Understanding Incoterms in Global Trade

34. Explain INCOTERMS International commercial terms—Incoterms for short—clarify the rules and terms buyers and sellers use in international and domestic trade contracts. The International Chamber of Commerce (ICC) developed Incoterms in 1936 and updates them periodically to conform to changing trade practices. Incoterms provide a universal set of rules and guidelines that help facilitate trade. In essence, they provide a common language trader can use to set the terms for their trades. Buyers and sellers can use Incoterms in a variety of activities necessary to conduct business. Typical activities that call for the use of Incoterms include filling out a purchase order, labeling a shipment for transport, completing a certificate of origin, or documenting a free carrier agreement (FCA). Typical examples of Incoterms rules for any mode of transportation include Delivered at Terminal (DAT), Delivered Duty Paid (DDP), and Ex Works (EXW). Incoterms were updated for 2020 and although only one term changed, there are notable differences in security costs. The terms are standardized but certain buyers and sellers will prefer individual terms over others. As such, which terms will be used is a matter of negotiation. Some common examples of Incoterms rules for any mode of transportation include Delivered Duty Paid (DDP), Delivered at Place (DAP), and Ex Works (EXW). Incoterms 2010 vs. Incoterms 2020 Although the 2010 Incoterms were updated in 2020, there are no significant differences in the naming conventions between the two. There was only one change in terminology: the 2010 term Delivered at Terminal (DAT) was clarified to the 2020 term Delivered at Place Unloaded (DPU). This was done to include all places of unloading, not just those in terminals. In both instances, there are 11 terms. Things become more involved when you move past the terms themselves. For example, the amount of freight insurance required under the CIP term has been increased. However, this does not have an effect on the CIF term.3 Incoterms 2020 covers situations where either the buyer or seller transports goods using their own vehicles. In 2010, it was assumed that these services were provided by a third-party carrier. And there is a change in the way that the FCA rule is used in conjunction with a letter of credit. In addition, security-related cost responsibilities have changed. These can be associated with export clearance processes as well as the import clearance process. The Incoterms revision clarified that the most common cost headings are those associated with transport that are the responsibility of the arranging party. Security costs associated with export clearance will be borne by the seller other than for Ex Works cases. Security costs associated with import will be borne by the buyer, except for DDP cases. ” Name seven Incoterms for any mode of transport The seven Incoterms for any mode of transport are : EXW: Ex Works FCA: Free Carrier CPT: Carriage Paid To CIP: Carriage and Insurance Paid To DAP: Delivered at Place DPU: Delivered at Place Unloaded DDP: Delivered Duty Paid DPU indicates the seller delivers the goods to a terminal and assumes all the risk and transportation costs until the goods have arrived and been unloaded. After that, the buyer assumes the risk and transportation costs of the goods from the terminal to the final destination.2 DDP indicates the seller assumes all the risk and transportation costs. The seller must also clear the goods for export at the shipping port and import at the destination. Moreover, the seller must pay export and import duties for goods shipped under DDP. Under Incoterm Ex Works (EXW), the seller is only required to make the goods available for pickup at the seller's business location or another specified location. Under EXW, the buyer assumes all the risk and transportation costs. In 2010, the two main categories of Incoterms were updated and classified by modes of transport. The first classification applies to any mode of transport, while the second classification only applies to sea and inland waterway transport. Incoterms Rules for Sea and Inland Waterway Transport The Incoterms for sea and inland waterway transport are The ICC has specific Incoterms rules for inland waterway and sea transport such as cost, insurance, and freight (CIF) and free on board (FOB). The Incoterms for sea and inland waterway transport are below: FAS: Free Alongside Ship FOB: Free on Board CFR: Cost and Freight CIF: Cost, Insurance, and Freight Free on-board shipment terms indicate the seller delivers the goods on board a designated vessel named by the buyer. The buyer or seller may assume all the risk and transportation costs depending on whether the goods are sold under the FOB shipping point or FOB destination point. Cost, insurance, and freight (CIF) terms indicate the seller must deliver the goods to a designated port and load them on a specified vessel, assuming responsibility for paying all transportation, insurance, and loading costs. After that, the buyer assumes the cost and risk associated with transporting the cargo from the designated port to its warehouse or business. The seven Incoterms for any mode of transport are: EXW: Ex Works FCA: Free Carrier CPT: Carriage Paid to CIP: Carriage and Insurance Paid to DAP: Delivered at Place DPU: Delivered at Place Unloaded DDP: Delivered Duty Paid What Do Incoterms Not Cover? There are specific instances that Incoterms will not cover. Incoterms do not: Address all the conditions of a sale Identify the goods being sold nor list the contract price Reference the method nor timing of payment negotiated between the seller or buyer When title, or ownership of the goods, passes from the seller to the buyer Specify which documents must be provided by the seller to the buyer to facilitate the customs clearance process at the buyer’s country Address liability for the failure to provide the goods in conformity with the contract of sale, delayed delivery, nor dispute resolution mechanisms2 Due to the omission of certain sale conditions, only working with Incoterms can be constricting. All parties involved in any contract should make sure all the applicable instances above are addressed before signing the contract. Many legal matters can arise due to working only with Incoterms, which is why you should address all the above reasons to ensure smooth business. Advantages and Disadvantages of Incoterms The single greatest advantage of using Incoterms is the standardization and specificity of complicated international trade aspects. Having a system that eliminates ambiguity between nations has made trading much more simple, especially when negotiating terms. This saves time and money that would have previously been spent on lawyers who would draft terms basically breaking down Incoterms into different language. A notable disadvantage to Incoterms is that buyers and sellers will have different preferences when using them. For example, sellers may choose CIF because they understand their shipments in a better way than buyers. The buyer, in contrast, may prefer FOB for the same reasons. However, the terms themselves are not the issue and it becomes more a matter of negotiation over which terms to use versus the clarity of the terms themselves. Pros Easily understood terms International standardization Updated and clarified by an international body (ICC) Cons Differences between buyer and seller preferences when choosing terms Certain terms expose one party to inflated costs Explain CIF Cost, insurance, and freight (CIF) terms indicate the seller must deliver the goods to a designated port and load them on a specified vessel, assuming responsibility for paying all transportation, insurance, and loading costs. After that, the buyer assumes the cost and risk associated with transporting the cargo from the designated port to its warehouse or business. Incoterms Definition Key Points Arrangement of Shipping CIF Seller pays the cargo insurance and delivery of goods to the named port of destination. From the destination port, buyer is responsible for customs clearance and other costs and risks. The seller pays for freight and insurance to transport the goods to the named port of destination. At that point, responsibility for the goods transfers from the seller to the buyer. Seller arranges shipping and insurance. Cost, insurance, and freight (named port of destination) Incoterms Explain EXW Incoterms Definition Key Points Arrangement of Shipping EXW Delivery takes place at the seller's premises or another named place (i.e., works, factory, EXW represents minimal obligation for the seller; the buyer bears all costs and risks involved in claiming the goods from the seller's premises. Buyer arranges shipping Ex works(named place) or warehouse). Etc….