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July 17, 2023

What are Incoterms for the logistics industry?

Picture of Silver Runner Kft.

Silver Runner Kft.

If you are involved in international trade, you have probably heard of Incoterms. But what are they exactly and how do they affect your business?

What are Incoterms?

Incoterms are a set of pre-defined commercial terms published by the International Chamber of Commerce (ICC) that define the responsibilities and liabilities of exporters and importers in the arrangement of shipments and the transfer of ownership and risk involved at various stages of the transportation process.

Incoterms are not laws or contracts, but rather guidelines that parties can agree to use in their sales contracts to avoid misunderstandings and disputes. They also provide a common language for traders across different countries and regions.

Why are Incoterms important?

Incoterms are important for several reasons:

They clarify who is responsible for arranging and paying for the transportation, insurance, customs clearance, documentation, and other costs related to the shipment.
They determine when and where the ownership and risk of loss or damage of the goods are transferred from the seller to the buyer.
They help to avoid costly disputes and litigation by providing clear rules and definitions for common trade terms.
They reflect the latest developments and best practices in international trade, such as security, electronic communication, and multimodal transportation.

What are the Incoterms 2020 rules?

The Incoterms 2020 rules are the latest version of the Incoterms rules, which were updated by the ICC in 2019 and came into effect on January 1, 2020. They replace the previous version, which was published in 2010.

The Incoterms 2020 rules consist of 11 rules, divided into two categories:

Rules for any mode of transport: These rules can be used for shipments that involve any mode or combination of modes of transport, such as road, rail, air, sea, or inland waterway. They are:

EXW (Ex Works): The seller delivers the goods at their premises or another named place and places them at the disposal of the buyer. The buyer bears all costs and risks involved in taking the goods from there to their final destination.
FCA (Free Carrier): The seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The seller is responsible for clearing the goods for export. The buyer bears all costs and risks involved in taking the goods from there to their final destination.
CPT (Carriage Paid To): The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place. The seller pays for the carriage of the goods to a named place of destination. The buyer bears all risks of loss or damage to the goods from that point.
CIP (Carriage and Insurance Paid To): The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place. The seller pays for the carriage and insurance of the goods to a named place of destination. The buyer bears all risks of loss or damage to the goods from that point. The seller is required to obtain a minimum level of insurance coverage, which is higher than under CIF.
DPU (Delivered at Place Unloaded): The seller delivers the goods and unloads them at a named place of destination. The seller bears all costs and risks involved in bringing and unloading the goods at that place. The seller is also responsible for clearing the goods for import, unless otherwise agreed.
DAP (Delivered at Place): The seller delivers the goods to a named place of destination, ready for unloading by the buyer. The seller bears all costs and risks involved in bringing the goods to that place. The seller is also responsible for clearing the goods for import, unless otherwise agreed.
DDP (Delivered Duty Paid): The seller delivers the goods to a named place of destination, cleared for import and ready for use by the buyer. The seller bears all costs and risks involved in bringing and delivering the goods to that place, including any duties, taxes, and other charges.

Rules for sea and inland waterway transport: These rules can be used for shipments that involve only sea or inland waterway transport, such as barge, ship, or ferry. They are:

FAS (Free Alongside Ship): The seller delivers the goods alongside the vessel at a named port of shipment. The buyer bears all costs and risks involved in loading the goods on board and taking them to their final destination.
FOB (Free on Board): The seller delivers the goods on board the vessel at a named port of shipment. The buyer bears all costs and risks involved in taking the goods from there to their final destination.
CFR (Cost and Freight): The seller delivers the goods on board the vessel at a named port of shipment. The seller pays for the freight of the goods to a named port of destination. The buyer bears all risks of loss or damage to the goods from that point.
CIF (Cost, Insurance & Freight): The seller delivers the goods on board the vessel at a named port of shipment. The seller pays for the freight and insurance of the goods to a named port of destination. The buyer bears all risks of loss or damage to the goods from that point. The seller is required to obtain a minimum level of insurance coverage, which is lower than under CIP.

How to choose the right Incoterm for your shipment?

Choosing the right Incoterm for your shipment depends on several factors, such as:

The mode or modes of transport involved
The type and value of the goods
The level of risk and liability you are willing to assume
The customs clearance requirements in both countries
The availability and cost of insurance and freight services
The negotiation power and trust between you and your trading partner

As a general rule, you should choose an Incoterm that:

Matches your mode or modes of transport
Minimizes your costs and risks
Maximizes your control and convenience
Meets your contractual obligations and expectations

For example, if you are shipping non-containerized cargo by sea only, you may consider using FOB or CIF terms. If you are shipping containerized cargo by multimodal transport, you may consider using FCA or CIP terms.

How to use Incoterms correctly?

To use Incoterms correctly, you should follow these steps:

Select an appropriate Incoterm for your shipment based on your mode or modes of transport, type and value of goods, level of risk and liability, customs clearance requirements, availability and cost of insurance and freight services, negotiation power and trust between you and your trading partner.
Specify the Incoterm clearly in your sales contract, along with a named place or port of delivery. For example: FCA New York Warehouse; CIP Shanghai Port; DDP Paris Office.
Understand your rights and obligations under the chosen Incoterm, as well as those of your trading partner. Refer to the official ICC publication for detailed explanations and guidance on each Incoterm rule.
Comply with your responsibilities under the chosen Incoterm, such as arranging and paying for transportation, insurance, customs clearance, documentation, etc., as well as transferring ownership and risk at the agreed point.
Communicate with your trading partner throughout the shipment process to ensure smooth delivery and avoid disputes.

Conclusion

Incoterms are essential tools for international trade that help to define the responsibilities and liabilities of exporters and importers in the arrangement of shipments and the transfer of ownership and risk involved at various stages of the transportation process. By choosing and using the right Incoterm for your shipment, you can avoid misunderstandings and disputes, reduce costs and risks, and increase efficiency and convenience.

sources:
Incoterms: The Difference between CIF and CIP – Customodal
CIP vs CIF: Differences Between Incoterms – Eurosender
CIF vs CIP – Incoterms explained – iContainers
Incoterms – Wikipedia
Incoterms® 2020 – ICC – International Chamber of Commerce
What is intermodal transportation?

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