Incoterms
Incoterms, or International Commercial Terms, are a set of predefined commercial
terms published by the International Chamber of Commerce 1 (ICC). They are widely
used in international commercial transactions or procurement processes. 2
Key Functions of Incoterms:
● Define Responsibilities: Clearly outline the responsibilities of both the
exporter and importer regarding the shipment and delivery of goods.
● Allocate Costs: Determine which party is responsible for various costs
associated with the transportation and delivery, such as freight, insurance,
and customs duties.
● Transfer Risks: Specify the point at which the risk of loss or damage to the
goods transfers from the seller to the buyer.
Incoterms 2020
The latest version, Incoterms 2020, came into effect on January 1, 2020, and
introduced some key changes:
● Focus on Multimodal Transport: Reflects the increasing importance of
multimodal transportation in international trade.
● Clarification of Responsibilities: Provides clearer definitions and
explanations of the responsibilities of both parties.
● Removal of Some Terms: Eliminated some less commonly used terms to
streamline the rules.
Key Incoterms 2020
● EXW (Ex Works): Seller makes goods available at their premises. Buyer
bears all costs and risks from that point.
● FCA (Free Carrier): Seller delivers goods to the carrier specified by the buyer
at the seller's premises.
● FAS (Free Alongside Ship): Seller delivers goods alongside the vessel at the
named port of shipment.
● FOB (Free On Board): Seller delivers goods on board the vessel at the
named port of shipment.
● CPT (Carriage Paid To): Seller delivers goods to the carrier at the named
place of departure.
● CIP (Carriage and Insurance Paid To): Seller delivers goods to the carrier at
the named place of departure.
● CFR (Cost and Freight): Seller delivers goods on board the vessel at the
named port of shipment.
● CIF (Cost, Insurance, and Freight): Seller delivers goods on board the
vessel at the named port of shipment.
● DAP (Delivered At Place): Seller delivers goods at the named place of
destination.
● DPU (Delivered At Place Unloaded): Seller delivers goods unloaded at the
named place of destination.
● DPU (Delivered At Place Unloaded): Seller delivers goods unloaded at the
named place of destination.
● DDP (Delivered Duty Paid): Seller delivers goods at the named place of
destination.
Choosing the Right Incoterm
Selecting the appropriate Incoterm is crucial for a successful international trade
transaction. Factors to consider include:
● Nature of the Goods: Type of goods, size, weight, and value.
● Transportation Mode: Method of transportation (sea, air, land).
● Risk Tolerance: Level of risk each party is willing to assume.
● Cost Considerations: Cost implications for both parties.
● Industry Practices: Common practices in the specific industry.
Importance of Incoterms in International Trade
● Clear Communication: Prevent misunderstandings and disputes between
buyers and sellers.
● Risk Management: Allocate risks effectively and manage potential losses.
● Cost Optimization: Optimize transportation and logistics costs.
● Legal Compliance: Ensure compliance with international trade regulations.
By understanding and correctly applying Incoterms, businesses can enhance their
international trade operations, reduce risks, and improve overall efficiency.
Would you like to delve deeper into a specific Incoterm or its implications in a
particular trade scenario?
