What are Incoterms?
Incoterms is an abbreviation of the phrase “International Commercial Terms.” It is a term trademarked by the International Chamber of Commerce. Their purpose is to aid communication and reduce confusion when dealing with international and global trade. An Incoterm is something that describes and defines a transaction between two parties, usually the party exporting goods and the party importing them.
These terms set out the various parts of trade and can assign which party is responsible for the various costs, tasks, and processes. They also cover all parts of the import-export and transportation process, from the goods leaving the point of production to them being accepted at the importing port. They cover all the ways in which the different parties share obligations and responsibilities.
Main Areas of Responsibility
There are four main areas of responsibility that Incoterms cover:
- Delivery stage: This is where the seller and buyer make an agreement for the details of the cargo’s final delivery, and when the goods exchange hands and the seller’s responsibility ends.
- Transportation stage: Incoterms set out which party is responsible for transportation costs, how these costs are shared, or whether each party takes responsibility for different stages of transportation.
- Documentation and formalities: Incoterms set out which parties take responsibility for dealing with all customs, export, and import documentation, formalities, and duty payments.
- Insurance: Incoterms set out which party is responsible for providing insurance coverage during transportation.
What Are the Incoterms?
There are 11 Incoterms. The International Chamber of Commerce updates the terms annually.
- EXW – Ex Works: This states that the selling party agrees to hand over ownership of the goods at an agreed location. From the moment of handover, the buyer holds all responsibility and risk for the entirety of the shipping process.
- FCA – Free Carrier: This term designates that the selling party makes the goods being sold available at either his own premises or at another location. The seller is responsible for clearing the goods for export and pays any associated fees. The buyer must instruct the carrier to provide a Bill of Lading when they load the goods.
- CPT – Carriage Paid To: The same responsibilities and terms apply with this term as with the FCA, but in this case the seller also pays all delivery costs to a certain location.
- CIP – Carriage Insurance Paid To: The seller has the same responsibilities as with CPT but has to pay insurance costs and the insurance must have a high coverage ratio. However, the parties can come to an agreement to apply more limited coverage.
- DAP – Delivered At Place: The seller delivers the goods to an address or location agreed between both parties. The seller covers all costs and risk of loss during the delivery process but those responsibilities pass to the buyer once delivery has been made to that agreed location.
- DPU – Delivered at Place Unloaded: The seller covers all costs and risks to bring the goods to an agreed location. There they can be unloaded and moved to other – or similar – modes of transportation. The seller organizes customs and unloading, but the buyer is responsible for customs clearance and any associated rights.
- DDP – Delivered Duty Paid: The seller covers all costs and risks of transportation, carries out all export and import processes, and also pays any required import duties. Those responsibilities only end when the goods arrive at the destination address and are ready to be unloaded.
- FAS – Free Alongside Ship: The seller has sole responsibility for everything until the goods are delivered next to the ship’s loading point. At that point, all costs and risks transfer to the buyer who also has to arrange export and import clearances.
- FOB – Free On Board: All costs and risks lie with the seller until the goods are on board the ship. The seller is also responsible for all export clearance processes. Once on board the ship, responsibility for the goods shifts to the buyer.
- CFR – Cost And Freight: The same conditions apply as with FOB but the seller must also pay for transportation of the goods to the port of shipment.
- CIF – Cost, Insurance, and Freight: In this scenario, the seller has the same obligations as with CFR, but in this case they must also pay for minimum insurance. If the buyer wants more comprehensive insurance on the goods, then they must pay for it themselves.
Knowing the definitions of these Incoterms is a helpful way to facilitate international trade. They make the process smoother and quicker for both buyers and sellers.