Incoterms: Everything You Need to Know

If you're a global trade business, you need to be familiar with Incoterms.

Incoterms (International Commercial Terms) are international trade terms that define the responsibilities of buyers and sellers when shipping goods.

They help to prevent misunderstandings and disputes during international transactions.

In this article, we will discuss the different types of Incoterms and how they can benefit your business.

We'll also provide a few tips on choosing the right incoterms for your needs.

Advantages of Incoterms in International Trade

There are many advantages when using Incoterms in your international trade. Here are a few of the most important benefits:

Provides Clarity and Certainty

Incoterms help to prevent misunderstandings when it comes to the international trade terms by clearly defining the responsibilities of buyers and sellers and helping to facilitate international trade.

This can help to avoid disputes and delays in shipments.

Saves Time and Money

Shipping companies can save time and money by reducing the need for paperwork and communication with other parties, which increases delivery speed.

Improve Efficiency

Incoterms can help improve your shipping operations' efficiency by standardizing procedures. This can make it easier to track shipments to their place of destination and ensure that goods are delivered on time.

Reduce Risk

Incoterms can help reduce the risk of delays or damage to shipments, as they provide clear guidelines on how goods should be packaged and shipped.

Promote Fair Trade

Incoterms help promotes fair trade by ensuring that buyers and sellers are treated fairly, which can help build trust and confidence in international trade.

It is important to note that each Incoterms has its own set of rules that define the responsibilities of buyers and sellers.

CFR Incoterms (Cost and Freight)

CFR means that the seller bears the responsibility of shipping the goods to the place of destination and paying for all the costs of transportation incurred.

The buyer's risk is any payments related to import duties and taxes.

Risk of Loss or Damage

It is critical to consider that under a CFR contract, the risk of loss or damage to goods passes from the seller to the buyer once the goods have been loaded onto the vessel.

This means that if something happens to the goods during transit, it is the buyer's responsibility.

DAP Incoterm (Delivered at Place)

In these sales contracts, the seller delivers the goods to the buyer at the place of destination. The buyer bears the responsibility of paying all transportation and import/export fees.

DAP can be used for any delivery, including air, sea, and land transport.

However, It should be pointed out that DAP does not include insurance, so you'll need to purchase your own insurance if you're using these Incoterms.

EXW Incoterm (Ex Works)

The EXW Incoterm is one of the simplest Incoterms to understand. Under this term, the seller's obligation ends after making the goods available at the seller's premises.

The buyer is responsible for all other costs and fees associated with shipping the goods, including cost insurance, freight transport, and customs formalities.

This term places a lot of responsibility on the buyer, so it's vital to ensure that you're fully prepared before using it.

FAS Incoterm (Free Alongside Ship)

The Free Alongside Ship Incoterm is often used for shipping goods by sea. Under this term, the seller is responsible for delivering the goods to the port of shipment.

They are also responsible for any costs and fees associated with getting the goods ready for transport.

The buyer is responsible for paying the cost of shipping and insurance. They are also responsible for any customs formalities.

DPU Incoterm and DDP Incoterm

This is often confused with DDP Incoterm (Delivered Duty Paid).

Both terms describe when the seller is responsible for delivering the goods to the buyer, but some key differences exist.

DPU Incoterm (Delivered at Place Unloaded)

DPU Incoterms (Delivered at Place Unloaded) means that the seller is responsible for delivering the goods to the place of destination, but they are not responsible for unloading them.

The buyer is responsible for all costs and risks associated with unloading the goods.

This term is typically used by users of sea and inland waterway transport.

DDP Incoterm (Delivered Duty Paid)

DDP Incoterm means that the seller is responsible for delivering the goods to the buyer and paying all applicable duties and taxes.

The buyer assumes all risks associated with the goods once they have been delivered. This term is typically used when the mode of transportation is by air, land, or courier.

Important Things to Keep in Mind When Using Either DPP or DPU

• The place of delivery should be clearly stated in the sales contract to avoid any confusion.
• It is vital to determine who is responsible for unloading the goods as this can often be a costly and time-consuming process.
• Ensure that all duties and taxes are paid before the goods are delivered to avoid delays or penalties.

Both DPU Incoterm (Delivered at Place Unloaded) and DDP Incoterm (Delivered Duty Paid) can be beneficial depending on the situation.

It is necessary to carefully consider which one is best for your needs before entering into a contract.

CPT Incoterm (Carriage Paid)

This is an Incoterm that is often used when the seller pays for the transportation of the goods to the buyer.

The goods loss or damage risk passes from the seller to the buyer once the goods are delivered to the carrier.

This term can be used for all modes of transportation, including air, sea, and land.

When the Buyer Lacks Resources or Capability to Arrange Transportation

The Incoterm CPT is often used when the buyer does not have the resources or capability to arrange transportation.

The seller will then be responsible for finding a carrier and paying for the transportation of the goods, which can be beneficial to the buyer as it saves them time and money.

Risks Associated with CPT Incoterm

• The buyer is not involved in the transportation process, and they may not be aware of any delays or problems that arise. This can lead to delays in receiving the goods.
• The seller may choose a carrier that is not reputable or reliable, which could result in damage to the goods or even loss of the goods.

Overall, the Incoterm CPT can be a good option for buyers who do not have the time or resources to arrange transportation themselves.

However, it is crucial to be aware of the risks involved before using this Incoterm.

FOB Incoterm (Free on Board)

FOB Incoterm is one of the most crucial international trade terms, as it is used to indicate who is responsible for paying the freight costs and other transport-related charges.

The FOB term also specifies where the seller hands over responsibility for the goods being shipped.

