Before carrying out any form of an international commercial transaction, it is essential to know the rules that regulate the responsibility of both the exporter and the importer. This helps avoid making mistakes that could generate extra costs or legal problems in the future. One of the most relevant issues is the Incoterms, which are specific terms used between the parties involved in a contract. Here is an in-depth description of their definition and importance:
What are Incoterms?
Incoterms, or international trade terms, are a series of rules established to define a commercial transaction between two parties: the exporter and the importer. They were created in 1936 by the International Chamber of Commerce (ICC) to control the contracts of sale of goods to offer a more reliable method or regulation.
Although the Incoterms 2010 version is still valid (at this time) for older contracts, it is recommended to use the newest 2020 version. One of its features is the simplification of the conditions that the parties in a contract have to meet. There are eleven individual rules that clearly define the respective tasks, costs and risks to be assumed. This includes specifying the transfer of risks, place of delivery of the goods, documents to be processed and identifying who is responsible for paying the transport and insurance.
What is the main advantage of using Incoterms?
The main advantage of Incoterms is the standardized terminology used by all companies doing international business. Specific terms or acronyms provide both carriers and buyers with clear rules, helping to avoid confusion about each party’s responsibilities and cost management.
Understanding the language of Incoterms 2020
The individual Incoterms always contain three letters. They were previously classified into four groups, C, D, E, and F, which was determined by the location of delivery for the goods and the responsibility of payment at different stages of international transport. This old classification caused some confusion, though, so the ICC grouped the updated Incoterms 2020 into two simpler categories:
1) Rules for any means of transport
- EXW - Ex-Works: the seller is only responsible for delivering the goods to his premises or other places designated by him. The buyer assumes all risk from there to the destination.
- FCA - Free Carrier: the point of delivery of the goods is specified. It is either at the seller’s facilities or at some other designated place.
- CPT - Carriage Paid To: the seller hires a carrier to deliver the goods, who has performed international transport. The seller assumes the costs.
- CIP - Carriage and Insurance Paid To: the seller pays the transport to the designated destination and delivers the goods to the buyer through a carrier.
- DAP - Delivered at Place: the seller delivers the goods, without unloading, to the destination place designated by the buyer.
- DPU - Delivered at Place Unloaded: the seller delivers the goods at the named place of destination, once unloaded from the respective means of transport.
- DDP - Delivered Duty Paid: the seller delivers the goods without unloading at the premises of the buyer or another established point.
2) Rules for sea transport
- FAS - Free Alongside Ship: the seller delivers the goods alongside the ship or in a place that is accessible for handling, at the port of shipment designated by the buyer.
- FOB - Free on Board: the seller delivers the goods placing them on board the ship, at the port designated by the buyer.
- CFR - Cost and Freight: the seller assumes the cost and freight to the designated port of destination.
- CIF - Cost, Insurance, and Freight: the seller assumes the cost of insurance and freight to the designated port of destination.
Understanding and applying Incoterms in the international marketing of goods is fundamental, as it establishes the important terms of the contract from the beginning.
If you have any questions about Incoterms, please do not hesitate to contact RTS International.