Introduction to Incoterms in Export

Introduction to Incoterms in Export

 

 

 

What is the International Chamber of Commerce (ICC)?

 

Introduction to Incoterms in Export

Key Points About ICC:

  • Founded in 1919: In Paris, France.
  • Purpose: To promote international trade and investment.
  • Contributions: Created rules and guidelines for international trade.
  • Significant Contribution: Developed Incoterms to clarify trade responsibilities.

The History of Incoterms

Incoterms, short for International Commercial Terms, were first introduced by the ICC in 1936. These terms help buyers and sellers understand their responsibilities in international trade.

Key Updates in Incoterms History:

  • 1936: First introduced with six terms.
  • 1953, 1967, 1976, 1980: Updated to meet evolving trade needs.
  • 1990: Detailed rules for containerized cargo and multimodal transport.
  • 2000: Updated for modern trade and transport methods.
  • 2010: Reduced terms from 13 to 11.
  • 2020: Latest version with 11 terms reflecting current trade practices.

Detailed Explanation of Incoterms 2020

Incoterms 2020 includes 11 terms that clarify the responsibilities of buyers and sellers. Let’s break down each term with simple definitions and examples.

EXW – Ex Works

Definition: The seller makes the goods available at their premises. The buyer is responsible for all transportation costs and risks.

Example: A bike manufacturer in Germany sells bikes to a store in France. The store owner must pick up the bikes from the factory in Germany and handle all

to buyer handling transportation.

Advantages for Buyer:

  • Full control over the shipping process.
  • Ability to choose the carrier and manage costs.

Disadvantages for Buyer:

  • Takes on all risks and costs from the seller’s premises.
  • More logistics to manage.

FCA – Free Carrier

Definition: The seller delivers the goods to a carrier chosen by the buyer at a specified place. The risk transfers to the buyer once the goods are handed over.

Example: A toy company in the USA sells toys to a retailer in Canada. The toy company delivers the toys to a shipping company in New York. From there, the retailer in Canada handles the rest of the shipping.

Advantages for Seller:

  • Responsibility ends once goods are handed over to the carrier.
  • Lower transportation costs compared to delivering to the buyer’s location.

Disadvantages for Seller:

  • Needs to coordinate with the buyer’s chosen carrier.
  • Risk and responsibility until goods are handed over.

Advantages for Buyer:

  • Chooses the carrier and shipping method.
  • Takes control of the shipment early in the process.

Disadvantages for Buyer:

  • Responsible for transportation costs and risks from the point of handover.
  • More logistics to manage.

CPT – Carriage Paid To

Definition: The seller pays for the transportation of the goods to the named place of destination. The risk transfers to the buyer when the goods are handed over to the first carrier.

Example: A clothing manufacturer in China sells clothes to a shop in Italy. The manufacturer pays for the shipping to Italy, but the shop in Italy takes on the risk once the clothes leave China.

Advantages for Seller:

  • Controls transportation up to the destination.
  • Easier to manage logistics up to the destination point.

Disadvantages for Seller:

  • Bears transportation costs.
  • No control over the goods once handed to the first carrier.

Advantages for Buyer:

  • Does not pay for transportation to the destination.
  • Lower initial cost compared to other terms.

Disadvantages for Buyer:

  • Takes on risk as soon as goods are handed to the carrier.
  • May face complications if problems arise during shipping.

CIP – Carriage and Insurance Paid To

Definition: The seller pays for transportation and insurance to the named place of destination. The risk transfers to the buyer when the goods are handed over to the first carrier.

Example: An electronics company in Japan sells gadgets to a store in Brazil. The company pays for the shipping and insurance to Brazil, but the store in Brazil takes the risk once the gadgets are given to the shipping company in Japan.

Advantages for Seller:

  • Controls transportation and insurance up to the destination.
  • Provides insurance coverage, reducing potential issues.

Disadvantages for Seller:

  • Bears transportation and insurance costs.
  • Risk transfers early in the process, potentially causing complications.

Advantages for Buyer:

  • Benefits from seller-arranged transportation and insurance.
  • Lower initial cost as shipping and insurance are covered.

Disadvantages for Buyer:

  • Takes on risk once goods are handed to the carrier.
  • May face issues if insurance coverage is insufficient.

DAP – Delivered At Place

Definition: The seller delivers the goods to a named place (usually the buyer’s premises). The seller bears all risks and costs until the goods are ready for unloading.

Example: A furniture maker in Italy sells tables to a customer in Spain. The furniture maker arranges and pays for the delivery to the customer’s address in Spain. The customer is responsible for unloading the tables.

Advantages for Seller:

  • Controls and manages transportation up to the destination.
  • Provides better service by delivering directly to the buyer.

Disadvantages for Seller:

  • Bears all transportation costs and risks until delivery.
  • Responsibility for any delays or issues during transport.

Advantages for Buyer:

  • Minimal responsibility for shipping.
  • Reduced risk and easier logistics.

