INCOTERMS

INCOTERMS 101

Are you an international trader struggling to understand when to use which INCOTERM?

Are you a new entrant in the shipping world who just learned about the existence of this acronym, but don't know what it means yet?

If the answer is yes, then we have some good news for you! Today all those questions and doubts are going to be put to rest.

Let's begin with understanding what exactly are INCOTERMS.

Incoterms or International Commercial Terms refer to a set of predefined trade terms that explain the roles and responsibilities of the buyer and the seller in an international sale contract. They were first published by the International Chamber of Commerce (ICC) in 1936 to reduce the confusion regarding the obligations of both the seller and the buyer in the shipping process. By clearly defining who is responsible for what and up to which point while shipping freight, these definitions provide clarity to traders and help facilitate the smooth functioning of the global supply chain.

Why is it important to know about Incoterms?

Incoterms define how the costs and risks associated with moving goods across borders will get divided between both the parties. Failure to employ the right incoterm can leave either the buyer or the seller with higher financial and legal responsibilities in comparison to the other party. Not knowing who is responsible to pay what duty can also result in seizure of goods and cause unnecessary delays and fines. This can really affect your bottom line and also render your business conduct as illegal or non-compliant with global trade rules. To help avoid such circumstances, it's vital for both the parties to have a thorough understanding of these terms before negotiating a contract.   

So what exactly do these Incoterms determine?

• Who arranges and pays for the transport
• Who arranges and pays for the insurance
• Who handles the export and import formalities
• Terms of delivery for the seller
• The point of transfer of risks and costs from the seller to the buyer

It's important to note that just because a party arranges for transport or insurance, doesn't mean it also bears the risk. The point of transfer of risk from the seller to the buyer differs from Incoterm to Incoterm.

THE CURRENT 11:

In order to keep up with the changing landscape of international trade, ICC revises Incoterms once every 10 years. Currently, Incoterms 2010 is the version that's in use. Before that, Incoterms 2000 was being followed worldwide.

As per Incoterms 2010, there are 11 Incoterms available to help facilitate international trade. They can be classified into two categories based on the mode of transport.

Category A - INCOTERMS FOR ANY MODE OR MODES OF TRANSPORT

The following Incoterms form a part of this category :

1. EXW - Ex Works

2. FCA - Free Carrier

3. DDP - Delivered Duty Paid

4. CPT - Carriage Paid To

5. CIP - Carriage and Insurance Paid

6. DAT - Delivered At Terminal

7. DAP - Delivered At Place

Category B -  INCOTERMS ONLY FOR SEA/INLAND WATERWAYS

These include:

8. FAS - Free Alongside Ship

9. FOB - Free On Board

10. CFR - Cost and Freight

11. CIF - Cost, Insurance & Freight

With this, you now know what exactly are Incoterms, their significance and how to classify them.

Don't worry! We're not winding up this topic here.

We'll be going over each term individually and explain what it means in the next blog.

See you next week!