What are Incoterms®?

Put simply, Incoterms® are the selling terms that the buyer and seller of goods both agree to during international transactions.  These rules are accepted by governments and legal authorities around the world. Understanding Incoterms® is a vital part of International Trade because they clearly state which tasks, costs and risks are associated with the buyer and the seller.

The Incoterm® states when the seller’s costs and risks are transferred onto the buyer.  It’s also important to understand that not all rules apply in all cases.  Some encompass any mode or modes of transport.  Transport by all modes of transport (road, rail, air and sea) covers FCA, CPT, CIP, DAP, DPU (replaces DAT) and DDP.  Sea/Inland waterway transport (Sea) covers FAS, FOB, CFR and CIF.

Why are Incoterms® essential in international trade?

Incoterms® are known as international business terms. They are a set of rules related to international commercial law issued by the International Chamber of Commerce (ICC). According to the ICC, the Incoterms® Rules provide internationally accepted definitions and rules of interpretation for the most common business terms used in contracts for the sale of goods.

All international purchases will be processed in accordance with an agreed Incoterm to determine which party legally bears the costs and risks. Incoterms® will be clearly stated in the relevant shipping documents.

An overview of Incoterms® 2022 for 11 Terms, 7 for any mode of transport.

EXW Incoterms– Ex-Works  or Ex-Warehouse

• Ex works is when the seller places the goods at the disposal of the buyer at the seller’s premises or at another named place (i.e., works, factory, warehouse, etc.).
• The seller does not need to load the goods on any collecting vehicle. Nor does it need to clear them for export, where such clearance is applicable.

FCA Incoterms– Free Carrier

• The seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place.
• The parties are well advised to specify as explicitly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.

FAS Incoterms– Free Alongside Ship

• The seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment.
• The risk of loss of or damage to the goods passes when the products are alongside the ship.  The buyer bears all costs from that moment onwards.

FOB Incoterms – Free On Board

• The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered.
• The risk of loss of or damage to the goods passes when the products are on board the vessel.  The buyer bears all costs from that moment onwards.

CFR Incoterms– Cost and Freight

• The seller delivers the goods on board the vessel or procures the goods already so delivered.
• The risk of loss of or damage to the goods passes when the products are on board the vessel.
• The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

CIF Incoterms– Cost, Insurance and Freight

• The seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the products are on the ship.
• The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
• The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.
• The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.

CPT Incoterms– Carriage Paid To

• The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such site is agreed between parties).
• The seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.

CIP Incoterms– Carriage and Insurance Paid To

• The seller has the same responsibilities as CPT, but they also contract for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.
• The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.

DAP Incoterms– Delivered and Place

• The seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination.
• The seller bears all risks involved in bringing the goods to the named place.

DPU – Delivered and Place Unloaded (replaces Incoterm® 2010 DAT)

• DPU replaces the former Incoterm® DAT (Delivered At Terminal).  The seller delivers when the goods, once unloaded are placed at the disposal of the buyer at a named place of destination.
• The seller bears all risks involved in bringing the goods to, and unloading them at the named place of destination.

DDP – Delivered Duty Paid

• The seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination.
• The seller bears all the costs and risks involved in bringing the goods to the place of destination.  They must clear the products not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.

Comparative analysis of Incoterms Different level of insurance cover between CIF and CIP

CIF and CIP are the only two Incoterms® that require the seller to purchase insurance in the buyer’s name.  Under Incoterms® 2010 the insurance cover for both CIF and CIP was required under Institute Cargo Clause C. Under the new Incoterms® 2020, CIP requires insurance cover complying with Institute Cargo Clause A.  Clause A covers a more comprehensive level of insurance which is usually suitable for manufactured goods, where Clause C would likely apply to commodities.

In summary:

• CIF remains the same, it requires ‘Institute Cargo Clause C’ insurance cover – Number of listed risks, subject to itemized exclusions.
• CIP now requires an upgraded ‘Institute Cargo Clause A’ insurance cover – All risk, subject to itemized exclusions.

BL (Bill of Lading)

 An essential document between the carrier and shipper that serves to acknowledge the receipt of cargo for shipment.

A BOL including the cargo’s details such as quantity, quality, nature etc. is demanded by international laws such as Hamburg Rules, Hague Rules as well as Hague-Visby Rules.

As stated above, a BOL serves as a definite receipt that acknowledges the successful loading of cargo. It includes the terms of the contract in addition to being a document of title to the products.

LCL (less than Container Load)

A shipment that does not take up all of a container’s space. The remaining space can then be used by freight transport provider’s other customers.

This option is pretty cost-effective since the total cost is divided between all customers.  In case your cargo weighs less than 150 kg, then you should definitely opt for this mode of shipment.

However, it should be noted that the additional costs can make things inconvenient in the long-run.

FCL (Full Container Load)

As per this term, you have the entire container space reserved for your goods alone! This approach is quite convenient and boasts several perks.

For start-ups, the risk of loss and breakage is pretty low. Moreover, the overall cost associated with FCL is lower than that of LCL. Also, the China-USA shipping time is reduced considerable.

Conclusion

In general, everyone in the field of international trade should be well aware of one key point of the Incoterms® rules: These rules help regulate the obligations of parties in international sales contracts. They do not constitute the entire contract and other agreements should be drafted to cover additional responsibilities and obligations.

Union Vision (unionvisionchart.com) is a wholesale toy manufacturer with more than 20 years of experience in product development, production, and exporting.
Union Vision have a production base of 8,000 square meters, a warehouse of 10,000 square meters, and 200+ employees. We are excellent in factory audits, such as BSCI, WCA, SQP, etc.,
We have professional product design teams, product development teams, and QA teams. Our supply capacity and highly qualified team provide a strong guarantee for effectively meeting customers’ OEM and ODM requirements.