What does Incoterms mean in Shipping?
Incoterms is an abbreviated version of the phrase “International Commercial Terms” and is a term that is trademarked by the International Chamber of Commerce. Their aim is to help with communication and minimize confusion when dealing with international and global trade.
An incoterm describes and defines a transaction that occurs between two parties, generally between the party that is exporting goods and the party that is importing them.
These incoterms set out the different parts of trade and can define which party is responsible for taking care of which of the different costs, tasks, and processes. The incoterms also deal with the various parts of the import-export and transportation process, all the way from the goods leaving the place of production to the point when they are accepted at the importing port. They describe all the ways in which various parties share the responsibilities and obligations in the import and export process.
What areas of responsibility do the Incoterms cover?
The Incoterms cover four main areas of responsibility. These areas are:
The Delivery stage
This is the stage in which the seller and buyer craft an agreement for the details of the cargo’s final delivery, and when the goods exchange hands and the responsibility of the seller ends.
The Transportation stage
In the transportation stage, Incoterms define what each party is responsible for with regard to the transportation costs, the way in which these costs are shared, and whether the different parties take responsibility for different stages of transportation.
Documentation and formalities
The Incoterms define which parties have to take the responsibility of handling all customs, export, and import documentation, formalities, and duty payments.
Incoterms set out which party has to take the responsibility of providing insurance coverage during transportation of the goods.
What are the main reasons for using Incoterms?
The three main purposes or general objectives of incoterms are outlined here:
While the task of figuring out how a shipment will travel from point A to point B can seem rather simple, it can get complicated. There are several legs to the journey for international shipments, and incoterms define exactly how far the seller will take the shipment before the buyer assumes responsibility for it. All transportation after that point would be the responsibility of the buyer.
The costs for the transportation of international shipments can vary greatly depending on lane and mode. The Incoterm on a shipment will define which party has to arrange the transportation as well as which party is responsible for payment and how it is reflected in the overall transaction. Transportation fees are also accounted for in the invoice value of the goods, and can often be deducted for duty and tax benefits.
With international journeys that have a lot of legs, quite a few points of risk tend to come along. If a shipment ends up getting lost or damaged, it is important to understand which party bears the risk. The incoterm that was agreed upon will make that happen and streamline the resolution process substantially.
What are the 11 Incoterms?
There are 11 incoterms and the International Chamber of Commerce regularly revises and updates them.
EXW (Ex Works)
This states that the selling party has to hand over ownership of the goods at an agreed location. From then on, the buyer has all responsibility and all the risk for the entirety of the shipping process.
FCA (Free Carrier)
According to this term, the selling party needs to makes the goods being sold available either at their own premises or at another location. The seller has the responsibility to clear the goods for export and to pay any associated fees. The buyer needs to instruct the carrier to provide a Bill of Lading when they load the products.
CPT (Carriage Paid To)
The same responsibilities as FCA apply to the seller in CPT, but the seller also has to pay all delivery costs to a certain location.
CIP (Carriage Insurance Paid To)
Sellers have the same responsibilities as they have in CPT but they aso need to pay insurance costs and the insurance has to have a high coverage ratio. But it is also possible for the parties to come to an agreement to apply more limited coverage.
DAP (Delivered At Place)
Here the seller will deliver the products to an address or a location that is agreed between both the parties. The seller will handle all costs and risk of loss during the delivery process but after delivery has been made to the agreed location, those responsibilities will pass to the buyer.
DPU (Delivered at Place Unloaded)
The seller takes care of all the costs and risks of transportation, handles all the export and import processes, and even pays any import duties that are needed. Those responsibilities only end after the goods reach the destination address and are ready to be unloaded.
FAS (Free Alongside Ship)
The seller holds sole responsibility for everything till the goods get delivered next to the ship’s loading point. After that, all the costs and risks are transfered to the buyer who also needs to arrange export and import clearances.
FOB (Free On Board)
The the costs and risks remain with the seller until the goods are on board the ship. The seller has the responsibility for all the export clearance processes. After the goods are on the ship, the responsibility for the goods shifts to the buyer.
CFR (Cost And Freight)
The same conditions as FOB apply here, but the seller also has to pay for transportation of the goods to the port of shipment.
CIF (Cost, Insurance, and Freight)
Here, the same obligations as CFR apply to the seller as under CFR, but the seller also has to pay for minimum insurance. If the buyer wants more comprehensive insurance on the goods, they’ll have to pay for it themselves.