Incoterms, or International Commercial Terms, are a set of standardized terms and definitions that are widely used in international trade to clearly communicate the responsibilities of buyers and sellers in relation to the delivery of goods. Understanding these terms is crucial for both freight forwarders and importers/exporters.
Both these sides play a key role in determining the terms and conditions of a shipment, ownership of the goods being transferred, people responsible for transport and insurance, and the agency responsible for customs clearance and other administrative tasks.
There are 11 Incoterms in total, which are grouped into two main categories:
- Those that apply to any mode of transport (EXW, FCA, CPT, CIP, DAT, DAP, DDP)
- Those that apply specifically to sea and inland waterway transport (FAS, FOB, CFR, CIF). Each Incoterm has a specific meaning and comes with its unique set of responsibilities.
Definition and Significance of all 11 Incoterms
The 11 incoterms with their meaning and significance are outlined below:
1. EXW (Ex Works)
The seller is responsible for making the goods available at their premises, but the buyer is responsible for all costs and risks associated with transport and customs clearance.
2. FCA (Free Carrier)
The seller is responsible for delivering the goods to a carrier or place of the buyer’s choice, but the buyer is responsible for all costs and risks associated with transport and customs clearance.
3. CPT (Carriage Paid To)
The seller is responsible for delivering the goods to a carrier and paying for transport to a named destination, but the buyer is responsible for customs clearance and all other costs and risks associated with transport.
4. CIP (Carriage and Insurance Paid To)
Similar to CPT, but in this case, the seller is also responsible for purchasing insurance for the goods.
5. DAT (Delivered at Terminal)
The seller is responsible for delivering the goods to a named terminal at a named destination, but the buyer is responsible for customs clearance and all other costs and risks associated with transport.
6. DAP (Delivered at Place)
Similar to DAT, but in this case, the seller is also responsible for unloading the goods at the named place of destination.
7. DDP (Delivered Duty Paid)
The seller is responsible for delivering the goods to a named place of destination, including customs clearance and all other costs and risks associated with transport.
8. FAS (Free Alongside Ship)
The seller is responsible for delivering the goods alongside a ship at a named port of shipment, but the buyer is responsible for all costs and risks associated with transport and customs clearance.
9. FOB (Free on Board)
Similar to FAS, but in this case, the buyer is also responsible for loading the goods onto the ship.
10. CFR (Cost and Freight)
The seller is responsible for delivering the goods on board a ship at a named port of shipment and paying for transport to a named port of destination, but the buyer is responsible for customs clearance and all other costs and risks associated with transport.
11. CIF (Cost, Insurance, and Freight)
Similar to CFR, but in this case, the seller is also responsible for purchasing insurance for the goods.
Also Read: The Importance of Choosing the Right Freight Forwarder for Your Business
To Sum Up
When choosing an Incoterm, it’s important to consider the specific needs of your business, including the type of goods being shipped, the destination of the goods, and the level of service and control that you require. It is also important to note that while Incoterms provide a framework for defining responsibilities, they can not replace the need for a detailed contract between the buyer and seller, which should include additional information such as payment terms, inspection procedures, and dispute resolution.
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