FOB Point and FOB Method

When using FOB, it's important to include two critical pieces of information in your contract, the FOB point and the FOB method.

The FOB point is the location where ownership of the goods being shipped is transferred from the seller to the buyer - typically the point at which the goods are loaded onto the transport vessel.

In contrast, the FOB method is the specific type of transportation used to ship the goods.

Three Main Methods of Transportation that Can be Used Under FOB

FOB Shipping Point

The seller's obligations include paying the freight and other transport-related charges up to the point where the goods are loaded onto the vessel.

The buyer is responsible for paying these charges from that point onwards.

FOB Port of Loading

The seller is responsible for paying the freight and other transport-related charges up to the port of loading.

The buyer is responsible for paying these charges from that point onwards.

FOB Port of Export

The seller is responsible for paying the freight and other transport-related charges up to the port of export.

The buyer is responsible for paying these charges from that point onwards, including export clearance.

When using FOB, it's important to clearly specify the FOB point and method in your contract in order to avoid any confusion or misunderstandings later on.

It is crucial to include both the FOB point and the FOB method in your contract.

By understanding and correctly using the FOB Incoterm, you can help ensure a smooth and successful transaction.

FCA Incoterm (Free Carrier)

The FCA Incoterm is one of the most popular Incoterms used today.

It stands for Free Carrier and important means that the seller hands over the goods to the carrier nominated by the buyer at the seller's premises.

The carrier then takes responsibility for delivering the goods to a predetermined destination.

Factors to Keep in Mind When Using the FCA Incoterm:

• The seller's responsibility is to load the goods onto the carrier's transportation.
• The buyer is responsible for unloading the goods at their destination.
• The seller covers any costs incurred up until the point of handing over the goods to the carrier. This includes export clearance, if necessary.
• The buyer is responsible for any costs incurred from taking possession of the goods from the carrier onwards, including import clearance if necessary.
• If the buyer has nominated a carrier, they are also responsible for any delays or damage caused by that carrier.

Overall, the FCA Incoterm is a very flexible Incoterm that can be used in a variety of situations.

However, it is necessary to remember that the seller retains some responsibility for the goods until they are delivered to the buyer.

When using this Incoterm, it's crucial to have detailed discussions with your trading partner about which party will be responsible for what to avoid any confusion or misunderstandings down the line.

CIP Incoterm (Carriage and Insurance Paid)

The CIP term is similar to the CFR term, with the exception that the seller must also procure insurance against the buyer's risk of loss or damage to goods during the carriage.

The seller must pay the premium for such insurance but does not contractually assume responsibility for the coverage.

While CIP may be used for any mode of transport, it is commonly used for shipments via airfreight or multimodal transport.

Therefore, as with all Incoterms rules, parties should clearly specify which version of CIP applies in their contract in order to avoid any misunderstandings.

CIP Places the Minimum Obligations on the Seller

The CIP term is often used in international trade because it places the minimum obligations on the seller.

Under this term, the buyer assumes most of the risks and costs associated with importing goods.

This can be advantageous to buyers, particularly if they are unfamiliar with the import process or if the buyer's country has high import duties.

Drawbacks to Using CIP

The drawbacks are mainly because the seller and the buyer are in different countries.

• The seller is not responsible for arranging insurance cover, so buyers should be sure to purchase their own policy.
• CIP does not include any provisions for delivering the goods to the buyer's premises (unlike DDP terms). Therefore, buyers will need to make their own arrangements for transport from the port of arrival to their premises.

CIP terms may be less advantageous to buyers in countries with high import duties, as they will be responsible for paying these duties (unlike CFR or CIF terms).

As with all Incoterms rules, it is vital that both parties clearly agree on which version of CIP applies in their contract in order to avoid any misunderstandings.

When choosing Incoterms for your business, it is vital to consider your needs and objectives.

You should also consult with your shipping partners to ensure that you use the most appropriate terms for your situation.

What Does Incoterms Not Cover?

As we've seen, there are many things that Incoterms do cover.

But what about the things they don't?

Let's take a look at some of the critical exclusions from Incoterms,

Insurance

One of the most important aspects of any international trade transaction is insurance.

And yet, Incoterms make no mention of it whatsoever.

This is because insurance is such a complex and ever-changing area that it would be impossible to include it in the terms without constantly needing to update them.

So, if you're looking to obtain insurance for your shipment, you'll need to arrange this separately.

Taxes

Another fundamental exclusion from Incoterms is taxes.

Again, this is because taxes are constantly changing and can vary depending on the countries involved.

So, if you're looking to ship goods internationally, you'll need to research the tax laws of both countries beforehand.

Customs

Customs clearance is another complex area that Incoterms doesn't cover, including import/export tariffs, quotas, and other restrictions that can vary from country to country.

So, if you're looking to ship goods internationally, you'll need to research the customs regulations of both countries beforehand.

Transport

Incoterms only cover the goods' transportation costs until they reach their destination port.

Once the goods have arrived at the port, it's up to the buyer to arrange transport to their final destination. This can be by land, sea, or air, and there are a variety of different companies that offer this service.

Storage

Incoterms also don't cover storage.

So, if you need to store your goods at the port or in a warehouse before they're transported to their final destination, you'll need to arrange this separately.

As you can see, there are a number of things that Incoterms don't cover.

But, despite their limitations, they're still an necessary part of international trade.

Wrapping Up

We hope you've found this article on everything you need to know about incoterms helpful.

As we've seen, Incoterms are an important part of any international trade transaction, and there are several things you need to consider when choosing the right terms for your shipment.

If you have any questions about Incoterms or need help choosing the correct international trade terms for your shipment, get in touch with us today. At, A1-Auto Transport, we’re always happy to help.