International Trade Disruptions: A Comprehensive Guide to Incoterms and Risk Management

The recent incident in Baltimore, USA, where a ship carrying over 2000 containers collapsed with a bridge, highlights the significant impact such events can have on international trade. The materials aboard the ship were severely affected, leading to disruptions in delivery schedules and financial disputes between buyers and suppliers.

In situations like these, understanding and adhering to Incoterms becomes crucial. Incoterms, published by the International Chamber of Commerce (ICC), are internationally recognized codes that delineate the responsibilities of buyers and sellers in international trade transactions. Let's delve into some examples to illustrate how Incoterms can guide parties in such circumstances:

1. EXW (Ex Works): Imagine a scenario where the seller, based in China, makes the goods available at their factory. The buyer, located in the USA, bears all costs and risks once the goods are ready for pickup at the seller's premises. In the event of a transportation mishap like the one in Baltimore, the buyer would assume responsibility for any damage or loss incurred after the goods are handed over at the factory.

2. FCA (Free Carrier): In another scenario, the seller in Germany arranges for the goods to be delivered to the buyer's designated carrier at a specified location. Let's say the goods were intended for shipment to Baltimore. If the collapse occurred before the goods were handed over to the carrier, the seller would bear the risk and costs associated with the incident.

3. CIF (Cost, Insurance, and Freight): Consider a situation where the seller, based in Japan, contracts for carriage and pays for insurance against loss or damage during transportation to the port of destination in Baltimore. In this case, the seller would be responsible for any damage incurred until the goods reach the designated port, providing the buyer with added protection in unforeseen circumstances.

1. CPT (Carriage Paid To): In a hypothetical situation, the seller, located in the Netherlands, contracts and pays for carriage to transport the goods to the named destination, which is the port of Baltimore. Once the goods are loaded onto the vessel, the buyer assumes responsibility for unloading and any subsequent costs. If the collapse occurred during transit, the seller would bear the costs and risks associated with the loss or damage until the goods reach the agreed destination port.
2. CIP (Carriage and Insurance Paid To): Let's consider a scenario where the seller, based in South Korea, not only arranges for carriage to transport the goods to Baltimore but also procures insurance coverage against loss or damage during transit. Until the goods are delivered to the agreed destination, the seller remains responsible for any damage or loss incurred. This Incoterm provides added protection for the buyer, as the seller assumes the risk until the goods reach the destination.
3. DAP (Delivered at Place): Suppose a seller in Italy agrees to deliver the goods to the buyer's specified location in Baltimore. The seller is responsible for arranging transportation and bearing the costs and risks until the goods are unloaded at the buyer's premises or another nominated location. However, the buyer is responsible for import clearance, ensuring compliance with customs regulations, and any associated costs. If the collapse occurred during delivery, the seller would be liable for any damage until the goods are unloaded at the designated place.
4. DDP (Delivered Duty Paid): In this scenario, let's imagine a seller in France delivering the goods cleared for import at the buyer's location in Baltimore. The seller assumes all costs and risks associated with transportation, including import duties and taxes, until the goods are delivered to the agreed destination. DDP is the most favorable Incoterm for the buyer, as it provides comprehensive coverage and minimizes their obligations and risks throughout the entire transportation process.

Incorporating Incoterms into international sales contracts provides clarity and guidance on the allocation of risks and responsibilities in various scenarios. By selecting the appropriate Incoterm based on factors such as mode of transport and risk tolerance, parties can mitigate disputes and ensure smoother logistics operations.

Consulting with logistics professionals, like Dheeraj Gupta , can offer valuable insights into choosing the most suitable Incoterm for specific trade transactions. Ultimately, integrating Incoterms into contracts fosters efficiency, reduces risks, and facilitates smoother international trade operations.