Foreign Trade Jianghu Black Talk Guide (Price and Payment Chapter): Every penny you spend is written in these terms

At the Foreign Trade Negotiation Table: The Tensest Moments Always Revolve Around Two Questions: How Much? And How to Pay?Newcomers are completely confused when they hear terms like “EXW”, “T/T” and “L/C”, while seasoned veterans instantly understand with just a glance. These terms are not just industry jargon; they are precise agreements that define cost allocation, responsibilities and risk sharing. Only by understanding them can you truly protect your profits and avoid payment risks.

I. Trade Terms: Where Does Your Responsibility End?

This set of terms defines when and where the ownership of goods is transferred from the seller to the buyer, with the core being the risk transfer point (all below are based on the latest rules of Incoterms® 2020).

• EXW (Ex Works)

  • What the buyer hears: “Our EXW price is $5 per unit.”
  • Actual Meaning and Risks: The seller’s responsibility ceases upon delivery of the goods at their factory or a designated location (e.g., warehouse). The buyer shall bear all costs, procedures and risks (such as damage or delays during transportation) from picking up the goods, domestic transportation, export customs clearance (Note: Incoterms® 2020 clearly stipulates that export customs clearance under EXW is the buyer’s responsibility by default; seller assistance, if needed, must be separately agreed upon), international sea freight to destination port customs clearance. This is the most hassle-free option with minimal liability for sellers, but the buyer must have strong control over international logistics.
  • Common Scenarios: Often used in transactions involving strong sellers, customized products, or when the buyer has a local agent in China capable of arranging end-to-end logistics and customs clearance.

• FOB (Free On Board)

  • What the buyer hears: “FOB Shanghai Port, $10 per unit.”
  • Actual Meaning and Risks: The seller is responsible for delivering the goods to the designated vessel at Shanghai Port and completing export customs clearance. According to Incoterms® 2020, the risk transfer point is when the goods are loaded onto the designated vessel (removing the ambiguous phrase “passing the ship’s rail” from the old version). The buyer shall then be responsible for all subsequent costs including sea freight, insurance premiums and destination port charges. As the most classic trade term in China’s foreign trade, it clearly delineates the responsibility boundary between the domestic segment (seller’s responsibility) and the international segment (buyer’s responsibility).
  • Key Points: The seller must promptly obtain the “on-board bill of lading” and notify the buyer; for containerized transportation, it is necessary to clearly specify the criteria for confirming “container loaded onto the vessel” in the contract to avoid risk disputes arising from loading methods.

• CIF (Cost, Insurance and Freight)

  • What the buyer hears: “CIF Los Angeles Port, $12 per unit.”
  • Actual Meaning and Risks: The seller is required to pay for the main freight to Los Angeles Port and basic marine cargo insurance premiums (with the minimum insurance coverage by default). The risk transfer point remains when the goods are loaded onto the vessel at the port of shipment (not the destination port). The seller only prepays the relevant fees and does not bear transportation risks after the goods are loaded. If the goods are damaged in transit, the buyer can file a claim with the insurance company against the policy. It is recommended that sellers clearly specify the insurance coverage (e.g., all-risk insurance) and insured amount in the contract to avoid subsequent disputes.

II. Payment Methods: The Trade-off Between Capital Security and Efficiency

How to receive payment is a perpetual challenge for foreign trade professionals. Different payment methods represent varying levels of trust and risk appetite.

• Advance T/T (Telegraphic Transfer)

  • Industry Jargon: “30% deposit in advance, and the balance to be paid before production.”
  • Actual Logic: This is the most favorable method for sellers, but it is rarely achievable unless the product is unique or the seller holds an extremely strong position. It requires the buyer to bear all capital risks and trust costs.

• “Balance Paid Against Copy of Bill of Lading After Shipment”

  • Industry Jargon: “30% deposit, and 70% balance payable upon presentation of the bill of lading copy.”
  • Actual Logic and Risks: This is the gold standard for small and medium-sized trade transactions. The seller holds a copy of the bill of lading (the document of title to the goods) as leverage, while the buyer makes payment after verifying the document, balancing risks for both parties. Core Risks include fraud involving “freight forwarder’s bill of lading” or delayed payment by the buyer, which may lead to high demurrage charges after the goods arrive at the port.

• L/C (Letter of Credit)

  • Industry Jargon: “We only accept 100% irrevocable sight letters of credit.”
  • Actual Logic and Risks: Bank credit replaces commercial credit, which is theoretically more secure. However, it is a document-only transaction—banks only verify whether the documents are “consistent with the letter of credit and with each other” and do not inspect the quality of the goods. Note: In 2025, banks in some countries have tightened anti-money laundering audits. Spelling errors in documents or unclear descriptions of trade backgrounds may be deemed as discrepancies leading to payment rejection. It is advisable to entrust professional document handlers or opt for electronic letters of credit (e-LCs) to improve review efficiency.

• O/A (Open Account)

  • Industry Jargon: “We’ve cooperated for so long; let’s do O/A this time, with payment 60 days after the goods arrive.”
  • Actual Logic and Risks: This option offers maximum convenience to the buyer based on absolute trust, but it poses the highest risk to the seller. Unless it is an intra-group transaction or a deal with a long-term top-tier partner, it is imperative to complement O/A with export credit insurance (in 2025, insurance institutions in many countries have raised premium rates for high-risk countries). Meanwhile, the buyer’s latest credit status should be verified through credit reporting agencies to avoid blind credit extension.

III. The Unspoken “Price Code Words”

• “Target Price”

  • Phrase: “Please re-quote based on a target price of $10.5.”
  • Hidden Meaning: This is not a price inquiry, but a final negotiation. The buyer has already completed market research and set their psychological price. Your task is to cut costs as much as possible by optimizing the supply chain and adjusting payment terms while ensuring product quality, to get as close to this figure as possible. This is a direct test of supply chain resilience.

• “Market Price”

  • Phrase: “The market price we’ve learned is much lower than your quotation.”
  • Negotiation Strategy: This is a common price-cutting tactic, which may be true or just a bluff. The best response is to break down your price structure (materials, craftsmanship, certifications, services) to justify the rationality of the price difference, rather than making concessions easily.

Summary: Core Principles of Pricing and Payment

1. Always Clarify Trade Terms: Clearly state the full term (e.g., “FOB Shanghai Port, Incoterms® 2020”) in contracts and invoices to avoid legal disputes caused by ambiguous rule versions.
2. Payment Methods Determine Risk Levels: Risk ranking from lowest to highest: Advance T/T > T/T after shipment (with time limit agreement) > L/C (e-LC preferred) > D/P > O/A (must be paired with credit insurance). Choose the method that matches the client’s creditworthiness, order value and target market risk level.
3. “Code Words” Are All About Risk Management: Every term serves as a firewall. Professional foreign trade practitioners use these terms to build a secure transaction framework.

(Next Issue Preview: Logistics and Documentation—What Kind of “Fantastic Voyage” Are Your Goods Undergoing? What exactly do the frustrating terms “container roll-over”, “port congestion” and “telex release” mean?)