What Do Incoterms Mean?

International Commercial Terms (Incoterms) are rules the International Chamber of Commerce (ICC) puts out to make doing business worldwide easier. Incoterms are used worldwide to ensure that foreign trade contracts are clear about who is responsible for what.

People who trade with each other in both domestic and foreign markets often use Incoterms as a shorthand to help them understand each other and the exact terms of their business deals. Some Incoterms can be used for any type of transportation, while others can only be used for movement by water.

How to Understand Incoterms

The International Chamber of Commerce (ICC) developed Incoterms in 1936, periodically updating them to reflect changes in business practices. The ICC’s job is to support open markets and ensure that trade leads to global economic growth.

People think that the ICC is the best group for making rules for international trade because it comprises more than 45 million companies in more than 100 countries that are all connected. The ICC sets rules for Incoterms, which buyers and sellers can choose to follow or not, and they are often used as a regular part of trade deals.

Incoterms are a set of rules that are used all over the world to make trade easier. In effect, they give traders a way to talk about how to set the terms of their trades. Both buyers and sellers use incorporations for many business-related tasks. Incoterms are often used when writing a buy order, labeling a shipment for transport, filling out a certificate of origin, or keeping track of a free carrier agreement (FCA).

Because the ICC constantly changes Incoterms, contracts should say which version they use, like Incoterms 2020. Also, remember that trade terms used in different countries may look the same at first glance but may mean different things when used in the same country.

Item Terms for All Types of Transport

Incoterms rules can be used for any type of transportation. Delivered Duty Paid (DDP), Delivered at Place (DAP), and Ex Works (EXW) are all typical examples. For any transportation, these seven words are used:

• EXW stands for “Ex Works.”
• Free Carrier, or FCA
• Carriage Paid to
• CIP: Paid for transportation and insurance to
• Given at Place (DAP)
• DPU: Unloaded and Delivered at Place
• Delivered Duty Paid 2, or DDP

For example, DPU means that the seller sends the goods to a terminal and is responsible for all risks and shipping costs until the goods arrive and are removed. Next, the buyer is responsible for the goods’ safety and the cost of getting them from the terminal to their final location.

DDP means the seller takes on all the risk and pays for the shipping. The seller must also ensure that the goods are ready to be shipped and imported at the location. Also, if the goods are shipped DDP, the seller must pay export and import taxes.

Under the Incoterm “Ex Works” (EXW), the seller must only make the goods available for pick-up at their business or elsewhere. If you buy something EXW, the buyer takes on all the risk and pays for the shipping.

The two main groups of Incoterms were changed and put into groups based on the type of transportation used in 2010. The first group covers all types of transportation, while the second group only covers transportation by sea and rural waterways.

Incoterms Rules for Transport by Sea and River

The ICC has specific Incoterms rules when shipping goods by sea or inland river. These include cost, insurance, freight (CIF), and free-on-board (FOB). These are the Incoterms for shipping by sea and rural waterways:

• Free Aboard Ship (FAS)
• FOB stands for “free on board.”
• Cost and Freight (CFR)
• It stands for “Cost, Insurance, and Freight.”

For example, “free on board” (FOB) shipping words mean that the seller puts the goods on a vessel that the buyer names. The buyer or seller may be responsible for all risks and shipping costs, whether the goods are sold at the FOB delivery or destination points.

Cost, Insurance, and Freight (CIF) terms say that the seller is responsible for all shipping, insurance, and loading costs and must bring the goods to a specific port and load them on a particular vessel. After that, the buyer is responsible for paying for and taking risks related to getting the goods from the chosen port to its warehouse or business.

U.S. Administration for International Trade. It means “Know Your Incoterms.”

What Doesn’t Incoterms Cover?

