Anyone who is involved in global trade should have a complete understanding of Incoterms. Incoterms are the worldwide accepted international 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.”
Table of Contents
- What Does Incoterm Mean?
- 11 Key Incoterms Used in Global Trade: Definitions and Overview
- 10 Reasons Why Understanding Incoterms is Essential in Global Trade: Insights from My Years of Experience
- Related Questions
What Does Incoterm Mean?
“incoterms” is an acronym for “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.
11 Key Incoterms Used in Global Trade: Definitions and Overview
“In global trade, there are 11 essential Incoterms frequently utilized. It’s imperative for those involved in international commerce to grasp the significance and definition of each.
Dive in as we delve into the meanings of these 11 crucial terms.”
EX-Works – EXW
Ex-works or EXW means that the seller sells 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.
Many buyers do not want to work on EXW terms when working with overseas suppliers. 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 customs fees and other local charges can be very expensive or difficult for LCL shipments.
When a buyer purchases 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.
The EXW Incoterm is written as:
Example – EXW Hanoi Vietnam
EXW (Name of the Place of Delivery)
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 seller’s 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, the risk of loss of transfer of the goods 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, the seller is responsible for loading them onto the destined truck.
With FCA incoterms, the carrier company will handle the transfer if the goods go by truck to another location. FCA can be used for all modes of transportation of goods.
The FCA Incoterm is written as:
Example – FCA Guangzhou China
FCA (Name of the Place of Delivery)
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 in the contract. Typically this destination includes air freight or container shipment.
The CPT Incoterm is written as:
Example – CPT Los Angeles, Ca, USA
CPT (Name of the Place of Destination)
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 being that the seller is responsible for the insurance of the goods for the CIP incoterm. Normally this destination includes air freight or container shipment.
The CIP Incoterm is written as:
Example – CIP Los Angeles. CA USA
CIP (Name of the Place of Destination)
Delivered At Place – DAP
Delivery At Place or DAP is the incoterm for delivery to a particular 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, a container yard, a warehouse, or a transportation hub.
The DAP Incoterm is written as:
Example – DAP Los Angeles, CA USA
DAP (Name of the Place of Destination)
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.
The DPU Incoterm is written as:
Example – DPU New York, New York USA
DPU (Name of the Place of Destination)
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, 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.
The DDP Incoterm is written as:
Example – DDP New York, New York USA
DDP (Name of the Place of Destination)
Free Alongside Ship – FAS
Free alongside ship is a rule restricted to cargo 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-container 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 is on the vessel.
The FAS Incoterm is written as:
Example – FAS Hai Phong, Vietnam
FAS (Name of the Port of Shipment)
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 on the ship, the buyer will be responsible for that damage.
The FOB Incoterm is written as:
Example – FOB Hai Phong, Vietnam
FOB (Name of the Port of Shipment)
Cost and Freight – CFR
Cost and Freight or CFR are very similar to the FOB terms, with the main difference being 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.
The CFR Incoterm is written as:
Example – CFR Los Angeles, CA USA
CFR (Name of the Port of 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 customs 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.
The CIF Incoterm is written as:
Example – CIF Los Angeles, CA USA
CIF (Name of the Port of Destination)
Anyone working in import and export should have some general knowledge of the Incoterms. The Incoterms are essential to trade terms to understand, especially when the cargo will pass from the seller to the buyer.
10 Reasons Why Understanding Incoterms is Essential in Global Trade: Insights from My Years of Experience
Having navigated the complex world of global trade for many years, I’ve come to realize the critical role that Incoterms play in the seamless transportation of goods across borders. These predefined international contract terms significantly reduce misunderstandings among traders, thereby minimizing trade disputes and litigations.
Here are ten reasons based on my experience why anyone involved in global trade needs to understand Incoterms thoroughly.
Clarity in Contracts:
In my interactions with various stakeholders, Incoterms have been instrumental in creating clear, standard contracts. They eliminate the ambiguity in terms and responsibilities, ensuring everyone is on the same page.
Cost-Efficiency:
Misunderstandings around terms can be expensive. I’ve noticed that understanding Incoterms helps anticipate and control shipping, insurance, and unforeseen expenses.
Risk Management:
Knowing which Incoterm to use means you’re aware of the risks at different points of the transaction. In my experience, this knowledge is crucial in making informed decisions about risk management, including insurance requirements.
Smooth Customs Clearance:
Delays at customs have been a challenge for me in the past. With the appropriate Incoterms, I’ve seen improvements in the customs clearance process, as duties and responsibilities are well-defined and anticipated by all parties.
Informed Decision-Making:
Over the years, I’ve used Incoterms to select the best delivery methods and routes. This understanding helps me negotiate better deals and make decisions that align with my business strategy.
Effective Communication:
I cannot overstate the importance of effective communication in global trade. Incoterms provide a common language, preventing misinterpretations between parties from different countries.
Building Trust:
By using Incoterms, I’ve established myself as a reliable trader. My partners know they can trust me to meet my contractual obligations, which has opened many doors for my business.
Global Compliance:
Each country has its regulations, and Incoterms help me comply with international trade laws and regulations. This compliance is critical in avoiding legal issues that can arise from the misunderstanding of shipment terms.
Conflict Resolution:
Disputes are not uncommon in international transactions. However, Incoterms provide a basis for resolving conflicts fairly and amicably, saving me from prolonged legal battles.
Strategic Partnerships:
Finally, a deep understanding of Incoterms has been fundamental in building long-term, strategic partnerships. It assures my partners that I am committed to fairness, transparency, and mutual benefit.
The importance of fully understanding Incoterms in global trade cannot be overstated. They are not just rules but essential tools that have guided me in running a successful, compliant, and competitive international business. The confidence gained from this knowledge is invaluable in the dynamic environment of global trade.
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Related Questions
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You can learn more by reading What Is The Difference Between Supply Chain Management and Logistics? by clicking here.
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There are many benefits to supply chain management. The benefits of supply chain management include teamwork and collaboration, improved quality control, better efficiency and effectiveness, on-time deliveries, maximization of overhead costs, improved cash flow, risk mitigation, and shipping optimization. All of these areas are greatly helped by proper supply chain management.
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