UNDERSTANDING EXW (EX-WORKS) INCOTERM: BUYERS AND SELLERS RESPONSIBILITIES IN EXPORT TRADE

The National Bank of Ethiopia (NBE) has introduced a new incoterm in its recent directive allowing the use of the EXW (Ex Works) Incoterm for export transactions—marking a pivotal shift in how Ethiopian exporters can engage in global trade. This addition provides exporters with the flexibility to focus solely on production, while giving buyers complete control over the logistics, from the seller’s premises all the way to the final destination. As a fresh opportunity in Ethiopia's evolving trade landscape, understanding the implications of EXW is crucial for businesses looking to capitalize on this streamlined and buyer-driven Incoterm. Let's explore how EXW works and why it could transform the way Ethiopian exporters do business internationally.

Export Delivered at EX-Works (EXW)

According to the new NBE directive, export deliveries under EX-Works (EXW) allow exporters to agree on sales and delivery terms where goods are priced based on costs at the factory or an inland dry port, depending on the buyer’s preference. The sales contract must clearly outline the delivery location, the payment terms, and the price to be paid, ensuring transparency and adherence to the agreed terms.

Exporters are also responsible for the repatriation of foreign exchange in line with the sales agreement and the chosen mode of payment. The costs associated with inland freight and transit are determined by the delivery terms and the designated sales point. Additionally, banks play a crucial role in this process by issuing export permits and registering sales contracts, considering the agreed delivery terms and sales locations. This process is guided by the payment instruments made available, ensuring regulatory compliance and smooth transactions.

What is EXW (Ex Works)?

EXW, or Ex Works, is an Incoterm where the seller makes the goods available at their premises (factory, warehouse, etc.), and the buyer is responsible for all subsequent transportation costs and risks. Under EXW, the seller's obligation is fulfilled when the goods are ready for pickup at the specified location. The buyer handles everything from export clearance to delivery at the final destination.

OBLIGATIONS OF THE SELLER

Under EXW, the seller's obligations are minimal, focusing primarily on ensuring that the goods are made available at their premises for the buyer to collect. The seller's key responsibility is to provide the goods along with the necessary documentation, such as the commercial invoice, which is essential for the buyer’s records and export clearance process.

Additionally, the seller must ensure that the goods are properly packaged and marked according to standard export practices or any specific requirements agreed upon with the buyer. While the buyer is responsible for handling export clearance, the seller may still need to offer assistance by providing relevant information or documents to facilitate the process, although they are not obligated to arrange or manage the export clearance themselves.

For instance, a coffee exporter agrees to sell coffee under EXW terms. He has to ensure the coffee is ready at his premises on the agreed date. And, provides the commercial invoice and ensures the commodity is adequately packaged for transport. Once the coffee is available at the warehouse, the exporter's obligations are fulfilled.

OBLIGATIONS OF THE BUYER

Under EXW, the buyer bears significant responsibilities throughout the transaction. One of their primary duties is to load the goods onto their chosen mode of transport directly from the seller's premises. This requires the buyer to coordinate logistics efficiently, as the seller's obligations end once the goods are made available.

The buyer is also fully responsible for export clearance, which includes handling all necessary formalities such as obtaining licenses, securing clearances, and completing any other documentation required by the exporting country. Additionally, the buyer must arrange and pay for transportation and insurance for the goods from the seller's premises to the final destination. The buyer assumes all costs and risks during transit. Finally, upon arrival, the buyer is tasked with managing import clearance, including paying duties, taxes, and ensuring compliance with all local regulations at the destination country. These comprehensive responsibilities mean the buyer must have the resources and expertise to handle logistics, legalities, and risk management.

COSTS ASSOCIATED WITH EXW

Seller's Costs:

• Producing the goods.
• Standard packaging and marking.
• Providing the commercial invoice and any documentation agreed upon in the contract.

Buyer's Costs:

• Loading goods at the seller's premises.
• Export clearance fees.
• All transportation costs from the seller's premises to the final destination.
• Insurance during transit.
• Import duties and taxes.
• Unloading at the final destination.

RISKS UNDER EXW

Seller's Risks:

• Minimal risk, as responsibility transfers once goods are available at their premises.

Buyer's Risks:

• All risks of loss or damage from the time the goods are made available at the seller's premises.
• Risks associated with export and import clearance.
• Potential delays in transportation.

ADVANTAGES AND DISADVANTAGES OF EXW

Advantages for Sellers:

• Minimal Responsibility: Limited obligations make it straightforward for the seller.
• Cost Control: No need to arrange or pay for transportation and export clearance.

Disadvantages for Sellers:

• Limited Marketability: Some buyers may prefer sellers to handle more logistics.
• Potential Delays: If buyers are inexperienced, delays in pickup can occur, affecting storage and scheduling.

Advantages for Buyers:

• Control Over Logistics: Full control of the shipping process and choice of carriers.
• Cost Management: Potential to negotiate better rates with service providers.

Disadvantages for Buyers:

• Increased Responsibility: Managing export clearance and transportation can be complex.
• Higher Risk: Assuming all risks from the seller's premises onward.

WHEN IS EXW THE BEST CHOICE? FACTORS TO CONSIDER

EXW is most advantageous when the seller seeks minimal involvement in the shipping process, and the buyer has the resources and expertise to handle all logistics from the seller's premises to the final destination. This term is ideal when the buyer has an established presence or agent in the seller's country, enabling them to efficiently manage export clearance, transportation, and associated risks. For buyers who prefer complete control over the shipping process to optimize costs and schedules, EXW offers maximum flexibility.

However, EXW may not be the best choice if the buyer is unfamiliar with the export regulations of the seller's country or if legal restrictions prevent the buyer from handling export clearance. In such cases, opting for alternative terms like FOB (Free On Board) can be more appropriate. These terms assign the responsibility of export clearance to the seller, who is better equipped to navigate local regulations and formalities. Choosing an alternative to EXW can mitigate risks associated with legal compliance, reduce potential delays, and streamline the overall transaction by leveraging the seller's expertise in handling export procedures.

PRACTICAL CONSIDERATIONS FOR EXPORTERS

When operating under EXW terms, exporters must consider several practical factors to ensure smooth transactions. Clear communication is essential—exporters should ensure that the sales contract clearly specifies all terms, including the exact pickup location, export clearance responsibilities, and payment conditions. This level of detail helps prevent misunderstandings and ensures both parties are aligned.

Though the responsibility for export clearance lies with the buyer, exporters must still provide all necessary documentation promptly to assist the buyer in fulfilling their obligations. Timely and accurate paperwork is crucial in avoiding delays. Additionally, exporters must conduct thorough risk assessments, recognizing that while the risk transfers to the buyer once the goods are made available, any issues or delays that occur prior to that point remain the seller’s responsibility. Lastly, exporters should maintain close coordination with banks to ensure compliance with foreign exchange regulations and to facilitate smooth financial transactions, particularly in the context of repatriating foreign currency earnings.

Conclusion

EXW Incoterm places significant responsibility on the buyer, making it essential for both parties to understand their obligations fully. Exporters benefit from reduced responsibilities but should ensure clear communication and proper documentation to facilitate the transaction. Buyers must be prepared to handle all aspects of transportation, export, and import procedures.

By comprehensively understanding EXW terms and incorporating directives and best practices, exporters can engage in international trade effectively, minimizing risks and optimizing costs.

References

International Chamber of Commerce (ICC) Incoterms? 2020.

NBE Directive

Trade and Customs Regulations.