In this page, you will learn all you need to know Incoterms, its benefits, the various types of incoterms, and everything you need to know about its use in trade transactions.
What are Incoterms?
Simply put, Incoterms are a set of universally recognized rules that define the responsibilities of the seller and buyer. It chalks out who is responsible for managing the tasks and costs associated with a shipment, from documentation to customs clearance. These rules are issued by the International Chamber of Commerce (ICC) and are updated every 10 years.
Why are Incoterms important and what do they define in a sale?
Incoterms are standardized terms for international shipping and serve as a contract between a seller and a buyer. In total, there are 11 rules. A 3-letter abbreviation is utilized by the seller to denote the terms of the trade. This abbreviation spells out the practical risks, time of delivery, costs, and the overall logistics of the transaction from start to finish. A good understanding of Incoterms will help in efficient business transactions as it clearly defines who does what at every step.
Some of the basic information that are defined when the parties adopt an Incoterm are listed below
Cost
The partner that will assume any costs in the process.
Insurance
The partner who will cover the insurance costs
Transfer of Risk
The risks to be assumed by either party
Responsibilities
The responsibilities allocated to each party
Customs
The partner that is responsible for customs clearance
Documents
The partner responsible for the documentation
Inspection
The partner that inspects the goods involved.
Why are Incoterms beneficial?
When it comes to conducting business overseas, many things can go wrong. From language to localized issues, there are plenty of chances for miscommunication to happen. Having standardized terms that businesses the world over follows is beneficial for many reasons. Some of the benefits of Incoterms are as follows-
Standardized Rules
The Incoterms are standardized rules that are followed by all companies with an international business worldwide. The clear rules act as a foundation on which both the exporter and importer carry out their transactions without any confusion or miscommunication from either side. Incoterms appoint tasks to both parties and define every aspect of a transaction, from insurance to customs clearance. Sellers and buyers can choose which Incoterms are beneficial for either side.
Reduced Risk and Miscommunication
Many things can go wrong in an export/import transaction. The lack of definition in contracts can create unnecessary issues. It is imperative that the contractual terms are specific to avoid miscommunication and confusion in the overall import/export process. Since the Incoterms are imposed by the ICC, an organization that companies the world over recognizes, and certain Incoterms specify the party that will cover insurance costs, there is minimal risk involved.
Bridge the Gap
The languages and culture may be different but the Incoterms are universal. They help in bridging the gap where cultural and language differences may occur. They are globally recognized and accepted by many countries, making international trade transactions easier to carry out. Since these terms are globally recognized, both parties already know the terms that would be beneficial for them in the process and make the entire process a lot faster, bridging any existing gap.
What Are The Different Types Of Incoterms 2020?
The seven Incoterms 2020 for any mode of transport are listed below
1. EXW - Ex-Works or Ex Warehouse
Ex works is when a seller is only responsible for delivery of goods to an agreed-upon location and the buyer bears the responsibility for the shipping costs.
2. FCA - Free Carrier
This rule places the responsibility of export clearance and delivery of goods to the seller who will deliver the goods to a premises as determined by the buyer.
3. CPT - Carriage Paid To
This rule defines that the seller is responsible for all costs related to bringing the goods to an agreed destination. The liability transfers to the buyer, who assumes unloading, local delivery and import requirements.
4. CIP - Carriage and Insurance Paid To
This rule defines that the seller is responsible for all costs and insurance charges to bring goods to an agreed premise. The liability then transfers to the buyer once the goods are taken in charge at the premise.
5. DAP - Delivered at Place
DAP defines that the seller is responsible for arranging carriage and delivery of goods. Risk transfers to the buyer once the goods are available for unloading, which is done at the buyer’s risk.
6. DPU - Delivered at Place Unloaded
DPU defines that the seller bears the responsibility of all costs and risks until the goods are unloaded at the agreed premise. The buyer is responsible for import customs clearance.
7. DDP - Delivered Duty Paid
This is when the seller assumes the responsibility for costs and risks to deliver the goods to an agreed place. The seller must pay for both export and import customs fees, duties, and taxes.
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The four Incoterms® 2020 rules for Sea and Inland Waterway Transport are:
1. FAS - Free Alongside Ship (insert name of the port of loading)
In FAS, the seller is responsible for clearing the goods for export and loading them alongside on a vessel at the port of departure. The buyer is responsible for loading the goods onto the vessel, and handling costs and import formalities from that point onward.
2. FOB - Free on Board (insert named port of loading)
In FOB, the sellers are responsible for clearing the goods for export and loading them onto a vessel at the port of departure. The buyers are responsible for risks and costs associated with the transaction from the point onward.
3. CFR - Cost and Freight (insert named port of destination)
In CFR, the sellers are responsible for clearing the goods for export and load them on to the vessel at the port of departure and assume transportation costs associated with the goods. The buyers assume all costs from the port of destination, including import duties and fees.
4. CIF - Cost Insurance and Freight (insert named port of destination)
In CIF, the sellers are responsible for clearing the goods for export, loading them on to the vessel, paying the transportation and insurance costs to the port of destination. The buyers assumes risks and costs once the goods are on board the vessel.
Who is responsible for insurance ex-works terms?
Earlier in this page, we discussed what does ex works mean in Incoterms. In this section, we will learn who is responsible for insurance. The buyer is responsible for insurance costs under the EXW rule. Any loss or damage under the main carriage of the journey falls under the responsibility of the buyer. Marine insurance policies may not cover for the duration the goods are in the seller’s premises or until transit takes place. It is a good idea to check with your insurance company if you are covered for the entire duration of the journey.
Which Incoterm should I use?
DAP is the one of the more commonly used terms for international business transactions. DAP allows the seller to pay for the shipping, insurance costs and prepare customs documentation on behalf of the customer. This is especially useful for businesses that directly deal with customers. The recipient of the goods assumes the responsibility of paying for import duties and fees.
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I’m Tammy Waller, a supply chain and logistics specialist with over 10 years of expertise. I’ve been an author and SFL employee for over 10 years.
As an author, I’ve been able to teach others. I love guiding users through supply chain and logistics operations.
I have substantial experience managing logistics operations, supply chain management, transportation, inventory management, and warehousing in shipping-moving and logistic services. I’ve worked on many worldwide logistics and supply chain projects, honing my abilities in negotiating rates, scheduling shipments, and managing vendors.
