What are Incoterms?
Incoterms are the international trade terms that determine who is responsible for costs and risks during the transportation of goods from the seller to the buyer.
It is critical to choose the correct Incoterm when importing or exporting goods because it determines responsibility and costs for transportation, insurance and customs duties. A wrong choice can lead to unforeseen costs and risks.
Did you know that "Incoterms" stands for International Commercial Terms? Translated into Dutch, it means "International Commercial Terms."
Below you will find all 11 Incoterms briefly explained:
- EXW (Ex Works, ex factory): The seller delivers the goods to the buyer at his own location. The buyer is responsible for all further costs and risks.
- FCA (Free Carrier, Free Carrier): The seller delivers the goods to the carrier designated by the buyer. The seller is responsible for clearing the goods for export.
- CPT (Carriage Paid To, freight paid to): The seller delivers the goods to the carrier or other person designated by the seller. The seller bears the cost up to the point of destination.
- CIP (Carriage and Insurance Paid To): The seller delivers the goods to the carrier or other person designated by the seller. The seller bears the cost and risk to the point of destination.
- THAT (Delivered at Terminal): The seller delivers the goods at the agreed terminal at the destination. The seller bears the costs and risks until arrival at the terminal.
- DAP (Delivered at Place): The seller delivers the goods at the agreed destination, ready for unloading. The seller bears all costs and risks up to this place.
- DDP (Delivered Duty Paid, delivered inclusive of duties paid): The seller delivers the goods to the agreed destination including all charges and customs duties. The seller is responsible for clearing the goods for import.
- FAS (Free Alongside Ship): The seller delivers the goods alongside the ship at the port of loading. The buyer bears all costs and risks from that point forward.
- FOB (Free On Board): The seller delivers the goods aboard the ship at the port of shipment. From that point, the buyer is responsible for transportation and costs.
- CFR (Cost and Freight): The seller is responsible for cost and freight up to the destination port of arrival. The risks and responsibilities pass to the buyer once the goods are loaded on board.
- CIF (Cost, Insurance and Freight): The seller is responsible for cost, insurance and freight up to the destination port of arrival. The risks and responsibilities pass to the buyer once the goods are loaded on board.
It is important to note that each Incoterm defines specific responsibilities and risks for both the buyer and seller. Therefore, it is essential to choose the right Incoterm to avoid potential disputes and ambiguities between both parties.
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Frequently asked questions about Incoterms:
Why are Incoterms important?
Incoterms are important because they clarify the responsibilities of buyers and sellers in international trade. They help avoid misunderstandings and disputes by clearly defining the allocation of costs and risks. They enable both parties to understand their obligations and responsibilities and provide a common frame of reference for international trade agreements.
How many Incoterms are there?
There are a total of 11 Incoterms in the most recent edition (2020). These include EXW, FCA, CPT, CIP, DAT, DAP, DDP, FAS, FOB, CFR and CIF. Each of these Incoterms has specific applications and defines the responsibilities of buyers and sellers in different ways.
Should Incoterms be explicitly stated in a trade agreement?
Yes, it is important to clearly and explicitly state the specific Incoterm(s) in a trade agreement. This ensures that both parties are aware of their obligations and responsibilities. Failure to state an Incoterm can lead to confusion and disputes.
Are Incoterms legally binding?
Incoterms are not laws per se, but they are widely recognized and accepted in international trade practices. They can be contractually binding if they are clearly incorporated into a trade agreement between the buyer and seller. It is important to seek legal advice when drafting international trade agreements to ensure that Incoterms are properly applied.
Do Incoterms apply to all types of goods and transportation?
Yes, Incoterms apply to different types of goods and transportation methods, such as maritime, air, road and rail transportation. They can be adapted to the specific needs and requirements of the trade transaction.