The rise of globalization has led to a continuous increase in worldwide imports and international shipping. Anyone who imports or exports products deals with international commercial terms and conditions, known as Incoterms.
This article will explain the functions of Incoterms and what exporters and importers need to know to select the most suitable incoterms.
What are Incoterms?
Created by the International Chamber of Commerce in 1936, Incoterms (International Commercial Terms) regulate international trade by acting as voluntary recommendations that can be applied by importers and exporters to define their obligations and responsibilities in an operation. In other words, Incoterms are standardized international delivery terms between sellers and buyers, describing the tasks, risks, and costs associated with the transaction of goods worldwide.
It must be noted that even though Incoterms are not laws, they have legal recognition at the international level. They are updated to suit new circumstances every ten years, and the most recent rules are Incoterms 2020.
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What are the functions of Incoterms?
Incoterms determine important contractual terms and obligations for global trade. The primary functions of Incoterms are:
- Cost allocation: which contract partner bears which costs?
- Division of obligations: which contract partner takes on which obligations on which route?
- Risk transfer: which contract partner covers which risk at which moment in time?
Other functions determine obligations surrounding goods documents, customs transport documents, shipping, insurance, goods inspection, and packaging.
How to select the most appropriate Incoterms
Buyers and sellers have different interests; therefore, it is vital to have a solid knowledge of the existing Incoterms to suit the interests of both parties. In this sense, the choice of Incoterms for both importers and exporters will depend on whether they want to control costs, contract the main transport, reduce risks or have greater security in the logistics chain.
Which are the most common Incoterms?
Presently, there are 11 Incoterms. In this guide, we will explain the five most used Incoterms.
- EXW (Ex Works)
Under this Incoterm, buyers responsible for everything: from collecting items at the seller’s warehouse to delivering them to their destinations.
- DDP (Delivered Duty Paid)
This is the opposite of EXW. The seller pays all the costs to collect the goods from the location of the buyer’s choice. This includes paying any duties involved.
- FOB (Free on Board)
This Incoterm dictates that the seller will deliver the goods to a ship chosen by the buyer and pay for them to be loaded onboard. Then, the buyer pays for everything from there, including transport by ship.
- CIF (Cost, Insurance and Freight)
Like FOB, the seller will deliver the goods to the ship and get them loaded on board. However, the seller will also pay the ocean freight and the insurance. Once the ship arrives in port, the buyer becomes responsible for the costs, including the unloading of the goods from the ship.
- FAS (Free Alongside Ship)
The seller is responsible for transporting goods to their port of choice. Once at the port, it is the buyer’s responsibility to pay for the goods to get loaded on the ship, the ocean freight and everything else needed to get the shipment to its destination.
In summary, Incoterms provide a solution for an international trade problem in which parties from different countries can interpret transport agreements differently. They are updated every ten years, and they are chosen based on the interests of both buyers and sellers.