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Cross-border trade and international transactions can be complicated from the very beginning. That's why standardizing terms and conditions in a contract remains essential. And the globally-known Incoterms have been developed and maintained to make every party clear what their responsibilities are at each step. In this guide, we will run you through the most updated Incoterm examples and Incoterm rules. We hope you can avoid errors, delays, and unexpected charges during the shipping process by coming across the key concepts of Incoterms 2020.
- 1. What are Incoterms in 2023?
- 2. Why Do Incoterms Play an Important Role in International Trade?
- 3. How Would Incoterms Affect the Final Shipping Costs?
- 4. Which Incoterm Should You Use?
- 5. What Do Incoterms Cover?
- 6. What Do Incoterms Not Cover?
- 7. Incoterm Rules in 2023 Explained in Detail
- 8. How to Utilize Incoterms on Sales and Purchasing Contracts?
- 9. Incoterms 2023 vs. Incoterms 2020?
1. What are Incoterms in 2023?
Incoterms refer to International Commercial Terms. They are a group of commercial terms with the intention of standardizing the international trading process. Developed by the International Chamber of Commerce (ICC), Incoterms are used to determine the transfer of risks of goods, the distribution of responsibilities, and the payment obligations. With Incoterms, signing up trading contracts will come with more clarity and fewer disputes for both parties.
Incoterms make it facilitated when defining who will be responsible for the freight shipping, the insurance, the customs clearance, and the corresponding costs. So both parties will know when to do what.
Every ten years International Chamber of Commerce (ICC) will have Incoterms revised in a bid to keep up with the changes in trade practices. Currently, the most updated version is Incoterms 2020, and in this guide, we will run you through the detailed Incoterm rules so you, as a buyer, will know what responsibilities and risks to assume at each stage.
2. Why Do Incoterms Play an Important Role in International Trade?
Various factors contribute to the complexity of international trade: handling importing and exporting, calculating differentiated taxes and duties, preparing required certificates and documentation, purchasing insurance, delivering the goods to a designated place, and the list goes on and on. It is essential to set up standards, or there would be mounting misunderstandings. And that's where Incoterms come into play. Incoterms ensure both the buyer and the seller will know who is responsible for what, so a rather smooth trading process can be achieved.
Incoterms are globally recognized nowadays. They are used by customs authorities and banks worldwide. You will find the Incoterm you agree upon on the contract of sales and the letter of credit. And that means all parties involved in the freight shipping and international transaction process should be on the same page.
3. How Would Incoterms Affect the Final Shipping Costs?
Costs incurred from the whole process may include basic transportation costs, insurance fees, and customs clearance fees. In the meantime, there are inevitable additional charges incurred due to various reasons: port handling fees, storage fees, and more.
Different choices of Incoterms used in a contract will define whether it falls upon the buyer or the seller to bear the corresponding costs. For example, DDP means that the seller is responsible for navigating customs clearance and paying customs-associated fees. In contrast, with EXW, it is the buyer who handles customs clearance and makes a payment.
4. Which Incoterm Should You Use?
There are a few things you need to take into consideration when reaching a decision: your initial budget, the cargo value, the types of goods, the mode of transportation, how much experience you have in shipping, whether you are familiar with the most updated customs regulations in the destination country, and most importantly, whether you want to minimize or maximize your control over the process. In general, greater control comes along with greater responsibilities.
Take the option of DDP if you would like to have the least responsibility and risk on your shoulder. Choose EXW if you have abundant resources to manage the entire shipping process after the goods become available. The choice of FOB seems better when your goods are already packaged and ready to get loaded onto the shipping vessel. In a nutshell, access and analyze your specific scenario carefully to see whether an Incoterm will generate benefits for you.
5. What Do Incoterms Cover?
- Delivery of Goods - Incoterms will specify the named place where the seller has to deliver the goods.
- Carriage of Goods - Incoterms will determine whether it is the seller or the buyer that is responsible for managing and paying for the transportation of goods.
- Risk of Loss or Damage - Incoterms will define the exact point at which the risk of cargo loss or cargo damage transfers from the seller to the buyer.
