25 International trade terms you should know

In the world of global trade, effective communication is a must. Every deal depends on a mutual understanding of trade terms and practices, and each transaction contributes to the broader flow of international commerce.

As Peter Harrell of Carnegie Endowment for International Peace notes, “trade is a key element of solving global challenges that affect us all, like the green energy transition and the risks of AI and the digital economy.”

To compete and avoid costly mistakes, it’s critical for business owners, consultants, and aspiring trade professionals to learn the language of international commerce. Read on for 25 international trade terms you should know to confidently navigate global markets.

Basic international trade terms

On the most fundamental level, everyone should know these basic terms. They help to shape the foundation of cross-border trade.

• Export – Sending goods or services from your country to another for sale.
• Import – Bringing goods or services into your country from abroad.

• Tariff – A type of tax one country places on goods coming in from other countries. It drives up the price of foreign goods for both foreign businesses and domestic shoppers. According to Michael Ligon of Forbes, tariffs may be used as a “tool to regulate trade, protect domestic industries, and generate revenue.”

• Trade Balance – The difference between a country’s exports and imports. A positive balance means the country has more exports (a trade surplus). A negative one means that they have more imports (a trade deficit). To calculate trade balance, you’d use this equation: Trade Balance = Total Value of Exports – Total Value of Imports.
• Exchange Rate – The value of one country’s currency compared to another. It affects how much it costs to buy and sell across borders.

Shipping and delivery terms

These shipping and delivery terms will help you clarify obligations and make the trade process more transparent for everyone:

1. Incoterms (International Commercial Terms) – Internationally recognized trade rules that outline seller and buyer responsibilities in an export transaction. These rules were created by the International Chamber of Commerce. The following terms are all examples of commonly used Incoterms.
2. EXW (Ex Works) – A situation where the seller makes the goods available at a specified location. The buyer pays all the transport and export costs.
3. FOB (Free on Board) – The point at which the seller no longer owns goods. It’s when ownership is transferred to the buyer. It also determines who is liable when goods are damaged during the shipping process.
4. CIF (Cost, Insurance, and Freight) – When the seller pays for transport and insurance to the destination port. Once the goods are shipped, the buyer becomes responsible for any further costs.
5. CFR (Cost and Freight) – The seller delivers the goods to the vessel at the port of shipment and then pays for transport. They do not pay for insurance. The buyer unloads the goods at the destination port and pays taxes, tariffs, import duties, and any further transportation costs. Risk transfers from seller to buyer as soon as the goods are on board.
6. DDP (Delivered Duty Paid) – A deal where the seller takes on all of the costs associated with the goods (transport, insurance/losses, and customs duties). Once the goods arrive at the agreed-upon destination, the buyer is typically responsible for unloading the goods and transporting them from the port to their warehouse.
7. CPT (Carriage Paid To) – The seller pays for shipping to a named destination (they don’t pay for insurance). The buyer takes on risk once the goods are handed to the carrier.
8. Group C and Group D Terms – Group C means the seller pays for transport but not risk (CIF, CFR). Group D means the seller handles delivery all the way to the destination (DDP).

How much do you know about Incoterms® 2020? Take this quiz to test your knowledge.

Payment and finance terms

Whether you’re an importer or exporter, these finance terms can help reduce risk in any trade transaction:

1. Letter of Credit (LC) – A guarantee from a bank stating that the seller will get paid once all delivery terms are met and the bank receives proof of shipment. Think of it as the buyer saying, “If the seller follows the rules and sends us the appropriate documents, we promise to pay them.” The letter will outline the payment amount and when the payment will be made.
2. Bill of Exchange – A written promise that the buyer will pay a specific amount on a set date. It’s much like an invoice, but for international trade agreements.
3. Open Account –  A sale where the seller ships goods before the buyer pays (usually 30, 60, or 90 days before the payment due date). This type of arrangement is typically reserved for trusted, long-time buyers.
4. Documentary Collection – A payment method where the seller’s bank collects payment from the buyer’s bank once shipping documents are exchanged. The banks don’t verify the validity of the documents, though. This form of payment is ideal for merchandise and commodity exports.
5. Forfaiting – Selling future medium and long-term receivables to a bank or finance company at a discount to boost cash flow.
6. Export Credit Insurance – Insurance that protects sellers if the buyer doesn’t pay or if political issues interfere with the transaction.

Learn more about trade finance terms.

Trade policy and compliance terms

Trade policies and regulations shape how goods cross borders. These terms help to define the rules behind tariffs, agreements, and market access.

1. Free Trade Agreement (FTA) – A deal between two countries that want to trade freely. As part of the agreement, tariffs are usually reduced or removed for certain goods and services. Other trade barriers may be eliminated as well (quotas, subsidies, etc.).
2. Non-Tariff Barrier (NTB) – Anything that makes it harder for two countries to trade with each other. Some of the most common NTBs are quotas, special standards, and licensing rules.
3. Customs Duty – A tax charged for any goods coming into the country. It is expressed as a percentage and is based on the item’s total value.
4. Harmonized System (HS) Code – The Harmonized System (HS) is a global system used to classify goods. This system is managed by the World Customs Organization. These codes have 6 digits, but individual countries may add more to allow for deeper classification.
5. Most-Favored-Nation (MFN) – A World Trade Organization clause stating that countries must treat all of their trading partners equally when it comes to tariffs and trade rules.

Logistics and documentation terms

Trade runs heavily on paperwork. These documents prove ownership, describe goods, and keep shipments moving forward without delays.

1. Bill of Lading (B/L) – This is a legal document that serves as proof that goods were shipped. It also acts as a title document and a shipping contract. Here’s an example of a B/L.
2. Certificate of Origin – A certificate that confirms where a given product was made. It’s used in the U.S., Canada, and Mexico. Although it’s not always required, a Free Trade Agreement (FTA) Certificate of Origin helps to determine whether a product qualifies for tariff benefits (low or no tariffs).
3. Commercial Invoice – The official document issued by the exporter to the buyer. It lists information about the goods, the buyer, the seller, and the shipment. It’s the main document used by the customs authorities in the importing country.
4. Proforma Invoice – A preliminary invoice is very much like a quote; it shows the buyer what a shipment will include and how much it will cost. It is sent to the buyer before the goods are shipped.
5. Packing List – A list of what’s inside each package. It includes quantities, weights, and measurements, and more. It’s used for customs checks and warehouse organization.

Mastering the language of global trade

Knowing the above terms can help you “speak trade” more confidently when negotiating contracts, shipping goods overseas, or reviewing customs documents. The more fluent you are, the smoother your deals and deliveries will be.

To dig deeper, explore more trade glossaries:

• Incoterms® 2020
• International Trade Council Glossary
• American World Trade Chamber of Commerce International Trade Glossary
• World Bank Global Trade Glossary