Disadvantages for Buyer:

  • Higher cost as transportation is included in the price.
  • Less control over shipping and potential delays.

DPU – Delivered at Place Unloaded

Definition: The seller delivers the goods, unloaded, at the named place. The seller bears all risks and costs until the goods are unloaded at the destination.

Example: A bakery equipment supplier in France sells ovens to a bakery in Portugal. The supplier arranges and pays for the delivery and unloading at the bakery’s address in Portugal.

Advantages for Seller:

  • Provides a higher level of service by delivering and unloading.
  • Full control over the shipment until it is unloaded.

Disadvantages for Seller:

  • Bears all costs and risks until unloading.
  • Responsibility for any issues during unloading.

Advantages for Buyer:

  • No responsibility for transportation and unloading.
  • Reduced risk and logistics management.

Disadvantages for Buyer:

  • Higher cost as delivery and unloading are included.
  • Less control over the shipping process.

DDP – Delivered Duty Paid

Definition: The seller is responsible for delivering the goods to the buyer’s location, including paying for all duties and taxes. The seller bears all costs and risks until the goods are delivered.

Example: A book publisher in the UK sells books to a bookstore in the USA. The publisher handles all shipping, customs duties, and taxes, delivering the books directly to the bookstore’s door.

Advantages for Seller:

  • Provides full service and better customer satisfaction.
  • Control over the shipment until delivery.

Disadvantages for Seller:

  • Bears all costs, including duties and taxes.
  • Responsibility for any customs issues or delays.

Advantages for Buyer:

  • No responsibility for transportation, duties, or taxes.
  • Reduced risk and easier logistics.

Disadvantages for Buyer:

  • Higher cost as all expenses are included in the price.
  • Less control over the shipping process.

FAS – Free Alongside Ship

Definition: The seller delivers the goods alongside the ship at the named port of shipment. The buyer is responsible for loading the goods and all costs beyond that point.

Example: A grain producer in Argentina sells grain to a buyer in Spain. The producer delivers the grain to the port in Argentina and places it next to the ship. The buyer then arranges for loading and shipping to Spain.

Advantages for Seller:

  • Responsibility ends once goods are alongside the ship.
  • Lower transportation costs compared to other terms.

Disadvantages for Seller:

  • Limited control over the loading process.
  • Risk until the goods are alongside the ship.

Advantages for Buyer:

  • Control over loading and shipping.
  • Can negotiate better rates with the carrier.

Disadvantages for Buyer:

  • Responsibility for loading and transportation costs.
  • More logistics to manage.

FOB – Free On Board

Definition: The seller delivers the goods on board the ship at the named port of shipment. The risk transfers to the buyer once the goods are on the ship.

Example: A seafood exporter in Norway sells fish to a company in Japan. The exporter delivers the fish on board a ship at a port in Norway. Once the fish are on the ship, the Japanese company takes on the risk.

Advantages for Seller:

  • Responsibility ends once goods are on the ship.
  • Lower transportation costs compared to other terms.

Disadvantages for Seller:

  • Risk until goods are on board the ship.
  • Limited control over the shipping process.

Advantages for Buyer:

  • Control over the shipping from the port of departure.
  • Can negotiate better rates with the carrier.

Disadvantages for Buyer:

  • Responsibility for shipping costs and risks from the port.
  • More logistics to manage.

CFR – Cost and Freight

Definition: The seller pays for transportation to the named port of destination. The risk transfers to the buyer once the goods are on board the ship.

Example: A steel manufacturer in India sells steel to a construction firm in Australia. The manufacturer pays for the shipping to Australia, but the construction firm takes the risk once the steel is on the ship in India.

Advantages for Seller:

  • Controls transportation up to the destination port.
  • Easier to manage logistics up to the destination point.

Disadvantages for Seller:

  • Bears transportation costs.
  • Risk transfers early in the process.

Advantages for Buyer:

  • Does not pay for transportation to the destination port.
  • Lower initial cost compared to other terms.

Disadvantages for Buyer:

  • Takes on risk once goods are on the ship.
  • May face complications if problems arise during shipping.

CIF – Cost, Insurance and Freight

Definition: The seller pays for transportation and insurance to the named port of destination. The risk transfers to the buyer once the goods are on board the ship.

Example: A wine producer in France sells wine to a restaurant in Canada. The producer pays for the shipping and insurance to Canada, but the restaurant takes the risk once the wine is on the ship in France.

Advantages for Seller:

  • Controls transportation and insurance up to the destination port.
  • Provides insurance coverage, reducing potential issues.

Disadvantages for Seller:

  • Bears transportation and insurance costs.
  • Risk transfers early in the process.

Advantages for Buyer:

  • Benefits from seller-arranged transportation and insurance.
  • Lower initial cost as shipping and insurance are covered.

Disadvantages for Buyer:

  • Takes on risk once goods are on the ship.
  • May face issues if insurance coverage is insufficient.

Conclusion

Leave a Comment

Your email address will not be published. Required fields are marked *