- Insurance - Incoterms will make it clear whether it rests with the seller to handle the insurance and bear the insurance fees or not.
- Customs Clearance - Incoterms will clarify which party is responsible for navigating the customs clearance and paying out the corresponding duties and taxes.
- Payment Obligations - Incoterms will also explain which party should make a payment at each stage.
6. What Do Incoterms Not Cover?
Incoterms do not cover all aspects of international transactions and freight shipping. What Incoterms do not cover is listed as follows:
- Transfer of the Title or Ownership of the Goods
- Intellectual Property Rights (patents, trademarks, or copyrights)
- Product Quality
- Product Specifications
- Possible Force Majeure Situations
- The Due Date of Payment
- The Method of Payment
- Liability for the Failure to Provide the Goods
- Liability for Non-performance or Breach of Contract
- Regulatory Compliance with Applicable Laws and Regulations
It is worth noting that some issues are typically addressed in separate legal documents and sales contracts. There remains the necessity to consult with professionals in law or logistics experts to eliminate misunderstandings and disputes.
7. Incoterm Rules in 2023 Explained in Detail
- EXW | Ex Works or Ex Warehouse
- FCA | Free Carrier
- FAS | Free Alongside Ship
- FOB | Free on Board
- CFR | Cost and Freight
- CIF | Cost, Insurance and Freight
- CPT | Carriage Paid to
- CIP | Carriage and Insurance Paid To
- DAP | Delivered at Place
- DPU | Delivered at Place Unloaded
- DDP | Delivered Duty Paid
EXW | Ex Works or Ex Warehouse
With EXW, the seller is responsible for making the goods available at a named place, from where the buyer has to collect the goods. "Available" means the goods should be ready for loading into the vehicle or container. And mostly, "a named place" refers to a factory or a warehouse owned by the seller. The seller is not obligated to bear any risks from the moment when the buyer gets access to the goods. And the buyer must assume all responsibilities for the goods till the destination.
To be more specific, the buyer should load the goods onto the vehicle, obtain cargo insurance, transport the goods to the desired destination, clear the goods for both import and export, and unload the goods. Buyers need to be noted that using EXW means that they have to handle both the export and the import. When not qualified or not officially authorized to undertake customs formalities, the buyer is not allowed to use EXW.
FCA | Free Carrier
Under FCA, the seller will package the goods so they can be prepared for the subsequent transport and then deliver the goods to a specific carrier, an agent nominated by the buyer, or a location agreed upon by both parties (usually, it would be a port). Besides, the seller is obligated to clear the goods for export.
Upon the delivery of the goods to the first carrier, the buyer is then responsible for all the following risks and costs. Also, the buyer needs to process customs clearance in the importing country.
FAS | Free Alongside Ship
With FAS, the seller needs to deliver the goods to a quay or barge alongside the vessel. And the vessel is usually nominated by the buyer at a designated port of departure. In addition to this, the seller is also responsible for handling customs clearance for export.
From the moment when the goods are placed alongside the goods, all costs and risks shift from the seller to the buyer. The buyer is the one who handles the import of the goods.
FOB | Free on Board
Under FOB, the seller should assume all the risks and responsibilities for the goods until the goods get on board the shipping vessel. From the point onwards, that buyer's responsibilities start, including overseas transportation, insurance, and customs clearance for import. Naturally, the seller is the one who is responsible for having the cargo cleared for export.
For buyers, the biggest benefit you can have using FOB is that you will be given greater control over the sea shipping process without assuming the responsibilities that come with it.
CFR | Cost and Freight
When using the CFR Incoterm, the seller will deliver the goods to the named port of destination. In the meantime, the costs that should be covered by the seller include packaging fees, transportation costs, cargo loading fees, export customs charges, and some other related fees.
However, the risks and responsibilities transfer to the buyer when the goods are on board the shipping vessel. Typically, the seller is the one who clears the goods for export, and the buyer needs to handle the customs formalities for import.
