Know your shipping Incoterms
What are Incoterms?
Incoterms is short for ‘International Commercial Terms’ and are trade terms published by the International Chamber of Commerce (ICC). They are used to make international trade clearer by outlining which party (seller or buyer) is responsible for each part of the international shipping costs. Incoterms have evolved over the years and in this article I will outline the common ones used between Kitagawa Europe and our customers.
Why are Incoterms important?
No one likes unexpected costs
When you are buying international goods you should be totally clear how the shipping would be handled and who is responsible for the costs – Incoterms make this clear. If you buy an item without clarifying the Incoterms you may end up paying more than you expected.
Simple Incoterm examples
At Kitagawa Europe we are happy to work to the needs of our customers. Outlined are two typical shipping scenarios within Europe:
- The customer does not ship regularly and prefers us to arrange everything on a door-to-door (from our warehouse to their premises) basis. In this case we would arrange the shipping on a service that would collect from our warehouse and deliver to the customers address. This is a ‘Delivered At Place’ (DAP) shipment. We would then add this cost to our invoice to the customer.
- The customer has their own shipping agent or courier and has their own account they want to use. The customer just wants us to advise when the goods are ready for collection. In this case we would work with the customer and their shipping agent and handover the goods when the shipping agent collects the order. We have no further responsibility and the shipping agent would charge the customer directly. This is referred to an Ex-Works / Ex-Warehouse (EXW) shipment.
Two very simple examples in which Kitagawa as the seller understands how the customer would like their order shipped. When you are ordering internationally it is always good practice to mention the incoterms on your order. This way the seller understands immediately how you would like the shipping handled and it avoids any delays later on. For example when you place an order you would state ‘please supply this order on a DAP basis’. Meaning you want door-to-door shipping included and the cost to be added to your invoice.
Are Incoterms required when shipping within Europe?
Yes they are. You still need to specify the required Incoterms but due to the current Customs Union within Europe you don’t have to worry about Duty and Tax - so the Incoterms specifically referring to Duty and Tax would not be used.
So what are the commonly used terms?
Outlined below are the abbreviations for the commonly used Incoterms and what they stand for.
CPT – Carriage Paid To
This means the Seller is responsible for the shipping to the destination port but not necessarily the final delivery address. No insurance included and for outside EU shipments - local duty and Taxes are not included and are the Buyers responsibility.
CIP – Carriage Insurance Paid To
Just like CPT but with Insurance added. For outside EU shipments - local duty and Taxes are not included and are the Buyers responsibility.
EXW – Ex-Works / Ex-Warehouse
Meaning from the place or manufacture or purchase. Typically the Seller would pack goods and then the Buyer would be advised the shipment is ready to collect. The Buyer is responsible for all shipping costs (including duty and taxes for non-EU shipments).
FOB – Free on Board
Sounds odd but when you look at it logically it makes sense. The Seller is responsible for the costs up to the point it boards the transport method. So, for example, if it were a sea freight shipment the seller would be responsible for all the costs up until the shipment is boarded onto the ship to leave the country. After this the Buyer is responsible. Again – Duty and Taxed are the buyer’s responsibility.
What about the others?
There are many other Incoterms to cover every thinkable variation required to transport goods. I have created a quick reference guide in A4 format with a complete list of the official terms text and their definitions available for download free from here: https://tinyurl.com/Incotermsguide
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Source: ICC website. The full text of the 2010 edition of the Incoterms rules is available at https://store.iccwbo.org/. "Incoterms" is a trademark of the International Chamber of Commerce (ICC).