SeaRates Explains: What are Incoterms?

This week we’re explaining Incoterms. Think of Incoterms as a universal shorthand for global trade. Incoterms, short for International Commercial Terms, are a set of standardised rules published by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international sales contracts. These terms provide a common language that helps to avoid misunderstandings and disputes.

These 11 terms, updated to Incoterms? 2020, cover various scenarios for transport modes and responsibility handoffs. They are incorporated into sales contracts to clearly outline which party is responsible for various tasks, costs, and risks involved in transporting goods.

These responsibilities might include export packaging, loading charges, transportation costs, insurance, import duty and taxes, and even the risk of loss or damage to goods in transit.

Why are Incoterms so Important?

Without clearly defined Incoterms, ambiguity can lead to disputes, delays, and increased costs. For example, imagine a shipment arriving at the destination port, with both the buyer and seller unsure who is responsible for the unloading costs or customs clearance.

This can cause delays in delivery, storage charges, and strained business relationships. Clearly outlining responsibilities with Incoterm rules helps streamline processes, reduce risks, and contribute to efficient and profitable international trade.

Decoding the 11 Incoterms

The Incoterms? 2020 rules reflect current practices in global trade. They are divided into two categories, each addressing different transport scenarios. Take a look at our breakdown of incoterms and definitions for the various transport and shipping rules.

Rules for Any Mode of Transport

• EXW (Ex Works): Minimal seller responsibility; goods are made available for pickup at the seller's location. The buyer bears all costs and risks.
• FCA (Free Carrier): Seller delivers to the buyer's designated carrier at an agreed location and is responsible for export clearance.
• CPT (Carriage Paid To): The seller pays for carriage to the destination, but risk passes to the buyer upon delivery to the first carrier.
• CIP (Carriage and Insurance Paid To): Similar to CPT, but the seller also arranges insurance for the buyer's risk during transit.
• DAP (Delivered at Place): Seller delivers ready for unloading at the buyer's specified location and bears costs and risks until that point.
• DPU (Delivered at Place Unloaded): Seller is responsible for unloading at the named destination. The risk passes after unloading.
• DDP (Delivered Duty Paid): Maximum seller responsibility, covering all costs and risks until goods reach the buyer's location, including import clearance.

Rules for Sea and Inland Waterway Transport:

• FAS (Free Alongside Ship): The seller delivers goods alongside the ship at the named port. The buyer handles loading and costs thereafter.
• FOB (Free on Board): The seller delivers goods onboard the ship; the risk passes once goods cross the ship's rail.
• CFR (Cost and Freight): The seller pays for transport to the destination port; the risk passes once goods are loaded onto the ship.
• CIF (Cost, Insurance, and Freight): Seller responsibilities are like CFR but also include arranging cargo insurance.

Understanding Your Needs and Selecting the Right Incoterms

Choosing the right Incoterms in logistics is a matter of understanding your specific circumstances and negotiating with the buyer or seller. For example:

Company A had limited resources for handling logistics at destination ports and so preferred Incoterms like DDP. In these cases, the seller handles costs and risks, including customs clearance and import duties in the destination country.

On some occasions the company dealt with buyers with sophisticated logistics operations who were well-equipped to manage the delivery process from a specific point. For such instances, the company would use Incoterm FCA, where we were responsible for delivery only up to the carrier nominated by the buyer. By tailoring the type of Incoterms to specific transactions, Company A optimised for cost and operational efficiencies and built stronger relationships with trade partners.

Implications for everyday logistics

The wrong Incoterm choice can have financial repercussions. For instance, in a CIF transaction, imagine the cargo is damaged during ocean transit. If the seller has only provided the minimum insurance coverage mandated by Clause C of the Institute Cargo Clauses, the buyer could face substantial losses.

A thorough understanding of Incoterms helps businesses mitigate these risks. This ensures a smoother, more successful trading experience. It also facilitates better communication with freight forwarders, insurers, and customs brokers, as everyone involved operates on the same page.

Staying informed

While the core principles of Incoterms are consistent, revisions have been made. The most recent version is Incoterms 2020. It's vital to work with the latest Incoterms, referencing it specifically in sales contracts to avoid discrepancies.

The International Chamber of Commerce's Incoterms? 2020 Rules book offers a thorough guide. Logistics professionals can also learn about these terms and receive updates on SeaRates.com.

Comparing Incoterms 2010 and 2020: Key Changes at a Glance

It's crucial to understand how the changes in Incoterms 2020 impact business practices and contracts. For ease of reference, the table below summarises the major changes:

Final Thoughts

Successfully managing international trade requires more than just product knowledge. Learning and working with Incoterms and their definitions is fundamental to efficient operations and fostering positive relationships. They help protect against misunderstandings and prevent financial problems by clarifying who is responsible for each step and where risks lie.

For all your shipping and logistics needs, including support with Incoterms, the experts at SeaRates are available 24/7 and are always ready to help.