Almost every aspect of international trade and the transactions and costs associated with it are up for negotiation, including pricing, expenses, custom duties, transportation and insurance.
Each of these issues must be negotiated between exporters and importers to clearly determine which party is legally responsible for each specific aspect of the trade transaction. These discussions can be compounded by disparities in language and culture.
To improve communication and mitigate the risks of misunderstandings, the ICC developed Incoterms (International Commercial Terms) to serve as universal trade definitions. It is now far easier for trading partners in different languages and from different cultures to do business.
To get you up to speed on these new terms and help you succeed in global markets, the Forum for International Trade Training (FITT) is partnering with the Canadian Chamber of Commerce (CCC), the Canadian Trade Commissioner Service (TCS) and Export Development Canada (EDC) to offer the only Incoterms® 2020 in-class training across Canada officially recognized by the International Chamber of Commerce.
How and why to use Incoterms
The Incoterms establish clarity in issues such as:
- Costs: Who pays for the various shipping expenses (packing, transportation, duties) encountered throughout a shipment’s journey?
- Ownership/Responsibility: At various points of the shipment’s journey, which party owns the goods and assumes the risk?
- Liability: If goods are damaged, who is responsible for paying damages, and at what point?
Do use Incoterms to establish party obligations, risks and costs with regard to:
- Delivery terms (destination, timelines, proof requirements)
- Standards of conduct
- Required or government imposed licenses and formalities
- Transportation mode and carriage terms
- Transfer of risk from seller to buyer
Don’t use Incoterms to:
- Outline rights and obligations for service contracts or any contract other than delivery
- Outline provisions before or after delivery (only during)
- Define breach remedies
- Determine how title of goods is transferred
Incoterms categories and responsibilities
Each incoterm is referred to by a three-letter abbreviation, and they are usually listed by category.
Rules for any mode or modes of transportation:
- EXW — Ex Works: The seller’s minimum responsibility is to make the goods available at the specified location. The buyer accepts all other risks and costs.
- FCA — Free Carrier: The seller ensures the goods are made available for the buyer’s named carrier at a specific named location. The buyer then assumes all risks and costs.
- CPT — Carriage Paid To: The seller pays the freight to a named destination. The buyer then assumes all risks and costs.
- CIP — Carriage and Insurance Paid To: Same as for CPT, but the seller must also provide insurance. The buyer then assumes all risks and costs
- DAT — Delivered to Terminal or Port (Used for ocean or inland waterway transport or multimodal transport): The seller pays all transport costs to a named port but does not clear the goods through customs. The buyer then assumes all risks and costs.
- DAP — Delivered at Place (Used for all modes of transport, as long as the final shipment to the named place is by land): The seller’s obligations terminate when the goods are delivered to the specified place. The buyer is responsible for clearing customs. The buyer assumes all risks and costs from this point on.
- DDP — Delivered Duty Paid: The seller pays all costs, including customs clearance, associated duty/taxes and delivery costs, to the buyer’s named delivery address.
Rules for sea and inland waterway transportation:
- FAS — Free Alongside Ship: The seller’s obligations are fulfilled when the goods have been placed alongside the principal ship at the dock or specified port. The buyer then assumes all risks and costs.
- FOB — Free on Board: The seller’s obligations are fulfilled when the goods are placed on board the ship by the exporter. The buyer then assumes all risks and costs.
- CFR — Cost and Freight: The seller pays all costs necessary to transport the goods to the named destination. Risks are transferred to the buyer when the goods pass over the ship’s rails.
- CIF — Cost Insurance Freight: Same as for CFR, but the seller must also provide marine insurance.
Each of these groups reflects varying degrees of seller cost and risk, and establishes the balance of responsibilities between the buyer and the seller.
Departure, main carriage unpaid and main carriage paid Incoterms are all shipment contracts. In these, the seller delivers simply by handing over the contract goods to a carrier somewhere on the seller’s side.
Depending on the terms, the place could be the seller’s premises, a carrier’s terminal, and a forwarder’s warehouse, or alongside or on board a ship. The need for payment to be made to the seller is recognized as soon as this delivery occurs.
Incoterms letter meanings
Terms beginning with the letter ‘E’ indicate that the seller’s responsibilities are fulfilled when the goods are made available for shipping by the buyer’s chosen carrier.
Terms beginning with the letter ‘F’ refer to shipments where the primary cost of shipping is not paid for by the seller.
Terms beginning with the letter ‘C’ refer to shipments where the seller pays for a portion of the shipping but the seller’s responsibility ends when the goods are delivered to the carrier somewhere on the seller’s side.
Terms beginning with the letter ‘D’ are destination contract terms because the seller delivers somewhere on the buyer’s side. The shipper or seller’s responsibility ends when the goods arrive at a predefined point. Delivery on the buyer’s side means that recognition of payment is deferred.
It is advisable for entrepreneurs to become familiar with Incoterms to accurately and clearly understand what rights they are entitled to and obligations they are responsible for when transporting goods internationally. This in turn can help them determine the insurance requirements compatible with their business needs.
What other advice or information about Incoterms do you think are necessary to become adept with them?