Overall, international trade can be quite confusing. Every country has its own laws and regulations exporters and importers need to be aware of. Similarly, for a successful and problem-free trading experience, both parties need to know their responsibilities. This is exactly where Incoterms come into play.
Incoterms are essentially a set of terms published by the International Chamber of Commerce (ICC). Incoterms are also known as international commercial terms. They are fundamental in international trade because they clarify the obligations of both buyers and sellers. By doing so, Incoterms prevent any confusion that may arise during transactions. Therefore, they are used in international trade frequently to understand the exact terms of agreements.
Why Are Incoterms Important?
The history of Incoterms date back to the 1930s. The International Chamber of Commerce, also known as ICC, established Incoterms first in 1936. Since then, Incoterms have been updated periodically based on the changing practices in world trade.
When thought of as a set of rules and guidelines for international trade, Incoterms provide a safe environment for export and import. Acting as a common language between the buyers and sellers, Incoterms are helpful for parties to understand each other and their agreement more clearly. Activities that may seem simple such as labeling shipments or filling out a purchase order follow Incoterms.
An Overview of Incoterms
Incoterms are made up of 11 rules established by ICC. These rules define the responsibilities of buyers and sellers during trade transactions. These rules define such responsibilities in detail so that there is no room for confusion. The rules clarify the tasks of both parties, costs and risks involved during the entire process. This gives the buyer and the seller a clear picture of what they need to do and what they need to know.
There are different Incoterms for different modes of transport. As of 2020, there are two main categories. One category involves rules regarding any mode of transport. The other category involves rules regarding sea and inland waterway transport. Let us examine each category in detail and the rules within each category.
Incoterm Rules for Any Mode of Transport
There are seven Incoterms for any mode of transport. We have listed them and briefly explained what each of them means. Let us take a look.
- EXW (Ex Works): The only responsibility of the seller is to make the goods available to be picked up either at the location of the seller’s business or another specified location. On the other hand, the buyer undertakes all the transportation costs and risks involved.
- FCA (Free Carrier): The seller is responsible for delivering the shipping to a port that was agreed upon. The seller undertakes to export the goods as well as the processes before the export. The buyer becomes responsible for the shipment once it is ready to be loaded.
- CPT (Carriage Paid To): The seller delivers the shipment to a carrier at their expense and undertakes all risks and costs of transport.
- CIP (Carriage and Insurance Paid To): The seller undertakes all the risks until the goods are delivered to a carrier for the first time at the place of the shipment. The buyer assumes all the risks once the goods are delivered to the first carrier. Yet the seller remains responsible for the transport costs until the shipment reaches its destination.
- DAP (Delivered at Place): The delivery of the goods at the named destination is the responsibility of the seller. The seller undertakes all the risks until unloading. However, the risks and costs of unloading are the buyer’s responsibility.
- DPU (Delivered at Place Unloaded): The seller is responsible for all the risks and transportation costs until the goods arrive at the destination and are unloaded.
- DDP (Delivered Duty Paid): The seller undertakes all the transportation costs as well as the risks involved. The seller also clears the goods and pays export and import duties for the shipped goods.
Incoterm Rules for Sea and Inland Waterway Transport
There are different Incoterms when it comes to inland waterway and sea transport. We listed all 4 of them and explained them briefly.
- FAS (Free Alongside Ship): The seller is responsible for delivering the goods alongside the vessel at the port. The seller assumes all the transportation costs and risks involved until the goods are delivered at the dock. From this point on, the buyer assumes all the risks and transportation costs.
- FOB (Free on Board): The seller delivers the goods on board a vessel that was decided by the buyer. The buyer is responsible for the risks involved as well as the transportation costs once the goods are loaded on the vessel.
- CFR (Cost and Freight): The seller is responsible for arranging the transportation of goods by sea to the destination port. The seller is also responsible for providing the buyer with the necessary documents. However, the seller is not responsible for the insurance of the cargo in case of loss or damage during transportation.
- CIF (Cost, Insurance and Freight): The seller is responsible for delivering the goods to the ship, loading them onto the vessel and insuring the shipment until it reaches the destination. The seller undertakes the costs during the transportation. The buyer undertakes the responsibility for the costs once the shipment is delivered to the destination port.
How to Choose the Most Suitable Incoterms
It is important that importers and exporters know all the details regarding Incoterms. Because knowing the details of each Incoterms will help them choose the most suitable one. Choosing the most suitable option depends on the responsibilities buyers and sellers want to undertake.
Each of the Incoterms has different benefits for importers or exporters. They may want to reduce the risks involved in the transportation process, have more control over the costs or have more security in terms of logistics. Depending on their priorities, buyers and sellers should choose the Incoterms that are most suitable for their situation. This will allow them to have clear expectations regarding the process, know the risks and prepare accordingly.
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