Incoterms, short for international commercial terms, are arguably one of the most important facets of international trade
Why Incoterms are used:
In short, they advocate the exact point in which the consignor (usually the seller), and consignee’s (usually the buyer) risk and responsibilities for a specific shipment start and end.
Dealing with different countries and their respective jurisdictions is an inherent trait and unavoidable risk of international trade. For incoterms however, buyers and suppliers abide to a universally accepted code. To avoid misunderstandings and disputes between customer and supplier for when their goods are in transit, Incoterms were put in place as an internationally enforceable body of law that affords transparency and accountability for both trading partners. In cases where incoterms have not been negotiated and there are issues, businesses options for recourse are limited and generally not internationally enforceable. We would recommend that you use the most up to date incoterms available when buying internationally!
How they work:
Prior to signing off on the commercial arrangement, the involved parties select the Incoterms. What this does is determine who is responsible for; the transport cost of each transportation segment, who loads and unloads the cargo, and who bears risk at any given point if something goes ‘wrong’.
The below diagram is an easy to understand representation that shows which party holds the risk and responsibility, and at what point. A more detailed explanation of the main points of each term is listed further below.
EXW: Ex-Works – the seller, or exporter is to make the cargo available to the buyer, or importer at the seller’s premises. The buyer is responsible for all costs, duties, insurance and risk associated with the shipments, once the seller has placed the goods outside their factory/premises.
FCA: Free Carrier – the seller, or exporter is responsible to transport to the goods to an agreed place, commonly specified by the buyer, and is required to complete all origin customs formalities. Once the cargo has reached a warehouse, or consolidation depot for example, the risk has now transferred to the buyer.
FAS: Free Alongside Ship – seller, or exporter transports the goods from their premises, completes origin customs formalities, and ensures the goods are safely delivered alongside the international mode of transport (e.g. vessel).
FOB: Free on Board – FOB is very similar to FAS, however differs in that risk transfers to the seller once the goods have been loaded onto the vessel (specifically when the cargo has crossed the “ships-rail”). When negotiating FOB terms, for the purpose of clarification, it’s important to state the port in which the terms apply to. For example, if you’re importing/exporting out of Shanghai the terms should read FOB Shanghai.
CFR: Cost and Freight – The seller, or exporter is now responsible for all origin formalities and is also required to cover the international freight charges to the destination port. It’s important to note that the transfer of risk is identical to the FOB term, being as soon as the cargo crosses the “ships-rail”.
CIF: Cost, Insurance and Freight – The CIF term carries the same conditions as CFR, however includes a provision that requires the seller, or exporter to purchase insurance for the goods, with the buyer, or importer named as the beneficiary. It’s important to note two things in particular for the CIF term. Firstly, should the goods be damaged in transit, the buyer is required to file the insurance claim, not the seller. Secondly, for a shipment to qualify for the CIF term, the cargo must be partially moved by ocean freight.
CPT & CIP: Carriage Paid to and Carriage, Insurance Paid to – CPT and CIP terms are respectively identical to the CFR and CIF terms. The notable difference is that instead of the buyer being responsible to the port of destination, risk transfers at a named place (e.g. a designated unpack depot).
DAT: Delivered at Terminal – The seller, or exporter is responsible for all origin formalities and charges, international carriage, and the port charges at destination. Risk transfers when the goods have been unloaded from the vessel. The buyer is responsible for customs clearance, payment of duties and taxes, and final delivery.
DAP: Delivered at Place – The seller, or exporter, is responsible for all transport costs involved in delivering the goods to a named place of destination. At this point the goods are placed at the disposal of the buyer (usually the buyer’s nominated unpack depot). The buyer, or importer, assumes risk of loss at that point and is responsible for customs clearing the goods and paying any outstanding duties or taxes.
DDP: Delivered Duty Paid– The DDP Incoterm is where the seller is responsible for door-to-door delivery, and also provides customs clearance at both origin and destination. The seller bears the risk and responsibility for the goods up until the point whereby the goods at delivered to the buyer’s premises.
In summary incoterms can assist in the efficient running of your supply chain if used correctly and consistently. They have the capability to reduce risk, time and cost in your business and have a real impact on your bottom line.
For any advice or if you have any questions or queries on Incoterms please feel free to contact the team at Explorate @ firstname.lastname@example.org.