International trade has been an important part of the world economy for a long time. International trade has become more pervasive and intricate as a result of globalization’s ascent. The use of Incoterms is a crucial part of international trade. International Commercial Terms (Incoterms) is an agreed upon set of procedures for conducting business across international borders. 

The International Chamber of Commerce (ICC) established Incoterms, or “International Commercial Terms,” to standardize the rights and responsibilities of buyers and sellers in international trade.

In this comprehensive guide to Incoterms, we’ll explore what are incoterms, their meaning, their significance, incoterms types, and how they impact international trade and the difference between Incoterms 2010 and Incoterms 2020.

Importance of incoterms in international trade

Incoterms play a critical role in international trade, and their importance cannot be overstated. They provide a standardized framework for international trade that reduces the risk of misunderstandings and disputes between buyers and sellers. Here are some of the importance of Incoterms:

Clarifies responsibilities and obligations

Incoterms help to clearly define the responsibilities and obligations of the buyer and seller in an international trade transaction. This includes who is responsible for arranging and paying for transport, insurance, and customs clearance, as well as who bears the risk of loss or damage to the goods during transport.

Provides a common language

Incoterms provide a common language for buyers, sellers, and carriers to use when negotiating and executing contracts for the transportation of goods. This common language helps to minimize the risk of misunderstandings and disputes, which can lead to costly delays and legal issues.

Streamlines import and export process

Incoterms provide a framework for addressing many of the logistical and operational issues that arise when goods are transported across borders. This helps to streamline the import and export process, making it easier for businesses to trade internationally.

Reduces risk

By clearly defining the responsibilities and obligations of each party, Incoterms help to reduce the risk of disputes and misunderstandings. This can help to minimize the risk of delays and financial losses, which can be especially important for small and medium-sized businesses.

Provides legal certainty

Incoterms provide a standardized set of rules that are recognized and accepted worldwide. This provides legal certainty for all parties involved in the transaction, as it helps to ensure that everyone is operating under the same set of rules and regulations.

Eliminates language barriers

Since Incoterms provide a common language for buyers, sellers, and carriers to use when negotiating and executing contracts for the transportation of goods, it helps to eliminate language barriers that may exist between different parties.

Encourages international trade

Incoterms help to facilitate international trade by providing a set of rules and regulations that are recognized and accepted worldwide. This can help to encourage businesses to trade internationally, as it helps to reduce the complexity and risk associated with cross-border transactions.

Types of Incoterms and their significance

There are currently 11 Incoterms types in use, and they are grouped into four categories—E,F, C, and D—based on the level of responsibility assigned to the buyer and seller. These terms are divided into categories based on the delivery location and who is responsible for covering the cost of each part of the journey. Within each category, there are sub-categories that refer to various scenarios.

When choosing an incoterm, it is important for both buyers and sellers to carefully review each term and select the one that best suits their specific shipment. It is important to consider factors such as transportation costs, insurance coverage, and the risk of loss or damage during transportation. By selecting the appropriate incoterm, buyers and sellers can avoid misunderstandings and disputes, ensuring a smooth and successful transaction.

The 11 types of incoterms: 

    EXW – Ex Works 

    FCA  – Free Carrier 

    CPT  – Carriage Paid To

    CIP –  Carriage and Insurance Paid To 

    DAP – Delivered at Place 

    DPU – Delivered at Place Unloaded

    DDP – Delivered Duty Paid

    FAS – Free Alongside Ship 

    FOB – Free on Board 

    CFR – Cost and Freight 

    CIF –  Cost Insurance and Freight

Incoterms rules for any mode of transport

Delivered Duty Paid (DDP), Delivered at Place (DAP), and Ex Works (EXW) are popular instances of Incoterms norms for any form of transportation. The seven Incoterms rules for any mode of transportation are as follows:

FCA: Free Carrier 

EXW: Ex Works

CPT: Carriage Paid To

CIP: Carriage and Insurance Paid To

DAP: Delivered at Place

DPU: Delivered at Place. 

DDP: Delivered Duty Paid Unloaded

For instance, DPU states that the vendor must deliver the goods to a terminal and bear all risk and transportation expenses until the goods arrive and are unloaded. The client then assumes the risk and expense of transporting the goods from the terminal to their final destination.

DDP indicates that the vendor is responsible for all risks and transportation expenses. Moreover, the seller must approve the goods for export at the port of shipment and import at the destination. In addition, the vendor must pay export and import duties on DDP shipments.

Under Incoterm Ex Works (EXW), the vendor is only required to make the items available for pickup at the seller’s business address or another designated location. Under EXW, the customer is responsible for all risks and transportation costs.

In 2010, the two primary Incoterms categories were modified and classified by modes of transportation. The first classification applies to all modes of transportation, whereas the second applies exclusively to maritime and inland canal transportation.

Incoterms rules for sea and inland waterway transport

The International Chamber of Commerce (ICC) has particular Incoterms rules for inland waterway and marine shipping, such as Cost, Insurance and Freight (CIF) and Free on Board (FOB). The Incoterms for sea and inland waterway transportation are as follows:

• FAS stands for Free Alongside Ship.
• FOB stands for “Free on Board.”
• CFR stands for Cost and Freight.
• CIF stands for Cost, Insurance, and Freight.

