Incoterms are standardized trade terms published by the International Chamber of Commerce (ICC). They provide a set of rules and guidelines for determining the responsibilities of buyers and sellers in the transportation and delivery of goods in international transactions.
There are a total of 11 Incoterms, which we can group into four categories:
- Departure terms.
- Main carriage unpaid terms.
- Main carriage paid terms.
- Arrival terms.
(1) Departure terms
Use these terms when the responsibility and risk are on the buyer at the point of departure. The four "departure" terms are EXW (Ex Works), FCA (Free Carrier), FAS (Free Alongside Ship), and FOB (Free on Board).
(2) Main carriage unpaid
Use these terms when the responsibility and risk of the main transport are on the buyer. The two "main carriage unpaid" terms are CFR (Cost and Freight) and CIF (Cost, Insurance, and Freight).
(3) Main carriage paid
Use these terms when the responsibility and risk of the main transport are on the seller until the goods reach the desired carrier or entity. The two "main carriage unpaid" terms are CPT (Carriage Paid To) and CIP (Carriage and Insurance Paid To).
(4) Arrival
You use these terms when the responsibility and risk are on the seller at the destination point. The three "arrival" terms are DPU (Delivered at Place), DAP (Delivered at Place), and DDP (Delivered Duty Paid).
Each Incoterm has a specific set of rules and guidelines that outline the obligations and responsibilities of the buyer and the seller. Review these rules and policies to ensure that the terms of sale are clear to all parties.
Each category has slight differences, and companies use them in international transactions. For example, Suppose a seller does not want to bother with logistics. In that case, they typically choose the EXW Incoterm as all they need to do is to make the goods available at their factory or warehouse and leave all the logistics up to the buyer.
The opposite example is if a buyer doesn't have logistics set up, it may be easier to use the DDP Incoterm as the seller then pays all costs and risks associated with the delivery of the goods, including transportation, insurance, customs clearance, and import duties.
To determine which Incoterm is most appropriate for a particular transaction, it is essential to carefully consider the specific terms of sale and the responsibilities and obligations of both the buyer and the seller. It is helpful to consult with a logistics expert or trade lawyer to ensure that the chosen Incoterm is appropriate and will help to minimize risks and costs for both parties. Shypple is, of course, always happy to help.
Each Incoterm has a specific set of rules and guidelines that outline the obligations and responsibilities of the buyer and the seller.
EXW (Ex Works) specifies that the seller is responsible for making the goods available at their factory or warehouse. The buyer is responsible for all transportation costs and risks, as well as any customs clearance and import duties.
FCA (Free Carrier) specifies that the seller is responsible for delivering the goods to a specified place, such as a carrier's terminal or designated airport. The buyer is responsible for paying for the transportation and any insurance costs, as well as any customs clearance and import duties.
FAS (Free Alongside Ship) is similar to the FCA Incoterm, but the seller is responsible for delivering the goods alongside a vessel at a specified port. The buyer is responsible for loading the goods onto the ship and paying for any transportation and insurance costs, as well as customs clearance and import duties.
FOB (Free on Board) is similar to the FCA and FAS Incoterms, but the seller is responsible for loading the goods onto the vessel. The buyer pays for transportation, insurance costs, customs clearance, and import duties.
CFR (Cost and Freight) to transport goods by sea. The seller delivers goods to the port of departure and pays the transportation costs up to the destination port. The buyer pays for the insurance, customs clearance, and import duties.
CIF (Cost, Insurance, and Freight) is similar to the CFR Incoterm, but the seller is also responsible for arranging and paying for the insurance for the goods, and the buyer is still responsible for any customs clearance and import duties.
CPT (Carriage Paid To) specifies that the seller pays for transportation up to the agreed-upon destination, and the buyer pays for the insurance, customs clearance, and import duties.
CIP (Carriage and Insurance Paid To) is similar to the CPT Incoterm, but the seller is also responsible for arranging and paying for the insurance for the goods, and the buyer is still responsible for any customs clearance and import duties.
DPU (Delivered at Place) specifies that the seller is responsible for delivering the goods to a designated terminal at the agreed-upon destination. The buyer pays for transportation, insurance costs, customs clearance, and import duties.
DAP (Delivered at Place) is similar to the DPU Incoterm, but the seller is responsible for delivering the goods to a designated place rather than a terminal. The buyer is still responsible for paying for transportation, insurance costs, customs clearance, and import duties.
DDP (Delivered Duty Paid) is the only Incoterm where the seller is responsible for paying for all costs and risks associated with the delivery of the goods, including transportation, insurance, customs clearance, and import duties.
DDP (Delivered Duty Paid) is the only Incoterm where the seller is responsible for paying for all costs and risks associated with the delivery of the goods, including transportation, insurance, customs clearance, and import duties.
To help you better understand the terms of a sale, obligations, costs, and risks, we created this chart to give you a better overview. Hopefully, this provides peace of mind when you conduct international trades where both buyer and seller are well informed.
Use incoterms in global logistics to avoid misunderstandings and disputes and ensures that the terms of sale are clear and properly executed. Incoterms can also help to minimize risks and costs for both the buyer and the seller as they specify who is responsible for various aspects of the transportation and delivery of goods.
Overall, Incoterms are an essential tool for international trade and logistics businesses. They reduce the risk of delays and additional costs for the buyer or seller and allow them to focus on other aspects of their business.
The transparent and standardized set of rules and guidelines, Incoterms, helps streamline the process of determining the responsibilities of buyers and sellers and reduces the potential for misunderstandings and disputes.
Incoterms also help improve communication and collaboration between buyers and sellers, as they provide a common language and framework for the terms of sale and the responsibilities and obligations of each party.
Precise communication levels the playing field for businesses of different sizes and countries—a single language framework for determining the terms of a sale is a significant advantage. It ensures access to information and opportunities, regardless of size. An even playing field helps promote competition and innovation and supports global trade growth.
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