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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.

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?

Why are incoterms used in international trade?

Incoterms are used to define business terms in international trade. It offers numerous advantages that often outweigh their drawbacks in most transactions. Incoterms play a crucial role in facilitating trade agreements, yet preferences between parties exist, necessitating negotiation of these terms before finalizing any agreement.

Advantages of incoterms

The following are the advantages of incoterms:

Simplifying international trade

One of the most important benefits of incoterms is that it helps eradicate ambiguity among countries and significantly streamlines trading procedures, particularly during negotiations of terms.

Defining responsibilities for smoother transactions

Each incoterms rule explains what buyers and sellers need to do, pay for, and be careful about in their transactions.³ Learning about incoterms can make transactions go more smoothly because it clearly says who needs to do what and takes you through each part of the deal step by step.

Disdvantages of incoterms

Below are a few disadvantages of incoterms:

Differing preferences between exporters and importers

Sellers might opt for CIF because it allows them more control and understanding of their shipments. This choice stems from their familiarity with handling logistics and the processes involved. On the other hand, buyers may favor FOB due to their understanding of the shipping process and a desire for greater control over the shipment from the onset.

Negotiation challenges

The challenge lies not within the terms themselves but in the differing preferences between buyers and sellers. It often leads to negotiation hurdles centered around which incoterms to employ rather than the clarity or suitability of the terms.

Impact on transactions

The focus shifts away from the clarity and appropriateness of the incoterms to a debate over which terms to utilize. This may potentially complicate negotiations and decision-making processes.

What are the different types of incoterms?

Some of the common types of incoterms are:

EXW:

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.

Free Carrier (FCA):

In a free carrier, 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 at the destination port in FCA.

Free on Board (FOB):

The FOB specifies whether the seller or the buyer is responsible for the goods that are damaged during shipping.

Carriage Paid To (CPT):

The seller delivers goods at their expense to a carrier in CPT that is nominated by the seller.

Carriage and Insurance Paid To (CIP):

In 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):

Under the CFT terms, 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 is defined under CIF terms.

Delivery at Place (DAP):

In DAP, the seller is liable to pay the cost involved in the delivery of goods to a location already agreed upon.

Delivered at Place Unloaded (DPU):

Under the DPU terms, 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):

Under the DDP terms, 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.

Intercoms used for any transport

DDP: Delivered Duty Paid

DPU: Delivered at Place Unloaded

DAP: Delivered at Place

EXW: Ex Works

FCA: Free Carrier

CPT: Carriage paid to

Intercoms used only for sea and inland waterway transport

FAS: Free Alongside Ship

CFR: Cost and Freight

CIF: Cost, Insurance and Freight

FOB: Free On Board

Each incoterms contains a set of rules of interpretation for the obligations of both the seller (A1- A10) and the buyer (B1-B10)³
• A1/B1- General obligations
• A2/B2 - Delivery
• A3/B3 - Transfer of risks
• A4/B4 - Carriage
• A5/B5 - Insurance
• A6/B6 - Delivery/transport document
• A7/B7 - Export /import clearance
• A8/B8 - Checking/ packaging/ marketing
• A9/B9 - Allocation of costs
• A10/B10 - Notices

What’s the difference between incoterms 2020 and 2010?

Below are some of the common differences between incoterms 2020 and 2010⁴:

Incoterms 2010

• The user had to refer to each article of the set of rules to see which costs were 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, require sellers to get insurance coverage for the benefit of covering a number of standard listed risks.
• In incoterms 2010, it was assumed that goods moved between the seller and buyer were handled by a third-party carrier.

Incoterms 2020

• Each incoterm rule mentions associated costs for the seller in A9 and for the buyer in B9.
• DAT limits the place of delivery to a terminal, so now, the reference to the 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.
• Importers can now use their transportation means under FCA rules, while sellers can employ their transportation methods under the D rules. This change grants more options and control over transport arrangements to both buyers and sellers.

What do incoterms not cover?

Incoterms have limitations as they do not cover all conditions of a sale, including4:
• Identifying the products being sold or listing the contract price.
• Referencing the method or timing of payment agreed upon between the seller and buyer.
• Determining when the title or ownership of the goods transfers from the seller to the buyer.
• Specifying necessary documents for customs clearance in the buyer's country.
• Addressing liability for failure to provide goods as per the sale contract, delayed delivery, or dispute resolution mechanisms.

Relying solely on incoterms can be restrictive due to these omitted sale conditions. To ensure a smooth business transaction, all involved parties should ensure that these aspects are addressed before signing the contract. Many legal issues may arise if solely relying on incoterms, highlighting the importance of covering these additional aspects in the contract.

Tips for incoterms

Here are a few tips when using incoterms⁵:

Select the appropriate rule

Ensure you choose the Incoterm that best suits your needs and responsibilities. Consider factors like the delivery location, mode of transport, and your preferences regarding risks and costs.

Define the location clearly

Specify the exact place or port for delivery without ambiguity. Precise location details prevent misunderstandings and ensure smooth logistics.

Integrate in all relevant documentation

Incorporate chosen incoterms not only in the contract but also in related documents like the Letter of Credit (LC) and the invoice. Consistency across all documentation streamlines transactions and avoids confusion among involved parties.

Incoterms serve as essential tools for international trade, outlining responsibilities between buyers and sellers for various transport modes, including water transport. However, they don't cover all trade aspects, like specifying products or future liability. Hence, they are useful for clarifying agreements, and they should complement, not constitute the entire trade agreement.

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More blogs on incoterms

1. What is Delivered at Terminal (DAT) incoterm?

2. What is a Cost and Freight (CFR) incoterm?

3. All you need to know about Free Alongside Ship (FAS) incoterm 2020

4. Guide to FCL shipping: Everything exporters need to know

5. What is Carriage Insurance Paid (CIP) in incoterms?

6. What is Freight on Board: How does it work in shipping?

7. What is a Container Freight Station (CFS) and its role in shipping?

8. What is Cost, Insurance and Freight (CIF) in shipping?

9. What is a Free Carrier (FCA) incoterm?

10. What is EX Works (EXW) incoterm in international trade?

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://www.investopedia.com/terms/i/incoterms.asp
3. https://www.trade.gov/know-your-incoterms
4. https://www.trade.gov/know-your-incoterms
5. https://www.tradefinanceglobal.com/posts/incoterms-2020-7-key-changes-you-need-to-know/
6. https://www.delta-net.com/knowledge-base/compliance/customs-controls/what-are-the-different-types-of-incoterms/

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