Understanding Incoterms
Whenever a buyer or seller wishes to move their goods internationally, they will need to find the right freight forwarder to handle the move for them, under the terms and conditions that suit them best.
There are many stages in the shipping process, from pick-up at the origin to delivery at the destination, and all parties need to be clear on where responsibilities lie at each stage of the shipping process. This article will explain all of the terms of trade defined for shipping to show where responsibilities lie in each case so that buyers and sellers can be clear on their obligations when arranging shipments.
WHAT ARE THE INCOTERMS® 2020 TERMS OF TRADE?
The terms of trade used for international shipping transactions are defined by the International Chamber of Commerce (ICC) and set out the responsibilities of buyers and sellers for the sale of goods in international transactions.
According to the ICC, Incoterms® was established in response to international trade needs. With different practices worldwide and different legal interpretations of responsibilities, there was a desperate need for a common set of rules and guidelines. The Incoterms rules are global and common to all countries. The ICC defined international commercial terms, Incoterms, to clarify the tasks, costs, and risks to be carried by buyers and sellers throughout these transactions.
The ICC defined international commercial terms, Incoterms, to clarify the tasks, costs, and risks to be carried by buyers and sellers throughout these transactions.
IS THERE AN INCOTERMS 2023 UPDATE?
The Incoterms® 2020 are the latest updates of these rules, which are grouped into two categories of international trade terms that are used in the shipping industry. Most of the terms apply to the industry in general, while some apply only to the ocean shipping industry.
ALL INCOTERMS EXPLAINED
There are seven for all mode(s) of transport, and four specifically for sea or inland waterway transport. The Incoterms® 2020 rules are slightly different from previously used terms. This newly consolidated set of terms is shown here.
Note: Where a term says (insert place of delivery), a shipping contract will define the terms and the destination within that term. These are explained further here.
- EXW Incoterm: Ex Works (insert place of delivery)
- FCA Incoterm: Free Carrier (insert named place of delivery)
- CPT Incoterm: Carriage Paid to (insert place of destination)
- CIP Incoterm: Carriage and Insurance Paid To (insert place of destination)
- DAP Incoterm: Delivered at Place (insert named place of destination)
- DPU Incoterm: Delivered at Place Unloaded (insert of place of destination)
- DDP Incoterm: Delivered Duty Paid (insert place of destination)
There are four Incoterms® 2020 rules intended specifically for Sea and Inland Waterway Transport:
- FAS Incoterm: – Free Alongside Ship (insert name of port of loading)
- FOB Incoterm: – Free on Board (insert named port of loading)
- CFR Incoterm: Cost and Freight (insert named port of destination)
- CIF Incoterm: Cost Insurance and Freight (insert named port of destination)
Each term carries specific responsibilities for both the buyer and the seller of the goods.
In all contracts between the buyer and the seller, the seller agrees to provide the goods as stated in the sales contract. The buyer agrees to pay the price as provided for in the contract of sale. The terms will then outline such details as who arranges and pays for pick up, export documentation, shipping, insurance, customs clearance and handling charges, local delivery, and who pays applicable duties and local taxes.
The terms of trade have a direct impact on the amount of duty and local taxes paid, so when clearing the shipment through customs the terms of trade must be declared for the correct duties and taxes to be applied. In general, the terms of trade describe the moment that the responsibility for the goods passes from the seller to the buyer.
WHAT IS NOT COVERED BY THE INCOTERMS® TERMS OF TRADE?
Incoterms clarify the responsibilities of all parties to a sales transaction. As noted above, Incoterms would normally be incorporated in the contract of sale. However:
- They do not address all the conditions of the sale
- They do not detail the goods being sold, nor show the contract price
- They do not make reference to the payment details as negotiated between the seller or buyer
- They do not state at what point ownership of the goods passes from the seller to the buyer
- They do not specify which documents must be provided to the buyer, by the seller, to facilitate customs clearance processes at the destination
- They do not address liabilities for any failure to provide the goods as defined in the contract of sale, or dispute resolution mechanisms.
WHAT IS NOT COVERED BY THE INCOTERMS® TERMS OF TRADE?
The ICC Incoterms® were established to define a common set of rules and guidelines for international trade. Although even today there are locally used terms of trade (for example, the US uses “Less Than Truckload” (LTL) for domestic trucking), the Incoterms rules are global and common to all countries. The Incoterms® rules were most recently updated in 2020 and thus Incoterms 2021, Incoterms 2022 and Incoterms 2023 remain unchanged.
A number of the terms relate to specific ocean freight situations, or specific types of shipment (such as heavy industrial equipment), where there are complications that need to be clarified in loading and unloading vessels.
However, the majority of shipments are smaller commercial items that may well be shipped in bulk, on pallets or full containers, and the logistics are more simple. In these cases, the responsibilities between seller and buyer are more straightforward, and one or other party will most likely cover the entire origin-to-destination shipment, with duty and taxes and perhaps local delivery being the biggest points of negotiation.
Many buyers, will want to enlist the services of a freight forwarder to advise on the best terms of trade, manage the costs and details of shipping, and handle all documentation and customs clearance.
