In the past, the problem that buyers and sellers encountered when shipping goods internationally was who would bear the losses? If a defect occurs during transportation, who will be held responsible? Where does the seller’s responsibility end?
For all these issues, there are Incoterms to ensure convenient import and export and avoid high-cost mistakes that may occur by both parties the seller and the buyer.
Why should traders know Incoterms?
Incoterms also known as International Commercial Terms, is a set of internationally recognized trading terms related to international commercial law issued by the International Chamber of Commerce (ICC).
The Incoterms provide internationally recognized definitions and rules for the most common commercial terms that are included in the sale contacts. All international transactions will be processed in accordance with the agreed Incoterm to determine who bears the costs and risks in accordance with the law.
Incoterms will be clearly indicated on the corresponding shipping documents they also determine the documents required for the transaction.
• Who is responsible for shipping?
• Who is responsible for insurance costs?
• Who is responsible for import costs?
• Who is responsible for customs clearance?
• Who is responsible for customs clearance?
• Who is responsible for transportation and where does it go?
• Who is responsible for the goods and until when?
Therefore, when the traders agree on the Incoterms rules and include them in the sales contract, they can understand exactly what each party is obliged to do and what responsibilities must be assumed in the event of loss, damage, or other accidents.
What are the most used Incoterms?
There are 11 rules of Incoterms classified into four major groups E, F, C, and D each of which is based on the delivery location and has a specific interpretation and definition as follows:
Incoterms Group E – EXW (Ex Works)
• EXW – Ex Works:
The seller shall deliver the goods to the buyer at an agreed location. At this time, the buyer bears all the costs of shipping and transporting the goods. The seller shall not assume any responsibility for the goods delivered. In this type, the buyer shall be responsible for preparing all papers and documents necessary for the transport process.
Incoterms Group F
In this group, the seller shall be responsible for delivering the goods to the buyer’s pre-agreed mode of transport, which means the seller will arrange some transport within his/her own country.
• Incoterms Free Carrier (FCA):
This is similar to EXW and it means the seller shall deliver the goods at his own risk and expense to his own premises or to an agreed place. In both cases, the seller shall be responsible for customs clearance of the exported goods. This term applies to all modes of transport, including air, rail, road, and containerized / multimodal transport.
• Incoterms Free Alongside Ship (FAS):
FAS means that the seller delivers the goods alongside the buyer’s nominated ship. Once the goods are beside the vessel, the responsibility transfers to the buyer.
• Incoterms Free on Board (FOB):
FOB means the seller shall deliver the goods on-board a ship nominated by the buyer. This means the seller bears all the costs and risks and customs clearance upon delivering the goods. Once the goods are on board the buyer becomes responsible for the goods.
Incoterms Group C
In this group, the seller bears responsibility for all costs to the destination port (including international transport). Once the goods are loaded on any means of transportation, the buyer shall be responsible for the goods of any damages or risks.
• Incoterms Cost and Freight (CFR):
The seller pays the cost and freight until the goods are delivered to the destination port.
• Incoterms Cost, Insurance and Freight (CIF):
CIF is similar to the CFR but in this case, the seller insures the goods against any damage or risk, or loss that may occur to the goods.
• Incoterms Carriage Paid To (CPT):
In this case, the seller shall be responsible for arranging the transportation of the goods to the designated destination, but shall not be responsible to obtain insurance cover for the goods.
• Incoterms Carriage and Insurance Paid To (CIP):
CIP is more similar to CPT, but in this case the seller is also responsible for arranging the insurance for the goods.
Incoterms Group D
The terms in this group are related to the destination where the goods are to be delivered.
• Incoterms DPU – Delivered at Place Unloaded:
In this case, the seller assumes full responsibility for the goods until it is unloaded in a designated place of the destination.
• Incoterms Delivered at Place (DAP):
The seller bears all costs and risks during transporting process to a designated place and the buyer becomes fully responsible as soon as the goods arrived at this place and are ready for unloading.
• Incoterms Delivered Duty Paid (DDP):
The seller covers all transportation costs and risks, import and export responsibilities, and pays import duties. Once the goods arrive at the buyer’s named place of destination and are ready for unloading, the risk shall pass to the buyer. To learn more about delivered duty paid DPP, click here
In short, Incoterms are very important for solving an international trade problem whereby parties from different countries can understand transport agreements differently but by knowing Incoterms, the process is easier.
what Incoterms should I use in International Trade?
Free Carrier (FCA) and Delivered at Place (DAP) incoterms are the most popular incoterms. They can be used for domestic and international shipments and for any mode of transport. As the obligations of both parties are identified the seller is responsible for export customs and the buyer is responsible for import customs. But in Ex Works (EXW) the buyer bears all responsibilities, which bears the risk that the buyer may not be able to fulfil all these responsibilities.
If you’re involved in international trade or plan to expand your business internationally, then it’s important that you understand the Incoterms rules. These standard sets of trading terms and conditions are designed to assist traders when goods are sold and transported. Each rule specifies obligations for each party (e.g., who is responsible for services such as transport; import and export clearance etc) while also specifying where risk transfers from the seller to the buyer so by agreeing on an Incoterms rule and incorporating it into your sales contract, both buyers and sellers can achieve a precise understanding of what they need to do in event of loss or damage. To determine the best incoterms for your project, contact us today and our team will be happy to assist you.