In international trade, incoterms® are essential for ensuring that both the seller and the buyer understand their obligations and responsibilities for delivering goods. Incoterms®, short for International Commercial Terms, are standardized terms developed by the International Chamber of Commerce (ICC) to provide a common language for buyers and sellers to use when negotiating the terms of a contract.
Incoterms® history
The history of Incoterms® dates back to 1936 when the International Chamber of Commerce (ICC) first introduced a set of standard terms for international trade transactions. These terms were developed to reduce confusion and misunderstandings between buyers and sellers, particularly regarding the delivery of goods. Over the years, the ICC has updated and revised the terms, with the most recent version being Incoterms 2020, which came into effect on January 1st, 2020.
Trade in international terms: the importance of Incoterms®
Incoterms®, or International Commercial Terms, play a crucial role in international trade by specifying the responsibilities of buyers and sellers in the delivery of goods. They provide a standardized language for international transactions, reducing confusion and misunderstandings and ensuring clarity and consistency in defining roles and responsibilities. Incoterms® help manage risk and minimize disputes by clearly defining who is responsible for the costs and risks associated with transporting and delivering goods. As a result, using Incoterms® is essential for ensuring smooth and successful international trade transactions.
11 Incoterms presently in use
There are 11 incoterms® in total, with the most commonly used being EXW (Ex Works), FOB (Free on Board), CIF (Cost, Insurance, and Freight), and DDP (Delivered Duty Paid). It's important to note that incoterms® only applies to the delivery of goods, not the payment.
EXW (Ex Works): The seller makes the goods available at their premises. The buyer bears all costs and risks involved in transporting the goods from there to the destination.
FCA (Free Carrier): The seller delivers the goods to the carrier nominated by the buyer at the seller's premises or another named place. From that point, the buyer is responsible for all costs and risks.
FAS (Free Alongside Ship): The seller delivers the goods alongside the ship at the port of shipment. The buyer is responsible for all costs and risks of loading the goods onto the shipping vessel.
FOB (Free on Board): The seller delivers the goods on board the shipping vessel at the port of shipment. From that point, the buyer is responsible for all costs and risks.
CFR (Cost and Freight): The seller delivers the goods to the port of shipment and is responsible for the costs and risks involved in getting the goods to the destination port. The buyer is responsible for loading the goods onto their transportation.
CIF (Cost, Insurance, and Freight): The seller delivers the goods to the port of shipment, is responsible for the costs and risks involved in getting the goods to the destination port, and provides the buyer with minimum insurance coverage.
CPT (Carriage Paid To): The seller delivers the goods to the carrier nominated by the buyer and pays for the carriage of the goods to the agreed destination. The buyer bears all risks involved in the transportation.
CIP (Carriage and Insurance Paid To): The seller delivers the goods to the carrier nominated by the buyer, pays for the carriage of the goods to the agreed destination, and provides the buyer with minimum insurance coverage.
DAT (Delivered at Terminal): The seller delivers the goods to a named terminal at the agreed destination. The buyer is responsible for all costs and risks in removing the goods from the airport.
DAP (Delivered at Place): The seller delivers the goods to the agreed destination. The buyer is responsible for all costs and risks involved in removing the goods from the transport and making them available.
DDP (Delivered Duty Paid): The seller delivers the goods to the agreed destination and bears all costs and risks involved in the transportation, including payment of duties and taxes. The buyer is responsible for unloading the goods.
When selecting an incoterm®, it's essential to consider the specific needs of the trade. For example, a buyer may prefer DDP if they want to minimize their risks and responsibilities, while a seller may prefer EXW if they keep their costs to a minimum.
In conclusion, incoterms® ensure clear communication and a shared understanding between buyers and sellers in the export-import business. By selecting the right incoterm®, both parties can avoid confusion and disputes and ensure that the delivery of goods is completed smoothly and efficiently.
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