What are INCOTERMS? #
INCOTERMS, short for International Commercial Terms, are a set of standardized trade terms that are used to define the responsibilities of buyers and sellers involved in international trade transactions. The International Chamber of Commerce (ICC) first introduced INCOTERMS in 1936 and has since then revised them several times to meet the changing demands of the global trade environment. INCOTERMS are widely used in international trade to ensure that both parties involved in a transaction understand their respective obligations and liabilities.
Types of INCOTERMS #
There are eleven different types of INCOTERMS, each representing a different set of obligations and risks for the buyer and seller. The most commonly used ones are:
EXW (Ex Works) #
The first type of Incoterm is Ex Works, or EXW. This term is used when the seller agrees to make the goods available at their premises. The buyer is responsible for all other costs and risks associated with the transportation of the goods.
Under EXW, the seller is responsible only for making the goods available at their premises. This means that the buyer must arrange for the transportation of the goods and cover all costs associated with the transportation, including insurance.
FCA (Free Carrier) #
The second type of Incoterm is Free Carrier, or FCA. This term is used when the seller agrees to deliver the goods to a specified carrier. The buyer is responsible for all subsequent costs and risks associated with the transportation of the goods.
Under FCA, the seller is responsible for delivering the goods to the specified carrier. Once the goods are delivered, the buyer assumes all responsibility for the transportation of the goods.
FAS (Free Alongside Ship) #
The third type of Incoterm is Free Alongside Ship, or FAS. This term is used when the seller agrees to deliver the goods to a port. The buyer is responsible for loading the goods onto the ship.
Under FAS, the seller is responsible for delivering the goods to the port. Once the goods are delivered, the buyer assumes responsibility for loading the goods onto the ship.
FOB (Free on Board) #
The fourth type of Incoterm is Free on Board, or FOB. This term is used when the seller agrees to deliver the goods on board the ship. The buyer is responsible for all subsequent costs and risks associated with the transportation of the goods.
Under FOB, the seller is responsible for delivering the goods on board the ship. Once the goods are delivered, the buyer assumes all responsibility for the transportation of the goods.
CFR (Cost and Freight) #
The fifth type of Incoterm is Cost and Freight, or CFR. This term is used when the seller agrees to deliver the goods to the port of shipment and cover the cost of transportation to the port of destination. The buyer is responsible for all other costs and risks associated with the transportation of the goods.
Under CFR, the seller is responsible for delivering the goods to the port of shipment and covering the cost of transportation to the port of destination. Once the goods are delivered to the port of destination, the buyer assumes all responsibility for the transportation of the goods.
CIF (Cost, Insurance and Freight) #
The sixth type of Incoterm is Cost, Insurance and Freight, or CIF. This term is similar to CFR, but the seller also covers the cost of insurance.
Under CIF, the seller is responsible for delivering the goods to the port of shipment, covering the cost of transportation to the port of destination, and covering the cost of insurance. Once the goods are delivered to the port of destination, the buyer assumes all responsibility for the transportation of the goods.
CPT (Carriage Paid To) #
The seventh type of Incoterm is Carriage Paid To, or CPT. This term is used when the seller agrees to deliver the goods to a carrier and cover the cost of transportation to the agreed destination. The buyer is responsible for all other costs and risks associated with the transportation of the goods.
Under CPT, the seller is responsible for delivering the goods to the specified carrier and covering the cost of transportation to the agreed destination. Once the goods are delivered to the agreed destination, the buyer assumes all responsibility for the transportation of the goods.
CIP (Carriage and Insurance Paid To) #
The eighth type of Incoterm is Carriage and Insurance Paid To, or CIP. This term is similar to CPT, but the seller also covers the cost of insurance.
Under CIP, the seller is responsible for delivering the goods to the specified carrier, covering the cost of transportation to the agreed destination, and covering the cost of insurance. Once the goods are delivered to the agreed destination, the buyer assumes all responsibility for the transportation of the goods.
DAP (Delivered at Place) #
The ninth type of Incoterm is Delivered at Place, or DAP. This term is used when the seller agrees to deliver the goods to a specified location. The buyer is responsible for unloading the goods and all subsequent costs and risks associated with the transportation of the goods.
Under DAP, the seller is responsible for delivering the goods to the specified location. Once the goods are delivered, the buyer assumes responsibility for unloading the goods and all subsequent costs and risks associated with the transportation of the goods.
DPU (Delivered at Place Unloaded) #
The tenth type of Incoterm is Delivered at Place Unloaded, or DPU. This term is similar to DAP, but the seller is responsible for unloading the goods.
Under DPU, the seller is responsible for delivering the goods to the specified location and unloading the goods. Once the goods are unloaded, the buyer assumes all responsibility for the transportation of the goods.
DDP (Delivered Duty Paid) #
The eleventh and final type of Incoterm is Delivered Duty Paid, or DDP. This term is used when the seller agrees to deliver the goods to a specified location and cover all costs and risks associated with the transportation of the goods, including customs duties.
Under DDP, the seller is responsible for delivering the goods to the specified location and covering all costs and risks associated with the transportation of the goods, including customs duties. The buyer assumes no responsibility for the transportation of the goods.
Choosing the Right Incoterm #
When it comes to international trade, choosing the right Incoterm is critical. It is important to choose an Incoterm that reflects the agreement between the buyer and seller, and that accurately represents the responsibilities and obligations of each party.
The choice of Incoterm will depend on a number of factors, including the nature of the goods being transported, the destination country, and the risk tolerance of the parties involved.
For example, if the goods being transported are high-value and require special handling, the buyer may prefer to choose an Incoterm that places greater responsibility on the seller, such as CIF or CIP. On the other hand, if the buyer is experienced in international trade and has a high risk tolerance, they may prefer an Incoterm such as EXW or FOB.
In addition to considering the nature of the goods being transported and the risk tolerance of the parties involved, other factors to consider when choosing the right Incoterm include the cost of transportation, insurance, and customs duties.
Conclusion #
Incoterms are a critical aspect of international trade, and choosing the right Incoterm is essential for ensuring a smooth and successful transaction. By understanding the different types of Incoterms and what they mean for international trade, buyers and sellers can make informed decisions and avoid misunderstandings or disputes.
It is important to remember that Incoterms are not a substitute for a written contract between the parties involved. A written contract should always be used to clarify any ambiguities or disagreements that may arise, and to ensure that the interests of both parties are protected.
By working together and choosing the right Incoterm, buyers and sellers can achieve a successful international transaction and build long-lasting business relationships.