Discover the fundamentals of Incoterms® in international trade and how they impact businesses. Gain clarity and consistency in global trade operations.
What are Incoterms®?
Incoterms®, which is an abbreviation for International Commercial Terms, refers to a universally recognised set of trade terms that are widely used in international commerce. They are a set of internationally recognised 3-letter trade terms. They describe the practical arrangements for the delivery of goods from sellers to buyers and allocate the obligations, costs, and risks between the 2 parties. These terms play a crucial role in defining the rights and responsibilities of both buyers and sellers involved in international trade transactions. Trade transactions are highly dependent on them, as they play a critical role in maintaining clarity and consistency across the global trade landscape.
Elements of a contract
When you are negotiating a contract with a buyer, you'll need to discuss and agree:
where the goods will be delivered
who arranges transport
who handles and pays for insurance
who handles customs procedures
who pays any duties and taxes
For example, an exporter might agree to deliver goods, at the exporter’s expense, to a port in the customer’s country. The customer might then take over responsibility, arranging and paying for customs clearance and delivery to their premises. The exporter might also be responsible for arranging insurance for the goods until they reach the port, but pass this cost on to the customer.Incoterms® are used to ensure these responsibilities and handovers are clearly defined and agreed upon.
As well as delivery details, the contract should cover the payment. This should include what currency payment will be made in, how much will be paid when payment is due, and what payment method will be used.
Contracts for service exporters
Exporters in the services sector cannot use Incoterms®, as there is no physical product that has to be shipped. Therefore, when you are negotiating contracts for service provision, it is important to define exactly what services you are providing and to what standards.
How many Incoterms® are there?
There are 11 Incoterms®:
EXW (Ex Works)
FCA (Free Carrier)
FAS (Free Alongside Ship)
Free on board, or FOB (Free On Board)
CFR (Cost and Freight)
CIF (Cost, Insurance and Freight)
CPT (Carriage Paid To)
CIP (Carriage and Insurance Paid To)
DAP (Delivered At Place)
DPU (Delivered At Place Unloaded)
DDP (Delivered Duty Paid)
Tip: Read our blog entry "Decoding Incoterms® One-By-One: A Quick Guide for Import-Export Businesses" . In it, we are unlocking the Mystery - Every Incoterm®, Explained. The cheat sheet for import-export businesses to navigate shipping & delivery responsibilities. https://www.customsmanager.info/post/incoterms
Can you make it simpler?
YES! To make it simple, Incoterms® can also be classified into four distinct categories based on their scope and applicability in international trade.
The four stages of the journey of goods in international trade are, in simplified terms, as follows:
Departure, where the goods begin their trip
Main Carriage Unpaid, which refers to the portion of the journey of the goods to the point where the main transportation starts.
Main Carriage Paid, which signifies the phase of the journey where the seller has completed the payment for their transportation; and finally,
Arrival, which marks the end of the journey.
Departure terms, such as EXW (Ex Works), are trade terms that allocate a significant portion of the responsibility to the buyer.
Note: Under these terms, the buyer assumes the responsibility for arranging and covering all transportation and associated costs starting from the seller's premises!
Main Carriage Unpaid Incoterms®
The Main Carriage Unpaid terms, such as FCA (Free Carrier) and CPT (Carriage Paid To), are trade terms that allocate certain responsibilities to the seller. Under these terms, the seller is obligated to deliver the goods to a designated location or carrier.
It is important to note that under "Main Carriage Unpaid" Incoterms® the buyer remains responsible for the primary transportation expenses.
Main Carriage Paid Incoterms®
The Main Carriage Paid terms, such as CFR (Cost and Freight) and CIF (Cost, Insurance, and Freight), are contractual agreements that place the responsibility on the seller to bear the expenses associated with transportation, which typically include freight charges and sometimes insurance costs as well.
Arrival terms, such as DAP (Delivered at Place) and DDP (Delivered Duty Paid), refer to specific contractual agreements between the seller and the buyer. In these terms, the seller assumes the responsibility of managing and covering all costs associated with the transportation and delivery of the goods to the buyer's designated location.
Tip: Arrival Incoterms® includes not only the expenses related to shipping and handling but also any import duties and taxes that may be applicable!
Specific sea and inland waterway terms
In addition, there are sea and inland waterway terms, such as FAS (Free Alongside Ship) and FOB (Free On Board).
It is important to note that the transfer of risk and responsibility from the seller to the buyer is commonly associated with the specific moment when the goods are loaded onto a vessel at a port.
Incoterms play a crucial role in assisting businesses in effectively managing the intricacies of international trade. They accomplish this by clearly defining the specific roles and responsibilities that businesses have at various stages of the shipping process. By providing detailed guidelines, these classifications enable businesses to understand their liabilities and obligations, ensuring smooth and efficient international trade operations.
Various Dates - Virtual Training Event
This course develops the competencies that professionals need to deal with all aspects of customs Incoterms®, including how to handle circumstances and activities in Incoterms®, including how to identify the correct term and apply it in the business context
More Information and Links
Understanding Incoterms: FOB vs. CIF - Which One Makes Sense for Your Business?
Discover the key differences between FOB and CIF Incoterms and determine which one is best for your business. Don't mix them up again!
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