What Are Incoterms®?

What does Incoterms® mean? This stands for International Commercial Terms, a set of rules coined by the International Chamber of Commerce in 1936. They were created for the sake of international trade as a way to standardize it by defining the responsibilities of the parties involved in cross-border transactions. While they are not mandatory, they can be incorporated into contracts and become legally binding. Do you wish to learn more? Then read on!

What Are Incoterms®?

Incoterms® are the International Commercial Terms’ rules written down to smoothen cross-border trade. Although Incoterms® were developed in 1936, they have been updated since, with the last update taking place in 2020. Currently, there are 11 Incoterms®, all having a three-letter name, with the first indicating one of the four categories.

What is the role of Incoterms®? In general, before they were introduced, there was quite a mess in international trade. The parties, deriving from different cultures and legal systems, had different expectations towards each other’s responsibilities. The Incoterms® were created to mitigate this by introducing a universal system.

Bear in mind that Incoterms® aren’t mandatory – they are a set of rules that you can use only if you wish to. However, you might implement them into your trade contracts to make them legally binding, which is a popular strategy.

What Are the 11 Incoterms®?

Knowing what the term Incoterms® means, let’s look at it from a practical perspective. What are the current 11 Incoterms®? Here’s a list.

Any Kind of Transport

• EXW – Ex Works – Seller is only responsible for packing and making the goods available at their premises. The buyer bears the full risk and costs from there to the destination (including the risks regarding loading and cargo).

• FCA – Free Carrier – Seller is responsible for delivery and loading of the goods. As soon as the products reach the buyer, the risks are transferred to them, with unloading being the buyer’s responsibility.

• CPT – Carriage Paid To – Seller organizes the transportation and covers the cost. The risk is transferred to the buyer when the goods are delivered to the first carrier.

• CIP – Carriage and Insurance Paid to – Seller organizes the transportation, covers the costs, and pays for the insurance. When delivered to the first carrier, the risks are transferred to the buyer.

• DAP – Delivered at Place – Seller delivers the goods to the destination, assuming all costs and risks until the goods are ready for unloading. Then, the risk transfers to the buyer.

• DPU – Delivered at Place Unloaded – Seller takes all the risks and responsibilities until the goods are unloaded at the destination.

• DDP – Delivery Duty Paid – Seller assumes all risks and costs, including import formalities, until the goods are unloaded at the destination.

Water Transport

• FAS – Free Alongside Ship – Seller is responsible for delivering the goods to the port alongside the vessel. When this happens, the risk and costs are transferred to the buyer.

• FOB – Free on Board – The risks and costs are on the seller until all the goods are loaded on the vessel. Then, they are transferred to the buyer.

• CFR – Cost and Freight – Seller covers freight costs to the port named by the buyer and takes risks until the goods are loaded on board the vessel. Then, the risk transfers to the buyer.

• CIF – Cost, Insurance, and Freight – Seller covers insurance and freight costs to the port named by the buyer or the exact place in that destination. Risk is transferred to the buyer after the goods are loaded onto the vessel.

  

  Source: https://easyroadtransport.com/en/knowledge-centre/blog/incoterms/

Is It Worth Using Incoterms®?

Yes, Incoterms® are quite helpful. While you could agree on the terms individually with every transaction, it would take time to negotiate and could cause misunderstandings affecting your business. Therefore, if possible, it’s good to learn the exact meaning of all the Incoterms® and incorporate them into your international operations.

However, if you wish to do so, be sure to monitor the changes. Incoterms® are altered from time to time, with the last changes incorporated in 2020, so you need to stay up to date if you want to use them for your business.

The Takeaway

What are Incoterms®? They are a set of rules created to smoothen international trade by removing misunderstandings. While they aren’t compulsory, you might use them in your agreements and contracts to streamline the processes and ensure that your business partners or customers know exactly what the conditions are. Therefore, we recommend using Incoterms® – even if it means checking the International Chamber of Commerce website for new updates from time to time.

You might also read: Navigating Cross-Border E-commerce with Jonathan Matchett

The Incoterms® Rules are protected by copyright owned by ICC. Further information on the Incoterm® Rules may be obtained from the ICC website https://iccwbo.org. Incoterms® and the Incoterms® 2020 logo are trademarks of ICC. Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above.