For instance, under free on board (FOB) shipment arrangements, the seller would deliver the goods to the buyer aboard a vessel of the customer’s choosing. The complete risk and transportation costs may be borne by the buyer or the seller, depending on whether the items are sold at the FOB shipping point or FOB destination point.

In a Cost, Insurance, and Freight (CIF) clause, the seller is obligated to ship the goods to the buyer at their expense and load them into a specified vessel at a specified port. After the cargo has arrived at the chosen port, the buyer is responsible for transporting it to its warehouse or place of business

Incoterms 2020 vs. Incoterms 2010

The most recent version of Incoterms is Incoterms 2020, which replaced the previous version, Incoterms 2010.

Here are some of the key differences between Incoterms 2020 and Incoterms 2010:

Choosing the right Incoterms for your business

When choosing the right Incoterm for your business, it’s essential to consider the specific needs of your business, the nature of the goods being shipped, and the shipping method. For example, if you’re shipping goods that require special handling, you may want to choose an Incoterm that places more responsibility on the seller, such as FOB (Free on Board) or CIF (Cost, Insurance, and Freight).

Incoterms rules can also impact shipping and logistics. For example, the choice of Incoterm can determine who is responsible for arranging and paying for transportation, insurance, and customs clearance. This has the potential to greatly affect shipping costs and productivity.

Advantages and disadvantages of Incoterms Rules

While they offer many benefits, they also come with a few drawbacks. Here are some of the advantages of incoterms and disadvantages of incoterms:

Advantages of Incoterms

Clarity and consistency

Incoterms provide a clear and consistent set of rules for international trade, making it easier for buyers and sellers to understand their respective obligations and responsibilities.

Reduced risk

The potential for disagreements and misunderstandings is diminished when incoterms are used since they make it clear what is expected of each side. This can be beneficial for the bottom line and for keeping the peace in the workplace.

Increased efficiency

Incoterms help to streamline international trade by standardizing procedures and documentation. This can result in faster processing times and lower costs.

Better cost control

Incoterms help to ensure that all costs associated with the transaction are agreed upon in advance. This can help to prevent unexpected expenses from arising and allow for better cost control.

Flexibility

Incoterms offer a range of options for buyers and sellers to choose from, allowing them to select the terms that best meet their needs.

Disadvantages of Incoterms

Complexity

Incoterms can be complex, particularly for those who are unfamiliar with international trade. This can lead to confusion and misunderstandings.

Legal implications

Legal problems can arise from a failure to comply with Incoterms because they are binding. The ramifications of the selected incoterm must be understood by both the buyer and the seller.

Limited scope 

Incoterms only cover a limited range of issues related to international trade. Other aspects of the transaction, such as payment terms and intellectual property rights, may need to be addressed separately.

Cultural differences

Incoterms may not take into account cultural differences or business practices in different countries. This can create misunderstandings and conflicts.

Lack of customization

Incoterms are standardized and may not be able to fully accommodate the unique needs of certain transactions. This can lead to a loss of flexibility and control.

Conclusion

Incoterms rules facilitate global trade. They are differentiated by modes of transportation into those that utilize any mode and those that utilize water transport exclusively. The terms categorize buyer and seller responsibility, but they do not cover certain aspects of trade, such as the products being sold or future liability responsibilities. It is recommended to utilize Incoterms as a means to clarify agreements, but not as the only basis for the agreement itself.

For businesses engaging in international trade, familiarity with Incoterms is essential. By choosing the right Incoterm for your business, you can ensure that you are allocating responsibilities and risks appropriately. While there are disadvantages of Incoterms rules, their advantages far outweigh the cons of incoterms, making them an essential tool for incoterms in international trade.

Incoterms can be a useful tool for facilitating international trade, but they should be used with care and attention to detail. Buyers and sellers should ensure that they fully understand the implications of the chosen incoterm and seek expert advice if necessary.

FAQ’s

What are Incoterms?

Incoterms (International Commercial Terms) are a standard set of trade terms used in international transactions to determine the buyer’s and seller’s responsibilities and liabilities regarding the delivery of products, the transfer of risk, and payment obligations. The International Chamber of Commerce (ICC) has published these terms.

How many Incoterms types are there?

There are currently 11 Incoterms types that are recognized by the ICC. These are:

EXW (Ex Works), 

FCA (Free Carrier), 

FAS (Free Alongside Ship), 

FOB (Free on Board), 

CFR (Cost and Freight), 

CIF (Cost, Insurance, and Freight), 

CPT (Carriage Paid To), 

CIP (Carriage and Insurance Paid To), 

DAP (Delivered at Place), 

DPU (Delivered at Place Unloaded), 

DDP (Delivered Duty Paid).

What is the purpose of Incoterms?

The purpose of Incoterms is to provide a universal set of rules that buyers and sellers can use to elucidate their respective responsibilities and obligations in international trade. Incoterms reduce misunderstandings, disputes, and litigation that can result from disparities in legal systems, business practices, and cultural norms by defining the obligations of each party at various stages of the transaction. In addition, they help facilitate global trade by promoting standardization and simplification of international transactions and by providing a common language for global merchants.