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What are incoterms in exports: Here’s everything you need to know

Incoterms or International Commercial Terms are a series of pre-defined terms published by the International Chamber of Commerce (ICC) that define the responsibilities of sellers and buyers in international trade and transactions.
what are incoterms
To make international trade simple and a smooth process, the International Chamber of Commerce (ICC) published a set of rules called International Commercial Terms or Incoterms. Recognised globally, intercoms prevent confusion in foreign trade contracts by clarifying the obligations of buyers and sellers. The ICC developed intercoms in 1936 and has been updating them periodically ever since to ensure that it is relevant to changing trade practices and policies. Some of the common examples of intercom rules are Delivery at Terminal (DAT), Delivered Duty Paid (DDP), and Ex Works (EXW)1.

What are incoterms?

Incoterms or International Commercial Terms are a series of pre-defined terms published by the International Chamber of Commerce (ICC) that define the responsibilities of sellers and buyers in international trade and transactions.

What’s the difference between incoterms 2020 and 2010?

Below are some of the common differences between incoterms 2020 and 20102:

Incoterms 2010

• The user had to refer to each article of the set of rules to see which costs are covered where.

• Delivery at Terminal (DAT) denoted that the goods are delivered once they are unloaded at the named terminal.

• CIP (Carriage and Insurance Paid to) and CIF (Cost, Insurance, and Freight), which impose insurance requirements, required sellers to get insurance cover for the benefit of covering a number of standard listed risks.

Incoterms 2020

• Each Incoterm rule mentions the associated costs for the seller in A9 and for buyer in B9.

• DAT limits the place of delivery to a terminal, so, now, the reference to terminal has been removed for generalization.

• For Cost, Insurance and Freight (CIF), the minimum cover status quo remains in effect but for CIP, the default insurance requirement has moved to include comprehensive all-risk cover.

What are the different types of incoterms?

Incoterms are divided into four categories – E, F, C, and D3.

Category E

This contains only one trade term – EXW, meaning Ex Works, where the buyer of a shipped product pays for the goods when they are delivered to a specific location.

Category F (Main Carriage Unpaid)

This contains three terms:
Free Carrier (FCA): The seller is responsible for the delivery of the goods to a destination that is specified by the buyer.

Free Alongside Ship (FAS): The goods are considered delivered when the seller’s ship arrives alongside the destination port.

Free on Board (FOB): This specifies whether the seller or the buyer is responsible for the goods that are damaged during shipping.

Category C (Main Carriage Paid)

This contains four trade terms:
Carriage Paid To (CPT): The seller delivers goods at their expense to a carrier that is nominated by the seller.

Carriage and Insurance Paid To (CIP): A seller pays freight and insurance to deliver the goods to a seller-appointed party at a location that is already agreed upon.

Cost and Freight (CFT): The seller transports goods by sea to a required port.

Cost, Insurance and Freight (CIF): The seller delivers goods at the port or procures goods that have already been delivered.

Category D (arrival)

It contains three trade terms:
Delivery at Place (DAP): The seller is liable to pay the cost involved in delivery of goods to a location already agreed upon.

Delivered at Place Unloaded (DPU): The seller is required to deliver goods at the disposal of the buyer after the goods have been unloaded from the arriving means of transport.

Delivered Duty Paid (DDP): The seller delivers goods when they are placed at the disposal of the buyer, are cleared for import at the arriving means of transport and are ready for unloading at the decided destination.
These four categories can also be classified in terms of transportation:
• Intercoms for any transport - EXW, FCA, CPT, DPU, DAP, DDP
• Intercoms only for sea and inland waterway transport - FAS, FOB, CFR, CIF

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Frequently Asked Questions

Can I still use incoterms 2010 after Jan 1, 2020?
Yes, all contracts using intercoms are valid if they are agreed by the parties involved and identified in related export documents.
Why are incoterms used?
Incoterms prevent confusion in foreign trade contracts by clarifying the obligations of both customers or importers and sellers or exporters.
Who publishes incoterm rules?
Incoterms are published by the International Chamber of Commerce. It was first published in 1936, while the latest was published in 2020.
What is the purpose of incoterms?
Incoterms provide information about responsibilities of parties involved in international trade like paying and managing shipment, insurance, documentation, customs clearance and other logistics.
How do incoterms help in international trade?
Incoterms prevent confusion in foreign trade contracts and clarify the obligations of buyers and sellers.
Published on July 19, 2022.

Sources:
1. https://www.trade.gov/know-your-incoterms
2. https://icc.academy/incoterms-2020-vs-2010-whats-changed/
3. https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-rules-history/
4. https://iccwbo.org/resources-for-business/incoterms-rules/what-are-the-key-changes-in-incoterms-2020/
5. https://iccwbo.org/resources-for-business/incoterms-rules/
6. https://www.delta-net.com/knowledge-base/compliance/customs-controls/what-are-the-different-types-of-incoterms/
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