• There are some situations that Incoterms won’t cover. These are not things that Incoterms do:
• Talk about all the terms of the sale.
• Please notify us of what is being sold or the agreed-upon price
• Refer to the agreed-upon method or date of payment between the buyer and seller.
• Find out when the thing’s title, or ownership, changes hands from the seller to the buyer.
• List the papers the seller needs to give the buyer to make customs clearance more accessible in the buyer’s country.
• Talk about who is responsible if the things aren’t delivered in line with the sale contract, if delivery is late, or if there are ways to settle disagreements.

When you only use Incoterms, it can be limited because they leave out some sale conditions. Before signing a contract, all parties should ensure that the above situations are handled. This keeps the business deal running smoothly since many legal issues can arise when only Incoterms are used.

Which is better: Incoterms 2010 or 2020?

For example, the 2010 Incoterms were updated in 2020, but there aren’t any significant changes in how they are used. That’s all that changed: the term “Delivered at Terminal” (DAT) from 2010 was changed to “Delivered at Place Unloaded” (DPU) for 2020. To cover all unloading sites, not just ports, this was done. Two times, there are eleven rounds.3

There are more parts to things once you get past the words. For instance, the amount of freight insurance that is needed under the CIP term has gone up. On the other hand, this doesn’t change the CIF term.

When either the buyer or the seller uses their vehicles to move goods, Incoterms 2020 applies. In 2010, people thought that a different company offered these services. And there are some changes to how the FCA rule is used with a letter of credit.

Costs tied to security have also changed who is responsible for what. They can be linked to both the export and import clearance processes. The updated Incoterms made it clear that the most common cost headings have to do with transportation and are the responsibility of the person in charge of making the arrangements. The seller will pay for any security costs with export clearance unless the item is sold “Ex Works.” The buyer will be responsible for any security costs that come with importing, unless the case is DDP.

The pros and cons of using Incoterms

One of the best things about using Incoterms is that they make complicated parts of foreign trade more consistent and clear. A method that clears up confusion between countries has made trading much easier, especially when terms are negotiated. Lawyers used to write terms that broke down Incoterms into different languages. This saves time and money that would have been spent on lawyers.

One big problem with Incoterms is that buyers and sellers often have different ideas about using them. Some sellers choose CIF because they know more about their products than buyers do. On the other hand, buyers may choose FOB for the same reasons. However, the terms themselves are not what matters. Instead, it is more about negotiating which terms to use than how clear they are.

Pros

• Easy-to-understand words
• Standardization around the world
• Updated and made clear by an international group (ICC)

Cons

• Differences in what buyers and sellers want when terms are being chosen
• Some terms can cause one side to pay more than they should.
• Incoterms 2010 will end on January 1, 2020. Can I still use it?
• Yes, you can still use the Incoterms from 2010. However, they should agree in writing to use either the 2010 or 2020 form of Incoterms.

What are the eleven terms?

There are 11 Incoterms: Ex Works (EXW), Free Carrier (FCA), Carriage Paid to (CPT), Carriage and Insurance Paid to (CIP), Delivered at Place (DAP), Delivered at Place Unloaded (DPU), Delivered Duty Paid (DDP), Free Alongside Ship (FAS), Free on Board (FOB), Cost and Freight (CFR), and Cost, Insurance, and Freight (CIF).

Do you need to use Incoterms?

It is used to make business terms more straightforward in foreign trade. Incoterms’ many pros are better than their cons for most transactions. This is why they are used to ease many trade agreements. There are still differences between the parties, and the terms of the deal need to be worked out before it is finalized.

Conclusion

• International commercial terms, or Incoterms, spell out the rules and words that buyers and sellers use in contracts for both international and domestic trade.
• The International Chamber of Commerce (ICC) developed Incoterms in 1936. They are updated from time to time to reflect changes in the way business is done.
• Delivered at Terminal (DAT), Delivered Duty Paid (DDP), and Ex Works (EXW) are all Incoterms for different types of shipping.
• The Incoterms were changed for 2020. There was only one change, but the protection costs are very different.
• Even though the terms are standard, some buyers and sellers like specific terms better than others. Because of this, the terms that will be used are up for discussion.