When it comes to international trades, having a common ground between participating parties is crucial in order not only to make the process smooth but also for companies to be able to foster a good lasting business relationship. That’s why standardizing terms and practices makes it easier for parties to come to an agreement, saves time, prevents conflicts due to misunderstandings, incomplete or misinterpreted communication and expedites the overall agreement process.
Ultimately, the adoption of standardized terms serves as the clean base for efficient, effective, and conflict free international trade transactions, fostering communication, trust and cooperation among global partners.
What are Incoterms?
Incoterms, short for International Commercial Terms, are standardized rules and regulation terms established by the International Chamber of Commerce (ICC).
These are specifically designed to clearly define the responsibilities of both buyers and sellers at each stage of the international trade process, as well as describing the extent of each party’s responsibility. These terms are well known in the international trade ambit and its usage is widely accepted all over the world.
The first publication of the Incoterms set of rules was originally published in 1936. Since then, these rules have undergone several revisions to adapt to the changing landscape of global trade. The Incoterms rules were revised in 1957, 1967, 1976, 1980, 1990, 2000, 2010, and most recently in 2020.
Incoterms Rules for Any Mode of Transport
There are 11 Incoterms and each one describes specific obligations and responsibilities for both the buyer and the seller, such as the point of delivery, transportation costs, export and import formalities, and insurance costs. You can download the Chart of Responsibility and Transfer of Risk here.
Each term covers a diverse range of options that adapt to specific needs of a variety of businesses. Is also important to consider that the specific Incoterm chosen for a transaction can impact the delivery time due to the distribution of responsibilities and tasks between the parties involved.
Is important for businesses to become familiar with them to better choose the one that best suits their industry or specific transaction.
1. Ex Works (EXW)
Under this Incoterm, the seller, or exporter is responsible for making the cargo available to the buyer at the seller’s premises. The buyer is responsible for all costs, duties, insurance and risks of handling and shipment. Risk transfers from the seller to the buyer the latter has placed the goods outside their facilities.
2. Free Carrier (FCA)
Widely used, In this Incoterm, the seller is responsible to transport the goods to a place specified by the buyer, and is required to complete all origin custom procedures. The buyer then arranges transportation. Risk transfers to the buyer once the shipment has reached a warehouse.
3. Carriage Paid to (CPT)
Another option. This Incoterm states that the seller is the one to cover the cost of delivering goods to the carrier, and the seller assumes the risks associated until the carrier takes over.
4. Carriage and Insurance Paid to (CIP)
This Incoterm agrees for the seller to deliver the goods to the carrier or at the location agreed and pays the costs of carriage and insurance. The risk passes to the buyer once the goods are delivered.
5. Delivered at Place (DAP)
The seller delivers and is responsible for all costs associated with the delivery of goods, when choosing this invoice, the buyer is responsible for the cost and risk from unloading point and transport after arrival.
6. Delivered at Place Unloaded (DPU)
With this Incoterm, the seller is responsible for delivering and unloading the goods and for clearing the goods for export. The buyer is responsible for import clearance and import taxes.
7. Delivered Duty Paid (DDP)
Under this term, the seller delivers and is responsible for all costs associated with the delivery. The buyer is responsible for the costs and risks associated with the unloading.
8. Free Alongside Ship (FAS)
In this case, the seller delivers the goods alongside a vessel designated by the buyer at the port of shipment. The buyer is responsible for all costs and risks associated with the transportation of the goods from that point.
9. Free on Board (FOB)
When choosing this Incoterm, the seller delivers the goods on board the vessel designated by the buyer at the port of shipment. The buyer is responsible for all costs and risks associated with the transportation of the goods from that point.
10. Cost and Freight (CFR)
This Incoterm states that the seller is the one delivering on board the vessel. The seller is responsible for the costs associated with the transportation up to arrival in the port of destination. The risk passes to the buyer when the goods are on board the vessel.
11. Cost, Insurance, and Freight (CIF)
A commonly used Incoterm where the seller delivers the goods on board the vessel and the seller is responsible for the costs associated with transportation until it arrives at the destination port, including insurance. The risk passes then to the buyer only once the merchandise is on board.
