Everything You Should Know about Incoterms [The Ultimate Guide]

What Are Incoterms?

Incoterms are a set of standardized selling terms that are agreed upon by both the buyer and the seller in international trade. These terms, established by the International Chamber of Commerce (ICC), provide a common framework for understanding the rights and obligations of the parties involved in a transaction. Incoterms define various aspects of the transaction, including the point of delivery, the division of costs and risks, and the allocation of responsibilities between the buyer and the seller.

Reasons to adopt Incoterms in Global Trade

Incoterms are essential in global trade for several reasons. They:

• Provide a common language by establishing a shared understanding between buyers and sellers, enabling smooth communication and reducing the risk of misinterpretation.
• Allocate responsibilities: By clearly defining the obligations of each party, Incoterms ensure that both buyers and sellers know their roles and responsibilities in the transaction.
• Determine risk and cost by specifying when the risk and cost associated with the goods transfer from the seller to the buyer. This happens when the shipping process, allows both parties to manage their financial exposure effectively.
• Facilitate legal compliance: Incoterms help ensure that transactions comply with international trade  regulations and laws, providing  a legal framework for resolving disputes.
• Standardize trade practices: By using internationally recognized terms, Incoterms standardize trade practices, making it easier for businesses to engage in global trade.

What do Incoterms define?

Incoterms are used to define various aspects of a transaction, including:

• The place of delivery: they specify the location where the goods will be transferred from the seller to the buyer.
• The division of costs: they determine which party is responsible for specific costs, such as transportation, insurance, and customs duties.
• The transfer of risk: they establish when the risk of loss or damage to the goods transfers from the seller to the buyer.
• The allocation of responsibilities: Incoterms define the obligations of both the buyer and the seller, such as packaging, documentation, and customs clearance.

Understanding these definitions is crucial for effectively managing international trade transactions.

The 3 Most Common Incoterms You Should Learn About

While there are several Incoterms, it's important to have a solid understanding of the most commonly used terms. The following three Incoterms are widely utilized in international trade:

EXW – Ex-Works or Ex-Warehouse

EXW, or Ex-Works, is one of the most basic Incoterms. In an EXW agreement, the seller makes the goods available at their premises or another designated location. The buyer is responsible for all transportation costs, customs clearance, and assumes the risk from the moment the goods are handed over. The seller's obligation is fulfilled once the goods are made available.

FOB – Free On Board

FOB, or Free On Board, is a common Incoterm used primarily for maritime transport. Under an FOB agreement, the seller is responsible for delivering the goods on board the vessel at the specified port of shipment. The risk of loss or damage transfers to the buyer once the goods are on board. The buyer bears the costs and risks associated with transportation and insurance from that point onward.

FR – Cost and Freight

CFR, or Cost and Freight, is another widely used Incoterm for maritime transport. In a CFR agreement, the seller is responsible for delivering the goods on board the vessel or procuring the goods already delivered. The risk of loss or damage transfers to the buyer once the goods are on board. The seller is also responsible for contracting and paying the costs and freight required to bring the goods to the named port of destination.

Other Incoterms to Acknowledge

In addition to the three common Incoterms mentioned above, there are several other terms that apply to different modes of transportation. Let's explore them in more detail:

FCA – Free Carrier

FCA, or Free Carrier, is a versatile Incoterm that can be used for any mode of transportation. Under an FCA agreement, the seller delivers the goods to the carrier or another person nominated by the buyer at the seller's premises or another named place. The parties are advised to specify the precise point within the named place of delivery to determine when the risk transfers to the buyer.

CPT – Carriage Paid To

CPT, or Carriage Paid To, is an Incoterm that can be used for any mode of transportation. With a CPT agreement, the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place, if any such site is agreed between the parties. The seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.

CIP – Carriage And Insurance Paid To

CIP, or Carriage And Insurance Paid To, is an Incoterm suitable for any mode of transportation. Similar to CPT, a CIP agreement involves the seller delivering the goods to the carrier or another nominated person. However, under CIP, the seller is also responsible for obtaining insurance cover against the buyer's risk of loss or damage to the goods during transportation.

DAT – Delivered At Terminal

DAT, or Delivered At Terminal, is an Incoterm used for any mode of transportation. In a DAT agreement, the seller delivers the goods when they are unloaded from the arriving means of transport and placed at the buyer's disposal at a named terminal at the designated port or place of destination. The terminal can be a quay, warehouse, container yard, or road, rail, or air cargo terminal.

DAP – Delivered At Place

DAP, or Delivered At Place, is an Incoterm that can be used for any mode of transportation. Under a DAP agreement, the seller is responsible for delivering the goods to the buyer at the named place of destination. The goods must be ready for unloading from the arriving means of transport, and the seller bears the risks involved in bringing the goods to that place.

DDP – Delivered Duty Paid

DDP, or Delivered Duty Paid, is an Incoterm suitable for any mode of transportation. With a DDP agreement, the seller is responsible for delivering the goods to the buyer, clearing them for importation to arrive at the means of transport, and making them ready for unloading at the named place of destination. The seller assumes all the costs and risks involved in bringing the goods to their destination, including customs duties and formalities.