CIF | Cost, Insurance and Freight
Incoterm CIF means that the seller is obligated to deliver the goods to a named port of destination and cover the associated costs, including packaging fees, cargo loading fees, transportation costs, insurance fees, and some other charges. In addition to delivering the goods, the seller is also responsible for navigating customs clearance for the export.
And the buyer's obligations will begin when the goods are about to get unloaded at the port of destination. The buyer is responsible for unloading and clearing the goods for import and paying for import charges, unloading fees, and other port charges.
CPT | Carriage Paid to
Under CPT, the seller has to deliver the goods to a specified destination or a named carrier, and handle the customs clearance for export of goods as well. As for the costs, the seller will cover all fees involved in the process. Upon the delivery of the goods to the destination or the carrier, the buyer needs to take over the responsibilities and costs related to the goods. Also, the buyer should clear the goods for import.
CIP | Carriage and Insurance Paid To
CIP works similarly to CPT. The main difference is that CIP puts the obligation of managing insurance onto the seller. With CIP, the seller is required to obtain cargo insurance to provide protection all along the way. However, buyers should be noted that sellers only have to arrange insurance on the minimum cover.
With CIP, the seller should manage the transportation of the goods until they are delivered to a specified location or a named carrier, and is responsible for clearing the goods for export. The risk for any further transport of the goods will be shifted to the buyer from the point when the delivery is complete. Anyhow, the transfer of risks and costs does not happen at the same time. It is the seller who should pay for the transportation costs to the destination and the export-related fees. The import of the goods will be processed by the buyer.
DAP | Delivered at Place
DAP is a service covering from the origin to the destination. Under DAP, the seller has to deliver the goods to the agreed destination and handle the customs clearance for the export. The seller will bear risks and responsibilities until the goods are delivered to the agreed destination and made ready for unloading. Also, the seller should pay the transportation costs and the export-associated fees.
Buyers are responsible for unloading the goods at the destination and carrying out the customs formalities for the import. And the unloading fees, customs charges, and import duties and taxes need to be paid by the buyer.
When shipping under the DAP Incoterm, which party should be responsible for the cargo insurance needs to be negotiated in advance and then added to the contract. It is not the seller's obligation to provide insurance coverage under DAP.
DPU | Delivered at Place Unloaded
With DPU, the seller will be responsible for delivering the goods to a specified destination, handling customs for the export, and unloading the goods at the named place of destination. As for the costs, the seller should pay for costs incurred during all steps, excluding import-related fees.
After the goods are unloaded at the destination, the buyer's obligations begin. Also, the import customs clearance is processed, and import fees are paid by the buyer.
DDP | Delivered Duty Paid
The DDP Incoterm represents a service that puts the maximum responsibility on the seller. Under DDP, the seller will deliver the goods to the named place of destination, manage cargo insurance, and clear the goods both for import and export. The seller is also responsible for all costs generated in the shipping process, including duties and taxes associated with import and export.
The risk will be passed onto the buyer when the goods are made available to the buyer at the place of destination. The buyer is then obligated to unload the goods.
8. How to Utilize Incoterms on Sales and Purchasing Contracts?
The most updated Incoterm version is Incoterms 2020, which has come into practice since January 2020. However, Incoterms 2010 are still allowed to use in contracts when the trading partner has a preference. And that's why it remains vital to check and confirm which Incoterms version is used in order to avoid disputes and misunderstanding. Also, both parties need to make sure the Incoterms edition year is clearly stated in the contract. Different edition years mean different Incoterm rules are applied.
Most Incoterms can be used in all modes of transport in general. However, there are some Incoterm applications limited to sea freight shipping. To be more specific, EXW, FCA, DPU, DAP, CPT, CIP, and DDP can be used for all modes of transport. While FAS, FOB, CFR, and CIF are applicable to sea transport only. Ensure that the correct Incoterm rule is being referred to in the contract.
9. Incoterms 2023 vs. Incoterms 2020?
The latest update of Incoterm rules took place in 2020. And there has been no further changes made to the Incoterms since then. That is to say, both sellers and buyers can refer to Incoterm 2020 edition to pinpoint the distribution of responsibilities and risks between the trading parties who are involved in sales and purchasing contracts.