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Incoterms Explained!

Understanding Incoterms is a vital part of International Trade. Find out why!

When exporting products internationally you must agree to sell your goods based on 11 Incoterms. Incoterms is short for International Commercial Terms, which are published by the International Chamber of Commerce and relate to International Commercial Law. They are accepted by governments and legal authorities around the world. The International Chamber of Commerce have published the latest version of Incoterms, Incoterms 2020 which have come into effect on the 1st of January 2020.

Put simply, Incoterms are the selling terms that the buyer and seller of goods both agree to, for the International sale and supply of goods. Incoterms clearly states which tasks, costs and risks are associated with the buyer and which are associated with the seller. The Incoterm states when the seller’s costs and risks are transferred onto the buyer.

 

 

This chart displays Incoterms 2020 in an easy to understand format. Note this chart should be used as a guide only, for a full and complete description, you should refer to the full version of Incoterms published by the ICC.

The blue section displays the different types of Incoterms beginning from left to right. The green section shows the groups, Any Mode or modes of transport, and Sea and Inland Waterway Transport. The yellow section shows the Freight Collect Terms and the Freight Prepaid Terms.

Starting from the left side is the exporter or the seller of the goods, beginning at the seller’s location or warehouse. As you move along to the right, the products leave the warehouse, get loaded on board a vessel or aircraft at the port of loading, get shipped through to the port of destination, pass through customs at the arriving country, and then get delivered further through to the buyer’s location. Along the way there are set Incoterms to establish which risks and costs are agreed to be paid by the seller and which are to be transferred to the buyer.

The left side of the chart displays the different obligations and charges, and displays which are covered by the seller, and which are covered by the buyer. So starting from the left is the first Incoterm EXW, which means Ex-Works, or Ex-Warehouse. If the buyer and seller agree to sell goods on Ex-Works terms, then seller’s obligations are simple. The seller will only cover the cost of the goods and the export packaging Ex warehouse. So the seller will manufacture the goods and have them packaged and ready for collection from their warehouse. From then on all additional costs and risks involved in transport away from the warehouse is covered by the buyer.

Moving further along the supply chain, there are FCA, FAS and FOB Incoterms. Under FCA, Free-To-Carrier the seller will cover export duties, taxes and customs clearance to get the products prepared for export. Under FAS, Free-Alongside-Ship, the seller will cover the origin terminal port handling charges.

Then it moves onto FOB, Free-On-Board. FOB is generally the most popular Incoterm that is used for containerized trade. When FOB terms are agreed upon, the seller’s obligation is to supply the goods and also to pay for all of the additional charges involved to get the goods actually loaded on board the vessel for export. That means the seller will cover all previously mentioned charges and pay for the loading charges to get the goods loaded onboard the vessel for export. As soon as the goods are loaded on board, all further associated costs and risks are transferred onto the buyer. The buyer will pay for the international freight and all charges thereafter.

If the seller agrees to pay for the cost of freight and carriage, then they can choose to sell the goods on CFR, CIF, CPT or CIP Incoterms. Note that CFR and CIF are similar Incoterms that cover Sea and inland waterway transport. If the seller agrees to cover the cost of insurance during international sea freight, then they can sell on the CIF Incoterm.

CPT and CIP are similar Incoterms that relate to any mode or modes of transport, where the seller will agree to pay for the destination terminal/port handling charges. If the seller agrees to cover the cost of insurance during transport, they can sell goods under the CIP Incoterm.

Moving further along, DAP, DPU and DDP are Incoterms involved with getting goods delivered, unloaded and customs cleared at the country of destination.

Under DAP, Delivered-At-Place, the seller will cover the costs of delivery to destination. If DPU, Delivered-at-Place-Unloaded is agreed, then the seller will also pay for the unloading costs at the destination.

Finally, if DDP, Delivered-Duty-Paid is agreed then the seller will also pay for the import duties, taxes &  customs clearance at the country of destination.

If you have any detailed questions relating to Incoterms you should refer to your freight forwarder, the International Chamber of Commerce or other professional advice. Before products can be shipped internationally, the buyer and seller must agree on the Incoterm that the goods are sold under. The Incoterm must be cleared stated in sales contracts and counter-signed by both parties to avoid any misunderstandings. Should any disputes arise then the details included in the documentation will be referred to. Join the future of global trade.

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