Incoterms

What Are Incoterms?

Incoterms, short for International Commercial Trade Terms, are standardized terms published by the International Chamber of Commerce (ICC) that define the responsibilities between buyers and sellers in international transactions. They clearly outline who is responsible for various tasks, costs, and risks associated with the transport and delivery of goods across borders. By using Incoterms, both parties can avoid misunderstandings regarding their roles in the logistics process.

These rules are updated every 10 years to reflect the evolving nature of global trade, with the most recent update published on January 1st, 2020. The 2020 version of Incoterms includes 11 distinct terms, each designed to simplify communication between international buyers and sellers.

When making an international purchase, sellers often specify the applicable Incoterm using a three-letter abbreviation (e.g., EXW, FOB, CIF), which defines the obligations of both parties during shipping. Incoterms apply to different modes of transport including sea freight, air freight, and land freight.

Key Responsibilities Defined by Incoterms

Each Incoterm clearly defines the following responsibilities:

1. Point of Delivery: Where the goods are transferred from the seller to the buyer.

2. Transport Costs: Which party is responsible for paying transportation costs, whether it is freight prepaid or freight collect.

3. Export and Import Requirements: Who handles export duties, customs clearance, and import fees.

4. Freight Insurance: In certain Incoterms, the seller is required to purchase freight insurance, while in others, it’s optional.

Breakdown of the 11 Incoterms

1. EXW – Ex Works

• Responsibility: The seller makes the goods available at their location. The buyer handles all costs and risks, including export, transportation, and import.

2. FCA – Free Carrier

• Responsibility: The seller delivers the goods to a specified location within their country (e.g., a shipping terminal). After this, the buyer assumes all costs, including transportation and import duties.

3. FAS – Free Alongside Ship

• Responsibility: The seller manages the export process up to placing the goods alongside a ship. The buyer is responsible for loading the goods and all subsequent costs, including shipping and import.

4. FOB – Free On Board

• Responsibility: The seller handles export and loading the goods onto a vessel. The buyer takes responsibility once the goods are onboard, covering freight, unloading, and import duties.

5. CFR – Cost and Freight

• Responsibility: The seller covers transportation to the buyer’s port. Once at the port, the buyer is responsible for unloading, importing, and final delivery.

6. CIF – Cost, Insurance & Freight

• Responsibility: The seller covers the cost of transportation and insurance to the buyer’s port. Once the goods reach the port, the buyer takes over responsibility for unloading, import duties, and final delivery. The seller must purchase freight insurance.

7. CPT – Carriage Paid To

• Responsibility: The seller covers transport to a specified destination. The buyer assumes responsibility upon delivery at that point, handling import and final delivery.

8. CIP – Carriage & Insurance Paid To

• Responsibility: The seller pays for transport and insurance up to a specified destination. The buyer is responsible for unloading, importing, and delivering to the final destination. The seller must purchase freight insurance.

9. DAP – Delivered at Place

• Responsibility: The seller delivers the goods to a specified location. The buyer handles unloading, import duties, and final customs clearance.

10. DPU – Delivered at Place Unloaded

• Responsibility: The seller delivers and unloads the goods at the buyer’s location. The buyer takes over once unloading is complete, managing customs clearance and import duties.

11. DDP – Delivered Duty Paid

• Responsibility: The seller is responsible for all costs, including delivery, import duties, and taxes. The buyer only handles unloading the shipment at the final destination.

Why Use Incoterms?

Using Incoterms provides a clear, legally binding agreement between buyers and sellers, simplifying international trade by ensuring that both parties understand their responsibilities. Incoterms help prevent costly misunderstandings, especially when language barriers or cultural differences are involved.

While Incoterms are not mandatory, their usage is recommended because they make trade transactions more efficient by avoiding confusion over logistics, risks, and costs.

What Incoterms Don’t Cover

Although Incoterms clarify much of the logistics involved in international trade, there are several areas they don’t address:

1. Payment Terms: Incoterms don’t define how or when the buyer should pay for the goods.

2. Product Quality or Defects: Incoterms don’t cover responsibilities related to defective or incorrect goods.

3. Fraud Protection: Incoterms do not offer protection against fraud or non-delivery.

4. Risk of Damage, Loss, or Theft: Incoterms don’t cover insurance unless explicitly stated (as with CIF or CIP). Buyers should ensure separate insurance is purchased if needed.

Where to Learn More About Incoterms

To stay updated on Incoterms, it is best to refer to the International Chamber of Commerce (ICC), which publishes updated guidelines every 10 years. Resources like the ICC website and specialized guides from logistics providers can also offer detailed insights and explanations.

Waterway vs. Other Transport Methods

Not all Incoterms apply to every mode of transport. Here’s how the Incoterms break down by transport type:

• For all modes of transport: EXW, FCA, CPT, CIP, DAP, DPU, DDP.

• For sea and inland waterway transport only: FAS, FOB, CFR, CIF.

Freight Prepaid vs. Freight Collect

• Freight Prepaid: The seller pays for the shipping costs upfront. Incoterms like CFR, CIF, CPT, CIP, DAP, DPU, and DDP follow this approach.

• Freight Collect: The buyer covers the transportation costs. Incoterms like EXW, FCA, FAS, and FOB fall into this category.

Insurance Obligations under CIF and CIP

Both CIF (Cost, Insurance & Freight) and CIP (Carriage & Insurance Paid To) require the seller to purchase insurance:

• CIF: Requires minimum cover under Institute Cargo Clause (C).

• CIP: Requires more comprehensive cover under Institute Cargo Clause (A).