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Incoterms: International Commercial Terms, Dissected and Defined

Incoterms®

What are Incoterms®?

The copyrighted term, Incoterms®, is an abbreviation for International Commercial Terms.

If you are in a business that involves transporting or shipping products outside of the United States, there are some key terms you should be familiar with. Defining the responsibilities for buyers (importers) and sellers (exporters) for the delivery of merchandise under sales contracts for domestic as well as international trade, these terms are a set of rules put in place to guide global trade professionals.

Originally published in 1936, and recently updated in May 2015, Incoterms® are published by the International Chamber of Commerce and are widely used in international commercial trade.

Guidance and Clarification

Incoterms® pointedly decrease mix-ups among traders and by this means minimize trade disputes and litigation. They also allocate transportation costs, responsibilities associated with the delivery of goods between buyers and sellers and reflect modern-day transportation practices.

Definitions

As of 2010, Incoterms® are comprised of two main categories and are organized by modes of transport. Both groups are used to simplify the drafting of sales contracts and to reduce misunderstandings by plainly specifying the obligations of importers and exporters.

Rules and Terms for All Modes of Transport:

ExWorks (EXW): the exporter or seller satisfies their requirements by having the goods available for the importer or buyer to pick up at their premises or another designated location such as a factory or warehouse.

The importer assumes all risks and costs from the time they retrieve the product from the exporter’s location until the product arrives at their location.

Free Carrier (FCA): the seller delivers the merchandise cleared for export to the carrier stipulated by the buyer (or another authorized party) to pick up the merchandise at the seller’s premises or designated location.

Buyer assumes all risks and costs associated with the delivery of goods to final destination, including customs fees.

Carriage Paid To (CPT): the seller clears the goods for export and delivers them to the carrier at a designated place of shipment.

While the seller is responsible for the transportation costs, they are not responsible for obtaining insurance.

Carriage and Insurance Paid to (CIP): the seller clears the goods for export and delivers them to the designated place of shipment.

Seller is responsible for the transportation costs, as well as obtaining minimum insurance coverage to the destination.

Delivered at Terminal (DAT): the seller clears the goods for export and assumes all risks and costs associated with delivering the goods, as well as unloading them at the terminal at the designated port or location.

The buyer is responsible for all costs and risks from this point forward, as well as clearing the goods for import in the country of final destination.

Delivered at Place (DAP): the seller clears the goods for export and bears all risks and costs associated with delivering the goods, but not unloading.

The buyer is responsible for all costs and risks associated with unloading and clearing customs.

Delivered Duty Paid (DDP): the seller assumes all risks and costs associated with delivering the goods ready for unloading and cleared for import.

Rules for Sea and Inland Waterway Transport:

Free Alongside Ship (FAS): the seller clears the goods for export. The goods are considered delivered when they are placed alongside the vessel at the designated port of shipment.

The buyer assumes all risks and costs for goods from the point of delivery.

Free on Board (FOB): the seller clears the goods for export. The goods are considered delivered when they are onboard the vessel at the designated port of shipment.

The buyer assumes all risks and costs for goods from the point of delivery.

Cost and Freight (CFR): the seller clears the goods for export. The goods are considered delivered when they are onboard the vessel at the designated port of shipment.

The seller bears the cost of freight to the designated port, and the buyer assumes all risks for goods from the time goods have been delivered.

Cost, Insurance, and Freight (CIF): the seller clears the goods for export.  The goods are considered delivered when they are onboard the vessel at the designated port of shipment.

The seller bears the cost of freight and insurance to the designated port. The seller’s insurance requirement is for minimum coverage only.

The buyer is responsible for all costs associated with unloading the goods and clearing goods for import.

The risk passes from seller to buyer once the goods are onboard the vessel at the port of shipment.

By understanding the risks and costs associated with each Incoterm®, you can intelligently decide which scenario works best for your global trade business. Having a solid comprehension of the various International Commercial Term definitions gives you a competitive advantage that can save time and money, as well as avoid misunderstandings, disputes, and litigation.

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