What are Incoterms and what are they for?

For any project that involves the transport of international goods, it is important to know both the legal framework and the uses of foreign trade in order to carry out exports without any problem. One of the aspects that tends to generate the most doubts in international trade are international trade terms (international commercial terms in English, or better known as Incoterms).

In this post we will see why they are important and what they are for. We will also see each one in more detail, something you can also do by studying a Master’s Degree in International Trade and Economic Relations at the European University.

DEFINITION OF INCOTERMS

The Incoterms are a set of codes and commercial terms predefined that can be used as a basis for sales contracts.

They were created by the International Chamber of Commerce (ICC) in 1936. However, the ICC has not ignored changes in the global economy and has periodically updated the incoterms to reflect business developments, with the current revision – Incoterms 2020, which entered into force on January 1, 2020, being the ninth version.

There are eleven individual terms that clearly define the respective tasks, costs and risks to be assumed for each party involved in the buying and selling process. This includes specifying the transfer of risks, place of delivery of the merchandise, documents to be processed and identifying who is responsible for paying the transport and insurance.

WHAT IS THE IMPORTANCE OF INCOTERMS?

The main advantage of Incoterms is the standardized terminology used by all companies doing international business. Specific terms or acronyms – containing three letters each – provide clarity throughout the process for both carriers and buyers, helping to avoid confusion about the responsibilities and cost management of each party.

Not understanding the correct definition of each Incoterm used will result in problems throughout the supply chain. Additionally, misused Incoterms can affect payment for goods, delivery times, increased costs, inventory control, and negative customer interactions. From distribution centers to consignment recipients, incorrect Incoterms drastically disrupt the flow of goods.

TYPES OF INCOTERMS

Individual Incoterms always contain three letters. Previously they were classified into four groups, C, D, E and F, which was determined by the place of delivery of the merchandise and the responsibility for payment in the different stages of international transport.

However, this old classification caused some confusion, so the ICC grouped the updated 2020 Incoterms into two simpler categories:

Rules for any means of transport

  • EXW. ( Ex-Works / In Factory ): The exporter has responsibility only to deliver the merchandise at its facilities or other places designated by it. The importer assumes all the risk from there to the destination.
  • FCA ( Free Carrier / Libre Transportista ): The exporter delivers the merchandise to an agreed place assuming the risks and expenses – including the costs of customs clearance for export. The importer is responsible from said loading to final discharge.
  • CPT ( Carriage Paid To / Transport Paid To ): The exporter carries out all the necessary procedures related to the export of the merchandise from his country, hires a carrier to the point of destination and pays for it. However, the transport risks are borne by the importer and therefore should take out insurance.
  • CIP ( Carriage and Insurance Paid To / Transport and Insurance Paid To ):  The exporter pays the costs of the main transport and insurance during the entire journey, as in the previous point, however in these conditions it is the exporter who is obliged to take out insurance.
  • DAP ( Delivered At Place / Delivered at a Point ): The exporter delivers the merchandise, without unloading, at the destination designated by the importer. The import customs clearance procedures are carried out by the importer.
  • DPU ( Delivered Place Unloaded / Delivery and Unloading at Agreed Place ):  The exporter delivers the merchandise at the agreed destination, once unloaded from the respective means of transport. The import customs clearance procedures are carried out by the importer.
  • DDP ( Delivered Duty Paid / Delivered with Duties Paid ): The exporter assumes absolutely all the costs and risks of the export and import operation, including both customs clearance. The download is assumed by the importer.

Rules for maritime transport

  • FAS ( Free Alongside Ship / Free Alongside Ship ): The exporter delivers the goods at the agreed dock or port of shipment next to the ship in which the goods will travel. The importer assumes all costs and risks from this moment on.
  • FOB ( Free On Board / Libre a Bordo ): The exporter delivers the merchandise by placing it on board the ship, at the port designated by the buyer.
  • CFR ( Cost and Freight / Coste y Flete ): The exporter assumes the costs and freight to the designated port of destination, but the transport risks are already on the importer.
  • CIF ( Cost, Insurance and Freight / Coste, Seguro y Freight ): The exporter assumes the cost of insurance and freight to the designated destination port. The risks of transport, as in the previous point, belong to the importer. However, in this term the exporter has the obligation to insure the merchandise.