Anyone who is involved in global trade should have a full understanding of incoterms. Incoterms are the worldwide accepted global trade rules..
Incoterms are the internationally accepted standard set of trade rules for all forms of global trade. Incoterms are trade rules by the International Chamber of Commerce (ICC). The Incoterms registered name by the ICC is an acronym for “international commercial terms.”
What Does Incoterm Mean?
The name “incoterms” is an acronym that means “international commercial terms.” Incoterms is a registered trademark of the International Chamber of Commerce or ICC. You can find out more about the International Chamber of Commerce (ICC) by clicking here.
Incoterms are a set of rules that are used in the import and exportation of goods. They are an internationally accepted and standard set of trade rules for all kinds of global trade.
The incoterm rules are used whether you are filling out a purchase order, packaging or labeling a shipment for freight, or even if you are working with a certificate of origin. The incoterm rules provide specific guidelines for anyone working with the import and export of global trade.
There are 11 standard incoterms; each of these standard 11 incoterms has different meanings and obligations for the buyer and seller. The Incoterms also clearly define when the risk is passed between the buyer and seller.
Below are the 11 standard Incoterm that is used for global trade and a definition of each.
EX-Works – EXW
Ex-works or EXW means that the seller is selling the goods without any transportation from their facility to the buyer. In other words, if you were buying from a factory and they quote you EXW, then you must pay for all the local transportation, customs to get the goods to your final destination.
When working with overseas suppliers, many buyers do not want to work on EXW terms. There are many unknown variables with the local transportation to get the local port and their final destination. EXW can be by train, plane, truck, or by sea.
EXW is a term that is commonly used in international trade. Especially if you are buying goods that are less than a container load (LCL), it may end up being more economical for you to buy the goods as EXW than FOB. If you are buying less than a container load (LCL), some suppliers may only sell the goods as EXW because local custom fees and other local charges can be very expensive or difficult for LCL shipments.
When a buyer is purchasing goods with EXW incoterms, all shipping costs are the buyer’s responsibility. The seller is ONLY responsible for making the goods and packing them up. The buyer is responsible for everything else, including loading the goods onto a truck or container.
Free Carrier – FCA
Free carrier or FCA means that the goods are deemed to be delivered by the seller as soon as they are placed to the carrier or another person designated by the buyer. In other words, as soon as the goods are picked up at the sellers’ destination (can be the seller’s warehouse or another location) by the carrier assigned by the buyer, the goods will be considered delivered.
In other words, once the goods are delivered to the specified location, then the risk of loss of transfer of the goods transfers immediately from the seller to the buyer, even if the location is the 3rd party as a trucking company. If the seller is loading the goods at their location, then the seller is responsible for loading the goods onto the destined truck.
With FCA incoterms, if the goods go by truck to another location, the carrier company will handle the transfer. FCA can be used for all modes of transportation of goods.
Carriage Paid To – CPT
Carriage Paid To or CPT terms is when both the buyer and seller agree to bring the goods to a certain destination. In this case, the seller is responsible for delivering the goods to the specified place of delivery or destination as agreed.
With CPT incoterms, the seller is responsible for arranging the carriage to the named destination but is not responsible for the goods’ insurance to that location. The risk and the transfer of the goods occur once the seller has delivered the goods to the destination.
In other words, the seller will pay the freight until the goods are delivered to the destination as specified on the contract. Normally this destination includes the air freight or container shipment.
Carriage and Insurance Paid To (CIP)
In the Carriage and Insurance Paid To or CIP incoterm, the seller is responsible for carrying the carriage or the cargo to the named place and having appropriate insurance for the goods. CIP incoterms can be used for any transportation mode.
This incoterm is similar to the Carriage Paid To (CPT), with the main difference that the seller is responsible for the insurance of the goods for the CIP incoterm. Normally this destination includes the air freight or container shipment.
Delivered At Place – DAP
Delivery At Place or DAP is the incoterm for delivery to a certain place. This incoterm was renamed in 2020; the former term was delivered at terminal or DAT.
The DAP terms can be used for any form of transportation. The seller is responsible for arranging the cargo and the delivery of the goods. Usually, this includes the ocean or air freight and the port destination charges.
The risk will transfer from the seller to the buyer when the cargo arrives at the destination. A place can literally be any place such as a terminal, a quay, container yard, warehouse, or a transportation hub.
Delivered At Place Unloaded – DPU
Deliver a place unloaded DPU used to be delivered at the terminal unloaded. Like the DAP, there are no restrictions as to the place where the goods can be unloaded. It could be a warehouse or the buyer’s depot.
The DPU risk will pass from the buyer to the seller once the goods have been unloaded at the agreed-upon destination. In this case, the buyer would also be responsible for unloading the goods at the agreed-upon destination. Usually, the DPU terms include the ocean or air freight and the port destination charge.
Delivered Duty Paid – DDP
Delivered Duty Paid terms, or DDP is when the seller is responsible for all the shipment charges to reach its destination. For these terms, the seller is responsible for arranging the cargo and delivering the goods to the named destination, including all customs clearance. The seller would need to pay all taxes and duties, including any VAT/GST, etc.
The risk will transfer from the seller to the buyer when the goods are made available to the buyer. In other words, when all the duties are paid and the buyer is ready to receive the goods at their final destination.
The risk for DDP terms is mainly on the seller. Because this risk is mainly on the seller many sellers do want to work with these terms.
Free Alongside Ship – FAS
Free alongside ship is a rule that’s restricted to cargo being transported by sea or inland waterways. In other words, the cargo must be loaded on a ship.
In practice, the FAS Incoterms are used for a situation where the seller has direct access to the vessel for loadings, such as bulk cargo or non-containerize goods.
The seller will deliver the goods for export to the port, at which point the risk will then transfer to the buyer. The seller will insure the goods until the cargo reaches the port and are on the vessel.
Free On Board – FOB
Free onboard or FOB is also restricted to go to cargo going by container ship or in-land waterways. This is probably one of the most widely used Inconterrms turns for global trade.
For the FOB, the seller will bring the container into their facility, load the container, and then send it back to the port. The seller will do this own customs at their destination. The buyer is responsible for the freight and all their own duties and taxes.
The buyer is responsible for insuring the goods from the time goods are loaded on the ship; in other words, if the goods are damaged while on the water or the ship, the buyer will be responsible for that damage.
Cost and Freight – CFR
Cost and Freight or CFR are very similar to the FOB terms, with the main difference that the cost of the freight to the final destination would be by the seller. The buyer is responsible for the cargo insurance throughout the carriage.
The buyer will also be responsible for the customs clearance, duties, and other taxes at their destination.
Cost, Insurance and Freight – CIF
Cost Insurance and Freight or CIF are very similar to Cost and Freight, \\except, in this case, the seller will pay for the insurance.
The seller will load the container at their destination, do the custom clearances, get the goods onto the vessel and pay for the ocean freight. This term does not include any duties or customs at the buyers’ destination, but only the cost of goods, insurance, and freight for the goods.
Anyone working in import and export should have some general knowledge of the Incoterms. The Incoterms are essential to trade terms to understand and especially when the cargo will pass from the seller to the buyer.
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