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Incoterms Explained: Your Complete Guide

October 12, 2023
Guide to incoterms

Navigating the Complexities of International Trade

Written By: Narek Hakobyan

Imagine you're a seasoned business owner, ready to expand your market presence globally. You've discovered the ideal overseas partner, yet now, you're confronted with the intricate web of international trade logistics. Enter Incoterms, your invaluable tool for seamless cross-border transactions. These international trade terms, conceived by the International Chamber of Commerce (ICC) in 1936, provide a universally accepted framework for facilitating international commerce. Let's embark on a journey to demystify Incoterms, the quintessential trade language that can either bolster or hinder your global business undertakings.

What Are Incoterms?

At the heart of international commerce, Incoterms serve as the universal language that buyers and sellers across the globe use to understand each other's roles and responsibilities, providing a common understanding of roles, responsibilities, and timelines in the intricate dance of global trade. Think of them as your GPS, expertly guiding your goods through the labyrinth of international logistics.

incoterms explained

Understanding Incoterms

Let's dive into the world of Incoterms and explore the most commonly used trade terms. 

Rules for Any Mode of Transport:

  1. EXW (Ex Works):
    1. The seller relinquishes goods at their premises.
    2. The buyer assumes full responsibility for transportation, costs, and risks.
  2. FCA (Free Carrier):
    1. The seller delivers goods, cleared for export, to a carrier nominated by the buyer.
    2. The buyer takes command of transportation expenses and risks.
  3. CPT (Carriage Paid To):
    1. The seller covers carriage costs up to the specified destination.
    2. Risk and any additional expenses incurred after delivery to the carrier? The buyer shoulders the burden.
  4. CIP (Carriage and Insurance Paid):
    1. The seller bears the cost of transportation and assumes risk until handover to the chosen carrier.
    2. From this point forward, it's the buyer's responsibility for insurance and risk management.
  5. DPU (Delivered at Place Unloaded):
    1. Seller pays transport costs and risk until goods reach the destination and are unloaded.
    2. Once the goods touch solid ground, the buyer takes charge of the baton.
  6. DAP (Delivered At Place):
    1. Seller handles transportation costs and risk until delivery at the specified place.
    2. Buyer steps in post-unloading, managing any extra costs or risks.
  7. DDP (Delivered Duty Paid):
    1. Seller takes the reins for all expenses, including customs clearance, duties, and taxes.
    2. Buyer? They're on duty to unload the goods at the final destination.

Rules for Sea and Inland Waterway Transport:

  1. FAS (Free Alongside Ship):
    1. The seller commits to delivering goods alongside a vessel at the designated port of shipment.
    2. It's important to note that this term exclusively applies to transportation by sea or inland waterway.
  2. FOB (Free on Board):
    1. Under the FOB Incoterm, the seller ensures goods are cleared for export and loaded on board a designated shipping vessel.
    2. Once this is accomplished, the buyer assumes responsibility for the goods, including customs clearance and related duties and fees.
  3. CFR (Cost and Freight):
    1. CFR designates that the seller is responsible for arranging and covering the cost of transporting goods to a named port of destination.
    2. The buyer, in turn, assumes responsibility for the goods once they are on board the shipping vessel.
  4. CIF (Cost, Insurance, and Freight):
    1. With CIF, the seller takes on the responsibility of organizing and financing transportation, insurance, and freight for goods to a named port of destination.
    2. The transfer of responsibility for the goods occurs when they are loaded onto the shipping vessel. The buyer incurs no costs until the goods reach the specified port of destination.

Limitations of Incoterms: What They Can't Do

Incoterms serve as your reliable roadmap, but like any map, they have limitations:

  • Ownership Disputes: Incoterms don't resolve disputes over ownership; that's a task for the contract.
  • Force Majeure (Acts of Nature): Incoterms don't have answers when nature throws unforeseeable challenges your way.
  • Contract Deviations: When parties diverge from the agreement, Incoterms can't redirect the ship.

Your Passport to Global Trade

Incoterms are your golden ticket to international trade, simplifying intricate logistics and promoting global commerce. Nonetheless, it's crucial to acknowledge their limitations and complement them with crystal-clear contract clauses to ensure a seamless journey, even in turbulent waters. With Incoterms as your trusted compass, your global business ventures are primed for success.

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