs formalities: his only task is to make the goods available to the buyer, often at the exit of his own premises. Apart from packing (and occasionally loading onto the vehicle, if both parties have so agreed), the supplier does not have to make any effort.
For the buyer, EXW also has certain advantages: since the transport and formalities are in his hands, he has full visibility over the delivery process. He can therefore better control the goods and the progress of their delivery. It also ensures that the supplier does not increase its local costs or add a margin to the delivery costs.
The challenges of the EXW Incoterm: when to avoid it?
But while EXW may seem like an easy option for the supplier, it is actually very risky. Here are the main problems that can arise:
Dependence on the buyer
The supplier has very few obligations – but this means that he has no visibility over the shipping process. He has no control over customs formalities or the choice of customs representative, and no authority over the forwarder. Whatever the contingencies, he is entirely dependent on the buyer. Therefore, the EXW incoterm is not really suitable for export.
Exporters tend to invoice duty free and appear as exporters on the Single Administrative Document (SAD). However, a contract negotiated with the EXW incoterm blocks access to customs procedures, which means that the exporter does not automatically get the SAD. Without this document, duty-free invoicing is automatically invalidated. With EXW, it therefore becomes much more complicated to obtain proof that the goods have left the country.
The foreign buyer may not be very familiar with the regulations of the exporting country. This increases the chances of an incorrect or insufficient export declaration. The exporter is liable for non-compliance with regulations. If he misses a specific authorisation, it is he who incurs penalties – penalties which may include the loss of his export privileges. For this reason, the CCI reserves EXW for national and regional trade.
Non-recovery of payment
In another case, the payment of a letter of credit requires a bill of lading. This bill of lading can only be provided by the forwarder. However, the forwarder has no obligation to the seller, as he has been engaged by the buyer. If the documents provided are incorrect or incomplete, the seller has no recourse to have them amended. This can lead the bank to refuse payment of the letter of credit.
Forcing the buyer to take responsibility for customs clearance, transport and insurance means that the supplier’s company will look much less attractive to customers, especially if other companies in the same market negotiate their contracts with more advantageous incoterms – such as FCA or DDP, which impose a more appropriate division of responsibilities.
Alternatives to EXW: FOB or FCA?Alternatives to EXW: FOB or FCA?
The EXW incoterm therefore places a lot of risk on the seller despite the apparent absence of obligations, and is more suitable for national or regional trade. Which alternative should you use for exporting? This obviously depends on the context, your products, your type of business and the countries concerned. However, there are two options in particular: FOB and FCA.
FCA (Free Carrier Alongside) stands for free carrier. Under this incoterm, the responsibilities are better shared. The supplier is responsible for clearing the goods through customs and getting them to the port of shipment. The supplier must provide the buyer with all necessary export documentation, including permits and licences for specific products.
The FCA incoterm is more advantageous for the seller than the EXW incoterm because it allows him to manage the customs formalities in his country himself and avoid problems of non-conformity on export. In addition, the seller can also benefit from a VAT exemption. The FCA incoterm is also very flexible with regard to the delivery address. This is why it is officially recommended by the ICC instead of EXW for exports.
The FOB (Free on Board) incoterm applies exclusively to transport by water or sea. It is very similar to FCA, with some nuances. Where FCA considers the goods to be delivered as soon as the seller has loaded them onto the buyer’s chosen means of transport, FOB considers them to be delivered once they have been loaded onto the specified vessel.
The organisation of the transport and the assumption of the associated costs and risks are the responsibility of the buyer. As with FCA, it is the seller who assumes responsibility for clearing the goods for export. FOB is one of the most widely used incoterms in international trade. If you are exporting by sea, it is a wise choice to avoid customs disputes.
Frequently Asked Questions
Who pays EXW?
The buyer pays all transport costs and customs duties, and bears the risk of transporting the goods to their final destination. This Incoterm gives the buyer the most responsibility for the transport of his goods.
Why Avoid EXW?
Tax disadvantage. Under EXW, customs export formalities are at the buyer's risk (the ICC advises that it is the exporter who should normally complete the formalities on export and the importer who should do so on import).
Who does EXW customs?
The EXW Incoterm stands for Ex Works, i.e. ex works. Under this Incoterm, the seller makes the goods available ex works, and the buyer bears the transport costs, customs duties and risks associated with transport to the destination.
What is the Ex Works Incoterm?
Ex Works (EXW) is an incoterm defined by the International Chamber of Commerce (ICC) that specifies the obligations of the parties involved in a sales contract. It is multimodal, meaning it applies to all types of transportation. Under EXW, the seller's obligations are limited to safely packaging and labeling the goods and making them available to the buyer at a specified location. The buyer is responsible for all further obligations and costs associated with transport.
What are the advantages of the Ex Works Incoterm for the seller?
The Ex Works Incoterm places the minimum responsibility on the seller, making it an attractive option for many suppliers. The seller is only required to safely package and label the goods and deliver them to a previously agreed-upon location, such as the seller's nearest port. The seller may also assist the buyer in obtaining any necessary export licenses or paperwork, though the buyer must pay the actual fees for the documents.
What are the risks of the Ex Works Incoterm for the buyer?
Under Ex Works, the buyer is responsible for all expenses and risks associated with the goods. This includes loading the goods onto a truck, transporting them by ship or plane, collaborating with customs officials, unloading them at their destination, and storing or reselling them. Even if the seller assists the buyer in loading the goods onto a ship, the buyer is still responsible for any problems that may occur during the loading process. The buyer is also responsible for paying for transportation, finding and contracting with a shipping company, and paying any customs fees incurred when the goods arrive in their destination country. The buyer is also responsible for insuring the goods.
Is the Ex Works Incoterm beneficial for my business?
The Ex Works Incoterm may be beneficial for businesses that want to cut costs by removing the seller's value-added services, such as shipping. However, it is important to consider the risks associated with the incoterm, as the buyer is responsible for all expenses and risks associated with the goods. In some cases, such as in the European Union, the term free carrier (FCA) may be a better choice, as the seller is responsible for delivering the goods to a specific location. It is recommended to carefully evaluate the terms of the contract and consult with a legal or trade expert before making a decision.
Can the Ex Works Incoterm be used for all types of transportation?
Yes, the Ex Works Incoterm is multimodal, meaning it can be used for any type of transportation, including by truck, ship, or plane.
Is the seller required to load the goods onto the buyer's designated mode of transportation under Ex Works?
Under Ex Works, the seller is not required to load the goods onto the buyer's designated mode of transportation. The seller's only obligation is to safely package and label the goods and make them available at a specified location.
Is the seller required to cover the cost of transporting the goods to a shipping terminal and pay customs fees under Ex Works?
No, under Ex Works, the seller is not required to cover the cost of transporting the goods to a shipping terminal or pay customs fees. These costs and responsibilities fall on the buyer.
Can the Ex Works Incoterm be used in all jurisdictions?
In some cases, such as in the European Union, the customs rules of certain jurisdictions may make the Ex Works Incoterm a less favorable option. In these cases, the term free carrier (FCA) may be preferable, as the seller is responsible for delivering the goods to a specific location. It is important to carefully evaluate the terms of the contract and consult with a legal or trade expert before making a decision.