Incoterms related to Sea and Inland shipping

FAS – Free Alongside Ship

FAS, or Free Alongside Ship, is an Incoterm used for maritime transport. In a FAS agreement, the seller delivers the goods when they are placed alongside the vessel nominated by the buyer at the named port of shipment. The risk of loss or damage to the goods passes to the buyer when they are alongside the ship.

CIF – Cost, Insurance and Freight

 CIF, or Cost, Insurance and Freight, is an Incoterm commonly used for maritime transport. Under a CIF agreement, the seller delivers the goods on board the vessel or procures the goods already delivered. The risk of loss or damage to the goods passes when the products are on the ship. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

What are the changes that impacted incoterms in 2023

As trade practices and regulations evolve, Incoterms are periodically updated to reflect these changes. It is essential to stay informed about the important changes and revisions to Incoterms. For the year 2023, some notable changes include:

Usually each incoterm defines a different level of responsibility for goods delivery. Sometimes some incoterms may require the seller to have more responsibilities , or sometimes there are more responsibility on the buyer : 

Some things have changed and here are a few to remember : 

• Definition of Delivered at Place (DAP): The definition of DAP has been changed to include deliveries to an Inland Clearance Depot (ICD), a facility that clears the import and export of goods. This change reflects the increasing use of ICDs in international trade and helps to clearly define the responsibilities of buyers and sellers in such situations. 

• Definition of “ Delivered Duty Paid” ( DDP) : The definition of this incoterm has changed , the seller is responsible for all cost and risk including delivery of goods and customs clearance. This definition was altered because to be sure that it is understand who is responsible for the customs 

• Further Focus on Sustainability:  Incoterms 2023 places greater emphasis on sustainability and the responsibility of buyers and sellers to act in an environmentally friendly manner. This includes the need for both sellers and buyers to consider using more sustainable transportation options such as rail and sea freight instead of air freight. 

• Simplification of Definitions: Incoterms definitions can be hard to understand, this is why they have been simplified to make them easier to understand and avoid confusion. The simplification was about the clarification of terms like responsibilities of the buyer and the seller .

Elements excluded when using Incoterms in international trade 

While Incoterms cover many aspects of international trade, it's important to note that they do not include certain elements. Hence, Incoterms do not cover:

• The transfer of ownership: Incoterms focus on the rights, responsibilities, and risks associated with the goods but do not address the transfer of ownership. This aspect is usually covered by other legal documents, such as contracts or bills of sale.

• Contractual terms: Incoterms provide a framework for the division of responsibilities, but do not replace the need for a comprehensive contract. It's important to have a well-drafted contract that covers additional terms and conditions specific to your trade agreement.

Understanding these limitations helps ensure that you cover all necessary aspects in your international trade agreements.

How to facilitate Incoterms Implementation?

Implementing Incoterms effectively requires following some best practices:

• Know your Incoterms: Familiarize yourself with the different Incoterms and their implications. Understand the specific obligations, risks, and responsibilities associated with each term.
• Communicate clearly: Clearly communicate the chosen Incoterm and its associated responsibilities to all parties involved in the transaction. Avoid any assumptions or misunderstandings by discussing and confirming the terms explicitly.
• Document everything: Maintain comprehensive records of all relevant documents, such as contracts, invoices, bills of lading, and insurance certificates. These records serve as evidence in cases of disputes or claims.
• Seek professional advice: If you're new to international trade or dealing with complex transactions, seek guidance from experts, such as freight forwarders, customs brokers, or legal advisors. Their expertise can help you navigate the intricacies of Incoterms and ensure compliance with regulations.

Consider Your Freight Rates 

At Docshipper, we understand the importance of smooth and efficient international trade, and that's why we offer exceptional shipping services tailored to meet your unique needs. Our team of experts is well-versed in the complex world of Incoterms, and we take pride in guiding our clients to understand the Incoterms that are most relevant to their specific transactions.

With our extensive knowledge and expertise, we help you navigate the intricacies of Incoterms, ensuring that you choose the right terms that align with the nature of your goods, mode of transportation, and level of risk tolerance. Whether you are a seasoned trader or just starting out in global trade, our team is here to assist you every step of the way.

So, if you're looking to take your international trade to the next level, let's consider your freight rates together. Reach out to our team of experts at Docshipper and experience the difference that our personalized multimodal shipping services can make for your business.

 Conclusion

In conclusion, Incoterms are indispensable tools for international trade. They provide a standardized framework for allocating responsibilities, risks, and costs between buyers and sellers. By understanding and utilizing Incoterms effectively, businesses can streamline their trade operations, minimize disputes, and foster successful relationships with trading partners around the world.

Entrust DocShipper teams with your shipping projects, and we will help you navigate the complex world of Incoterm by helping you choose the most relevant one for your business! Dont hesitate to contact our team available 24/7