Understanding Incoterms: A Guide by Anderson Shipping

Anderson Shipping believes in enhancing our customers' understanding of key industry concepts. Today, we shed light on Incoterms, or International Commercial Terms, which play a significant role in international and domestic trade. This explanation is drawn from a comprehensive article by Troy Segal, last updated on May 24, 2023, and published on Investopedia [1].

Deciphering Incoterms

Incoterms are a set of international rules, established by the International Chamber of Commerce (ICC), to clarify the obligations of buyers and sellers in trade contracts [1]. They've been a part of the global trade landscape since 1936, updated regularly to reflect evolving practices. Incoterms help prevent confusion, streamline business arrangements, and promote understanding in both domestic and international trades.

Typical Incoterms & Their Applications

Some commonly used Incoterms for any mode of transport include Ex Works (EXW), Free Carrier (FCA), and Delivered Duty Paid (DDP) [1]. These terms define the responsibilities and risks assumed by buyers and sellers during the transit of goods. For instance, under the DDP term, the seller assumes all the risk, transportation costs, and even export and import duties.

For sea and inland waterway transport, specific terms like Free on Board (FOB) and Cost, Insurance, and Freight (CIF) are used [1]. Under the CIF term, the seller is responsible for delivering the goods to a designated port, loading them onto a vessel, and bearing all transportation, insurance, and loading costs.

Incoterms: What They Don't Cover

It's crucial to remember that while Incoterms facilitate trade, they don't cover every aspect of a sale [1]. For instance, they don't specify the method of payment, timing of payment, or when the ownership of goods transfers from the seller to the buyer. Consequently, while Incoterms form an important part of trade contracts, they shouldn't be the only basis of your agreement.

Evolution: Incoterms 2010 vs. Incoterms 2020

The ICC updated Incoterms in 2020, making some changes to improve their relevance and clarity [1]. Notably, the term Delivered at Terminal (DAT) from the 2010 version was replaced with Delivered at Place Unloaded (DPU) in 2020 to encompass all places of unloading, not just terminals.

Incoterms: The Pros & Cons

The greatest benefit of Incoterms is their ability to standardize and specify complex aspects of international trade [1]. They help save time and resources that might be spent on legal consultations to draft terms and interpret contracts. However, they also have limitations. The preferences of buyers and sellers may vary, and some terms might expose one party to inflated costs. That's why it's important to negotiate the terms that best suit the specific needs of your transaction.

Conclusion

Incoterms serve as invaluable guidelines in the realm of international trade, but they shouldn't replace a comprehensive, well-negotiated agreement. Anderson Shipping recommends always striving for clarity in every trade agreement you enter and ensuring it addresses all crucial aspects of your transaction, not just those covered by Incoterms.

For more details, we encourage you to read the full article on Investopedia [1].

Reference

[1] Segal, Troy. "Incoterms Explained: Definition, Examples, Rules, Pros & Cons." Investopedia, 24 May 2023.