Understanding Incoterms: A Guide to International Trade
Understand Logistics & Freight
International trade is a complex web of transactions, regulations, and logistics that involve businesses across the globe. To facilitate this process, Incoterms, or International Commercial Terms, were established by the International Chamber of Commerce (ICC). Incoterms provide a universally recognized set of rules that define the responsibilities and obligations of buyers and sellers in international transactions. This blog post will explore what Incoterms are and how they are used, focusing on the four main groups of Incoterms.
What are Incoterms?
Incoterms are a set of standardized trade terms that serve as a common language in international trade. They are used to determine the responsibilities of buyers and sellers in the sale of goods, specifying who is responsible for various aspects of the shipment, including costs, risks, and logistics. These terms are crucial for avoiding misunderstandings and disputes in international business transactions.
Incoterms are periodically updated by the ICC to reflect changes in the global trade environment and technology. They are divided into four groups: D, F, C and E, each representing a different level of responsibility and risk for the parties involved in the transaction. As much as each INCOTERM is different, they have similarities when it comes to the rules that they settle and that is where this subject gets a little bit complex, but fear not, let’s dive into it!
This group is the one that places most of the responsibility on the seller, who must pay for the international trip and manage the delivery of the shipment to the country of destination. However, none of the rules demand insurance from the seller’s part.
Delivered at Place (DAP)
The seller has to arrange and pay for the transportation until the place of delivery that was settled between them and the buyer. The seller’s responsibility ends when the vehicle carrying the goods arrives, and it’s up to the buyer to unload the cargo.
Delivered at Place Unloaded (DPU)
The obligations of the seller and the buyer are basically the same as in DAP, but with the crucial difference that, in this case, the seller must unload the cargo from the carrier that they arranged and the buyer will only collect it. This is riskier for the seller, since the unloading of a shipment is one of the most dangerous stages of transport and, if anything happens to it, it will still be the seller’s responsibility.
This is the only rule that requires the seller to unload the cargo in order for their job to be considered done.
Delivery Duty Paid (DDP)
This rule places more responsibility on the seller than the others, since here the seller is obligated to arrange, manage and pay for the transportation of the cargo until it reaches the settled place, as well as taking care of the import clearance, something that usually is done by the buyer, who actually is located at the destination country and would have an easier time dealing with this bureaucracy.
In Brazil, the use of this INCOTERM is prohibited for formal importations due to the fact that foreign companies don’t have the legal rights to participate in customs clearance at the port of entry.
The INCOTERMS in this group have their use restricted to ocean freight only, except for FCA, and they put the responsibility of paying for the cargo’s international freight on the buyer. In addition to that, they also don’t demand the seller to insure the goods.
Free Alongside Ship (FAS)
The seller must deliver the cargo at the indicated port, by the side of the ship that was arranged by the buyer, with export clearance taken care of. This INCOTERM is mostly used for bulk shipments.
Free On Board (FOB)
Very similar to the previous rule, but in this case the seller must leave the cargo inside the ship, ready to take off. The costs and the risks involved in doing so are also a responsibility of the seller.
Free Carrier (FCA)
This INCOTERM applies to any mode of transportation and is also more flexible. Here, the seller is responsible for the export clearance, but whether they will load the cargo into the vehicle that was arranged by the buyer or just deliver without doing so it’s up for both of them to decide.
In this group, the risks transfer from the seller to the buyer during the delivery of the cargo to the transport, and it is responsibility of the seller to arrange and pay for the main transportation. This detail is very important, because it is what makes group C a little bit riskier for the buyer, since here all of the INCOTERMS give the seller most of the control over the cargo’s transport (that the buyer arranged and paid for).
The differences between the members of group C are minimum, but it is extremely important to tell them apart.
Carriage Paid To (CPT)
The seller delivers the cargo cleared for exportation to the carrier, that they chose and paid for, at the settled place. The risks are transferred to the buyer as soon as the cargo is delivered to the transport. If there is more than one transport involved, this transfer occurs with the first carrier.
Carriage and Insurance Paid To (CIP)
The difference between CPT and CIP is that here the seller is obliged to insure the cargo, but the buyer can acquire additional coverage on their own if they want to.
Cost and Freight (CFR)
This INCOTERM has its use restricted to ocean freight, because in this case the risks are transferred from the seller to the buyer when the cargo is delivered on board of the ship.
Cost, Insurance and Freight (CIF)
Just like CFR, except in this case the seller must also insure the products in addition to paying for its main transport and loading them inside the ship cleared for export.
Ex Works (EXW)
The sole member of “group” E puts the responsibility of the cargo’s transport almost entirely on the buyer. Here, the seller’s only attribution is to leave the goods properly packaged and identified available for pickup at the place that was specified during the negotiation. Loading the cargo in the vehicle, getting the export clearance, paying for the transport, as well as everything else is up to the buyer to take care of.
Incoterms are a fundamental component of international trade, ensuring that both buyers and sellers have a clear understanding of their responsibilities, costs, and risks. By understanding the four primary groups of Incoterms (D, F, C, and E) and selecting the appropriate term for your trade agreement, you can navigate the complexities of global trade with confidence and efficiency. Whether you’re a seasoned international trader or just venturing into the world of global commerce, a solid grasp of Incoterms will serve you well in your business endeavors.