Incoterms
Entering the world of global trade means understanding your roles and responsibilities in importing
What do Incoterms mean?
Incoterms are rules – set by the International Chamber of Commerce – that define the terms of trade for the sale of goods all around the world. You can think of them as the common language of trade – and by understanding them better, you will be better equipped in importing and exporting goods with parties around the world.
What Incoterms do and don’t cover
What Incoterms do cover
- They do define the obligations and costs between a buyer and seller
- They do define the point at which the risk for cargo passes between buyer and seller
What Incoterms don’t cover
- They don’t cover the passage of title or ownership
- They don’t cover payment – this is negotiated separately.
- They don’t cover insurance – only two Incoterms, CIF and CIP outline insurance as the seller’s responsibility.
What are the most common Incoterms?
EXW
(Ex Works)
The buyer bears all the costs and risks in an Ex Works arrangement. The seller must only make the goods available for the buyer at their warehouse/factory. As soon as the goods are collected, buyer undertakes all other obligations. Ex Works can be used for any means of transportation.
FCA(b)
(Free Carrier)
The seller is responsible for export clearance and delivering the goods to the carrier at the designated point of delivery in accordance with the Free Carrier (FCA) shipping terms. Any individual or business that conducts the carrying is referred to as a carrier, including a shipping line, airline, trucking company, railroad, or freight forwarder.
FAS
(Free Alongside Ship)
According to the Free Alongside Ship (FAS) Incoterm® guidelines, the seller clears the cargo for export and puts them next to the ship at the designated port of departure. The specified port of departure shall be either a loading dock or a barge, but not a container terminal. The buyer oversees local transport, discharge, import formalities and duties, and onward carriage to the final destination in addition to handling the loading of the freight aboard the vessel. Nowadays, FAS is mainly reserved for interior canal cargo and sea freight.
FOB
Free on Board
Free on Board (FOB) is an Incoterm® that specifies that the seller is responsible for all costs involved with loading the cargo onto the ship. When the goods are secured on board the ship, the risk is transferred to the buyer, who is then in charge of the remaining portions of the shipment.<br> The buyer is responsible for processing after the delivery point. Based on what the two parties have decided, responsibility for risk and insurance is defined. Only transport by sea or interior waterways is covered by FOB. As a result, the location is always a port. If the principal conveyance is by air, ground, or rail, it does not apply.
CFR
Cost and Freight
Cost and Freight (CFR) means the seller has fulfilled its obligation when the goods are delivered and loaded on the vessel they’ve nominated at the named port of shipment. Only inland and sea transport should make use of CFR under Incoterms® 2020. As soon as the items are loaded onto the vessel before carriage begins, risk or liability for the goods passes from the seller to the buyer, and the buyer is then responsible for any further expenditures.
CIF
Cost, Insurance and Freight
Cost, Insurance and Freight (CIF), a commercial clause in Incoterms 2020, states that the seller is responsible for all costs up to and including delivery of the products and payment of settlement for carriage and insurance to the designated port. The use of CIF is limited to ocean and inland waterways, and it is typically reserved for bulk cargo, non-containerized commodities, and situations in which the seller has direct access to the vessel for the purpose of loading the goods.
CPT
Carriage Paid To
Carriage Paid To (CPT) Incoterm® states that the cost of the items includes everything needed to transport the goods to the specified location. Only local shipping and unloading fees as well as import procedures are the buyer's responsibility. Once the items are delivered to the first carrier, typically at the origin port, the responsibility for the shipment is transferred. CPT is similar to an FCA agreement in that it can be applied to all modes of transportation, but unlike an FCA agreement, the delivery destination is not predetermined. Even though CPT is a less frequent Incoterm®, there are specific instances in which it can be applied.
CIP
Carriage and Insurance Paid To
Under the Incoterms® 2020 rules, Carriage and Insurance Paid To(CIP), indicates that risk passes to the buyer when the seller delivers the goods to the first carrier or to a different person specified by the seller at a designated place of shipping. The expense of transportation and insurance for delivering the products, at the very least, to the specified location, is the seller's responsibility. CIP is one of just two Incoterms® regulations (the other being CIF—Cost, Insurance and Freight) that indicates which party must purchase insurance is CIP.
DPU
Delivered at Place Unloaded
The most recent Incoterm® as of now is DPU. It has replaced DAT (Delivery at Terminal) Incoterm®. The DPU Incoterm® is applicable to all forms of transportation, including combinations of modes. Until the products have been delivered to the agreed-upon location and have been unloaded, the seller is responsible for all risks of loss or damage.
DAP
Delivered at Place
The Delivery at Place (DAP) Incoterm® can be used to any mode of transportation, including multiple modes. According to DAP rules, the seller is in charge of all expenses and risks related to delivering the items to the final agreed-upon location, which is often the buyer's premises, and the buyer and seller must agree on the place of destination. The buyer is alone accountable for importing and unloading the cargo when using DAP for sea, air, road, and rail freight.
DDP
Delivered at Duty Paid
According to the Incoterm® Delivered at Duty Paid (DDP), the seller is responsible for all expenses and risks associated with shipping the goods to the designated location. Furthermore, it is the sole condition in which the seller is responsible for import customs fees. Since the seller assumes most of the responsibility, a DDP arrangement benefits the buyer. However, the buyer may be better prepared to handle it if they remain alert and try not to rely totally on the seller for certain costs.