How do you select Incoterms for your import/export transactions?

1 What are the main Incoterms categories?

There are 11 Incoterms that are divided into two main categories: rules for any mode of transport and rules for sea and inland waterway transport. The rules for any mode of transport apply to shipments that use more than one mode of transport, such as road, rail, air, or sea. They are: EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DAP (Delivered at Place), DPU (Delivered at Place Unloaded), and DDP (Delivered Duty Paid). The rules for sea and inland waterway transport apply to shipments that use only sea or inland waterway transport. They are: FAS (Free Alongside Ship), FOB (Free on Board), CFR (Cost and Freight), and CIF (Cost, Insurance, and Freight).

2 How do you select the best Incoterms for your transaction?

When selecting the best Incoterms for your transaction, there is no one-size-fits-all answer. However, several factors should be taken into consideration such as the nature of the goods, the mode of transport, customs procedures, bargaining power and level of trust. For example, perishable, hazardous or high-value goods may require more protection and insurance than standard goods. Air transport may be faster and more convenient than sea transport but also more expensive and subject to more regulations. Certain countries may have more complex or strict customs procedures than others which could affect the time and cost of clearing the goods. The seller and buyer may have different levels of bargaining power in the transaction depending on market conditions and demand/supply of the goods. And finally, the seller and buyer may have different levels of trust in each other depending on their previous experience, reputation or references.

3 What are the advantages and disadvantages of different Incoterms?

Each Incoterm has its own advantages and disadvantages, depending on the perspective of the seller or the buyer. Generally speaking, the more control and responsibility the seller has over the transport of the goods, the more favorable the Incoterm is for the buyer, and vice versa. For example, EXW is the most favorable Incoterm for the seller, as it means that the seller only has to make the goods available at their premises and has no obligation to arrange or pay for any transport, insurance, or customs formalities. However, this also means that the buyer has to bear all the costs and risks involved in moving the goods from the seller's premises to the final destination. On the other hand, DDP is the most favorable Incoterm for the buyer, as it means that the seller has to deliver the goods to the buyer's premises and pay for all the transport, insurance, and customs duties. However, this also means that the seller has to deal with all the logistics and regulations involved in exporting and importing the goods.

4 How do you communicate and document the Incoterms in your transaction?

It is essential to communicate and document the Incoterms clearly and accurately in your transaction, as they form part of the contract between the seller and the buyer. You should always specify the official three-letter code of the Incoterm, such as EXW, FOB, or DDP, and indicate the exact location where the delivery or transfer of risk takes place. Additionally, you should state the year of the Incoterm edition that you are using, such as Incoterms 2020 or Incoterms 2010. Moreover, include any other terms and conditions that are relevant to your transaction. It is important to communicate and document the Incoterms in all your written communications and documents related to your transaction, like quotations, invoices, purchase orders, sales contracts, bills of lading, or certificates of origin.

5 What are some common mistakes and pitfalls to avoid when using Incoterms?

Using Incoterms incorrectly or inconsistently can lead to misunderstandings, conflicts, or losses in your import/export transactions. To avoid this, it is important to remember that Incoterms do not cover all aspects of a transaction and should be supplemented with other terms and conditions. Additionally, you should not mix different Incoterms for different parts of the same transaction as this can create confusion and inconsistency. Furthermore, when choosing an Incoterm, make sure it suits your situation and preferences and minimizes your costs and risks. Finally, always check and update the Incoterm edition that you are using and make sure both parties agree on it, as there may be differences or changes between editions that may affect your rights and obligations. For example, the Incoterms 2020 introduced some new rules such as DPU and CNI, as well as modifications to the allocation of security-related costs and the insurance coverage under CIP.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?