When conducting international trade, it’s essential to establish clear agreements about the terms and conditions of the transaction to avoid any misunderstandings or disputes. This is where Incoterms come in. Incoterms, or International Commercial Terms, are a set of standardized rules created by the International Chamber of Commerce (ICC) that outline the rights and obligations of the buyer and seller in international trade.
In this blog, we’ll explore the basics of Incoterms and how they work in the context of export business.
What are Incoterms?
Incoterms are a set of three-letter trade terms that define the obligations of the buyer and seller in an international transaction. They cover everything from the delivery of goods to the transfer of risk and costs associated with the transaction.
There are 11 Incoterms in total, and they are divided into two categories:
Rules for any mode or modes of transport:
• EXW – Ex Works
• FCA – Free Carrier
• CPT – Carriage Paid To
• CIP – Carriage and Insurance Paid To
• DAT – Delivered at Terminal
• DAP – Delivered at Place
• DDP – Delivered Duty Paid
Rules for sea and inland waterway transport:
• FAS – Free Alongside Ship
• FOB – Free on Board
• CFR – Cost and Freight
• CIF – Cost, Insurance, and Freight
It’s important to note that Incoterms do not address the transfer of ownership of the goods, which is typically governed by the sales contract between the buyer and seller.
Why are Incoterms important in export business?
Using Incoterms in export business provides clarity and certainty for both parties involved in the transaction. By specifying the obligations of each party, Incoterms reduce the risk of misunderstandings, disputes, and legal issues that can arise in international trade.
For exporters, Incoterms help them understand their responsibilities, such as preparing the goods for shipment, obtaining the necessary documents, and arranging for transportation. This helps them avoid unexpected costs and delays, and ensures that the goods are delivered to the buyer in a timely and efficient manner.
For importers, Incoterms help them understand their responsibilities, such as arranging for the transport of the goods and handling any necessary customs clearance procedures. This helps them avoid unexpected costs and ensures that they receive the goods in the condition and timeframe they expect.
In addition to clarifying the responsibilities of the buyer and seller, Incoterms also provide guidance on the transfer of risk and costs associated with the transaction. This includes who is responsible for insuring the goods, paying for transportation costs, and handling any customs fees or taxes.