Incoterms Changes Over Time (2010 vs 2020)
As we mentioned earlier, Incoterms have undergone some changes throughout the years as the International Chamber of Commerce (ICC) updates Incoterms about every ten years to better adapt to the changing needs in the industry and also to the ever evolving technologies applied in global commerce.
The latest version Incoterms 2020, covers the following adjustments:
Delivered at Terminal (DAT)
Delivered at Terminal (DAT) was changed to Delivered at Place Unloaded (DPU) to clarify that the place of final delivery is not necessarily a “terminal” only.
Insurance cover differences between CIF and CIP
CIF can now only be used for maritime transport where delivery is onto a ship and the destination is a port only. Also, CIP has increased the level of insurance required to be obtained by the seller.
Cost Listings
With better transparency in mind, 2020 Incoterms rules establish that all total costs will be stated and collected all together. This to avoid carriers to change their prices and contracts clearly stating the costs to each party since the beginning and avoiding conflicts that were happening when adding costs once a contract was signed.
Security Requirements
Incoterms 2020 talk about updated security measures required in order to adapt to the changing modern industry.
Transport
Incoterms 2010 rules assumed that goods were always carried by a 3rd party, but Incoterms 2020 now allows sellers and buyers to use their own transportation.
Bill of Lading
Incoterms 2020 states that upon agreed by the parties, the buyer can instruct the carrier to issue to the seller, a document stating that the goods have been loaded.
What is not included in Incoterms?
Incoterms don’t cover the rest of the conditions in a sale, neither they identify the merchandise or contract price. They also do not reference the method or payment terms or mention anything about title of ownership and when it passes from seller to buyer.
They don’t give any specifications on which documents must be provided at customs or Address liability for delayed, damaged or lost merchandise.
3 Advantages and Disadvantages of Incoterms
Although not mandatory, Incoterms bring important advantages:
- Advantage 1: They become key to keeping a clear communication in the trade agreement.
- Advantage 2: They prevent conflict between the parties by helping both buyer and seller define their obligations, risks and costs during a specific contract while encouraging transparency since the beginning of the transaction.
- Advantage 3: Without Incoterms contracts would be prone to many disagreements and confusions considering the potential language and cultural barriers and different interpretations of a scope of work.
- Disadvantage 1: The main disadvantage of Incoterms is that each seller and buyer will have a specific preference that will tend to work better for the greater benefit on their side. Both parties will have to negotiate to reach an agreement that works for both.
- Disadvantage 2: Incoterms do not cover the rest of clauses needed in a sales contract, such as ownership, costs and payment.
- Disadvantage 3: While Incoterms provide security to international transactions, they do not resolve all these issues or special cases for example, products may be unique, and Incoterms may not be applicable.
Also, certain Incoterms may raise costs for one party, potentially impacting the negotiation process and overall deal outcomes. This can result in challenges in securing favorable terms and agreements. That’s why it is always important that both parties are familiar with the Incoterms or hire the services of a specialized logistics company, to ensure that they clearly understand what the selected term for each contract will imply for each one’s end, this way preventing any future conflicts due to misinformation.
Conclusion
Overall, Incoterms can bring essential benefits to international trade transactions that significantly impact the efficiency and effectiveness of global commerce, providing a standardized set of rules and regulations among buyers and sellers. Now that you know what Incoterms are and how to use them, miscommunication can be avoided and transparency enhanced, therefore facilitating smooth international trade transactions.
The adoption of Incoterms not only enhances operational clarity but also promotes trust, reliability, and cooperation among trading partners worldwide. Incorporating Incoterms in your logistics process is not just a best practice, but a strategic must for businesses looking to thrive in the world of international trade.
With +30 years of experience and expertise, in EP Logistics we stand out as a reliable partner helping out clients with the complexities of international trade. Our Logistic Services we can help your businesses optimize management, reduce risks, and enhance your global trade practices. We successfully serve many companies in the United States and Mexico. Feel free to contact us and let us assist you with your international trade transactions with confidence and efficiency.
