Incoterms: What are they?
Whether you are importing or exporting goods, and whether you are a buyer or a seller, the chances are high that you will encounter Incoterms.
What are Incoterms?
Incoterms stands for International Commercial Terms. The terms are published by The International Chamber of Commerce. They regulate commercial transactions between parties in terms of costs, responsibilities, tasks and risks associated with the transportation and delivery of the purchased goods.
The first Incoterms were agreed upon in 1923. They have been revised and improved 9 times since. The current set is Incoterms 2010. One of the improvements in the 2010 terms were related to information sharing, which makes perfect sense in the age of online communication.
The terms have been developed and maintained by experts and practitioners brought together and coordinated by the ICC. Because of the independent and neutral position of the ICC, the terms are accepted almost everywhere in the world.
Which Terms Are There?
Incoterms 2010 has 11 pre-defined terms. Seven of these can be used regardless of the mode of transportation and the other four are for transportation by water only and are not applicable to containerized cargo, because the condition of the goods needs to be verifiable when the goods are loaded onto the ship.
Applicable to all modes of transport:
- EXW – Ex Works
- FCA – Free Carrier
- CPT – Carriage Paid To
- CIP – Carriage and Insurance Paid
- DAT – Delivered at Terminal
- DAP – Delivered at Place
- DDP – Delivery Duty Paid
Applicable for transport by water
- FAS – Free Alongside Ship
- FOB – Free on Board
- CFR – Cost and Freight
- CIF – Cost, Insurance & Freight
What is the Difference?
The differences between each of the terms mentioned above have to do with who is responsible for the cost and who is responsible for the risk. The costs involved are for example related to export customs declaration, transportation to and from the port, loading, and unloading of trucks and ships, and import duties and customs clearance.
As the terms are listed above the cost moves from the Buyer to the Seller for each term. When goods are delivered Ex Works, the Buyer is fully responsible for the cost. When goods are delivered Delivery Duty Paid, the seller is fully responsible for the cost.
The same goes for risk at the various stages of transportation: Carrier, Port of Origin, Ship, Port of Destination, Terminal, and Final Destination. When goods are delivered Ex Works, all risk is for the Buyer, and with Delivery Duty Paid, all risk is for the Seller.
For both cost and risk, the responsibilities move from Buyer to Seller as you move down the list of terms.
What Does Each Term Entail?
The different terms have different implications for both Buyer and Seller. What these differences are I will explain in a series of follow up blog posts, where I will go into more detail for each INCOTERM.
What About INCOTERMS 2020?
You may have heard about INCOTERMS 2020. The International Chamber of Commerce has published an update of the INCOTERMS 2020.