WHAT ARE INCOTERMS IN
INTERNATIONAL TRADE?

Incoterms, also known as international commercial terms, are set to eliminate or decrease confusions and conflicts between buyers and sellers in international trade and to facilitate the trade and commerce process globally. Incoterms were created by the International Chamber of Commerce (ICC) in 1936 and since then, they are updated on a regular basis to suit changing trade trends. 

Incoterm

Incoterms 2020

EXW Ex Works

FCA Free Carrier

FAS Free Alongside Ship

FOB Free on Board

CFR Cost and Freight

CPT Carriage Paid To

CIF Cost, Insurance and Freight

CIP Carriage and Insurance Paid Тo

DAP Delivered at Place

DPU Delivered at Place Unloaded

DDP Delivered Duty Paid

Expected changes

CNI Cost and Insurance

DTP Delivered at Terminal Paid

DPP Delivered at Place Paid

Incoterms 2010

DAT Delivered at Terminal

Incoterms define the duties of buyers and sellers in global commerce contracts. They are often used as a form of shorthand by parties involved in domestic and international trade to help understand one another and the actual terms of their business contracts, costs, risks, and responsibilities. Some Incoterms apply to various transportations, while others are only applicable to sea freight and water transportation.
Incoterms rules chart
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Different Incoterms Groups
Group E

EXW (EX Works) The customer (buyer) bears the burden of the responsibility in Ex Works. The buyer loads and clears the products for export at the seller’s facility or another designated place.

Group F

The seller is responsible for delivering the goods to the buyer’s pre-arranged mode of transportation in this group. Following that, the buyer takes full responsibility for all expenses and risks. In the F category of Incoterms, there are a few sub-groups, including Free Carrier (FCA) Free carrier resembles EX works. The seller of the goods delivers them to the agent of the buyer or the carrier at the chosen location. The place where the buyer accepts all risks must be stated in the contract. Free Alongside Ship (FAS) When a supplier delivers products alongside a vessel chosen by the buyer, it is referred to as FAS. Once the products are alongside the vessel, the buyer is responsible. Free on Board (FOB) Free on Board (FOB): When a seller delivers commodities to a buyer-designated vessel, the term “free on board” is used. Once the commodities are on board the ship, the buyer takes responsibility. For marine shipments, both FAS and FOB are Incoterms.

Group C

The seller is responsible for all charges to the destination port in this group. The risks are passed to the buyer once the items are put onto the carrier. Incoterms in Group C include: Cost & Freight (CFR) CFR is highly similar to FOB. The difference is that the seller is responsible for all costs and freight associated with delivering products to their intended location. Cost, Insurance & Freight (CIF) CIF resembles CFR. The seller, on the other hand, provides insurance coverage against the risk of any loss or damage. Both CIF and CFR refer to shipments that go by water. Carriage Paid To (CPT) The seller is responsible for arranging for the products to be transported to a specified location, but not for insuring them. Carriage & Insurance Paid To (CIP) This is similar to CPT, except the seller is also responsible for insurance the goods and commodities.

Group D

The Incoterms included in this group are related to the shipment destination. Delivered at Terminal (DAT) According to this Incoterm, the seller delivers and unloads the goods at a pre-determined destination. The seller is in charge of the safety of the goods up until he delivers them at the destination port. Delivered at Place (DAP) When the seller delivers the products ready for unloading at the specified destination, it is referred to as DAP. The seller is fully responsible for the products until they arrive at the specified location. Delivered Duty Paid (DDP) This is used when the seller accepts full responsibility for all expenses and risks involved in delivering goods to the buyer’s specified location. This includes clearing products for export and import at the customs, paying any necessary duties, and finishing customs paperwork.

What Do Incoterms Not Cover or Include?

As a further and clearer explanation, they do not cover the following:

The owner of the products and the basis of the agreement are not determined by Incoterms.
Incoterms do not protect parties against loss or damage; instead, it helps both parties be aware of their responsibilities, costs, and risks.
Incoterms don’t specify how the buyer and seller should pay each other, and they also don’t address non-payments. Make sure the Incoterm you choose is compatible with your bank’s requirement when arranging overseas payment, especially if you’re using a Letter of Credit (LC)

Tips to Consider When Choosing Incoterms

The Incoterms Free Carrier (FCA) and Delivered at Place (DAP) are popular since they can be used for domestic and international shipments, as well as any mode of transportation. The seller is in charge of export customs, whereas the buyer is responsible for import customs. Using Ex Works (EXW), on the other hand, places the entire duty on the buyer, raising the chance that the buyer will be unable to meet all of these responsibilities. To help you choose the most suitable Incoterm, you can perform a cost-benefit analysis. This might help you figure out whether there are any tax or other financial advantages to the transaction. It’s also a good idea to double-check that there are no legal difficulties that might prevent cargo from reaching its destination. If your goods are prohibited in your country, then it’s critical that you have all of the necessary documentation, such as licenses or permits. Without the suitable Incoterm, shipments might face challenges, therefore it’s critical to think carefully about which Incoterm to choose. The inability to understand Incoterm definitions causes issues across the supply chain. For example, logistical costs may rise, terms may not meet the buyer or seller’s expectations, or the buyer or seller may be unable to comply with the Incoterm.

How to Choose the Most Appropriate Incoterms

The most desirable Incoterms for international trades are DAT (Delivered At Terminal), DAP (Delivered At Place), and DDP (Delivered Duty Paid). Only customs processes in the place of arrival, inland transportation to his premises, and unloading are the buyer’s responsibilities. Selecting the appropriate Incoterm for your international transaction might be a difficult task. You may be wondering about the most appropriate Incoterm for a seller and buyer. It’s a risky process that requires a lot of consideration. The sheer number of factors to examine in Incoterms might make decision-making difficult. You may rely on the experience of our experts at DFreight if you have any queries about the use of Incoterms or are unsure which Incoterm best suits your shipment and goods. To contact our experts, fill out the Contact Us form on our website.

FAQ

What documents are required for import and export?

Bill of lading (BOL), commercial invoice, and shipping bill are mandatory documents for importing and exporting goods.

How long does it take to get an import and export license approved? 

There isn’t a defined time to get an import and export approval but normally an import/export license will take about 60 days in most countries.

Which countries are the biggest importers and exporters in the world? 

The United States of America is the biggest importer and China is the biggest exporter in the world.

What is the main shipping mode for importing and exporting worldwide? 

Road transportation is the most common shipping mode worldwide. 

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