Sourcing 101 - Know Your Incoterms
One of the biggest challenges for companies engaging in global trade these past few years is how few organizations have managed to integrate their global trade and customs / brokerage teams with their global sourcing organization – and vice versa. Logistics, tax, tariff, customs and other related trade issues can easily end up costing the original projected savings of working with a new locale in the first place. If your business wants to have a well-functioning global trade operation, a great place to start is getting familiar with a set of terms and conditions known as International Commercial Terms, or Incoterms.
Incoterms are a series of predefined commercial terms published by the International Chamber of Commerce (ICC) that are widely used in International commercial transactions or Procurement processes. According to Source Juice, an Incoterm "defines the monetary transaction and role responsibilities for both sides of the international trading buyer and seller transaction. The purpose of standardized incoterms is to determine export and import clearance responsibilities, who is owning the risk for the condition of the products at each stage in the transport process, and who is responsible for paying for what."1
Governments, legal authorities, and businesses around the world rely on Incoterms to provide mutually agreeable definitions of the most common commercial terms used when conducting international trade and managing the transfer of risk between buyers and sellers as goods are exchanged.
A History of Modern International Commerce
Incoterms themselves were created in 1936 by the International Chamber of Commerce (ICC). Founded in 1919 by a group of “merchants of peace” concerned about the lack of global business standards in the wake of World War One, the ICCO created Incoterms to provide clear global guidelines for both sellers and buyers with respect to how goods are transported from sellers to buyers, reducing miscommunication. Incoterms also provide guidance on import and export clearances and specific divisions of rights, risks, costs, and obligations between the two parties.2
Incoterms, when included in the formalized text of purchase orders, sales contracts, and other trade agreements, are legally binding. They are useful in neatly and collaboratively defining contract specifics touching on goods sold, insurance, packaging, freight charges, licensing, customs, and approved processes for material handling in different countries.
“Governments, legal authorities, and businesses around the world rely on Incoterms to provide mutually agreeable definitions of the most common commercial terms used when conducting international trade and managing the transfer of risk between buyers and sellers as goods are exchanged.
Incoterms Related to All Modes of Transport
The first Incoterms consisted of just six defined terms. In the decades since, they have gone through numerous revisions, with two versions—the seventh, Incoterms 2000 and the eighth, Incoterms 2010—still in use. The latest version decreases the total number of rules from 13 to 11, but all 13 trade terms are still supported by businesses, governments, and organizations who continue to use both versions.3
The terms themselves are divided by transport time; seven are related to all methods of transport, while six are specific to ocean freight and inland waterway transport methods. Four of the thirteen terms present in Incoterms 2000 have been recombined into two terms used in Incoterms 2010.
Below are brief explanations detailing the nature of Incoterms related to all modes of transport:
- Delivered Duty Paid – DDP
“Delivered Duty Paid” communicates an instance where 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 and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.
- Ex Works – EXW
“Ex Works” pertains to a circumstance where the seller delivers when it 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 the goods for export, where such clearance is applicable.
- Carriage and Insurance Paid – CIP
The seller delivers the goods to the seller’s preferred shipper, pay the cost of carriage to deliver the goods to a named destination, and procure insurance against damage or loss during said carriage on the buyer’s behalf.
- Carriage Paid To – CPT
Similar to CIP, except the buyer incurs all costs after goods are delivered to a named destination. However, the seller is obligated to clear the goods for export.
- Delivered At Place – DAP
The seller incurs all costs of carriage for deliver to a named place, with the exception of those related to import clearance. The seller also assumes all risk up to the point where the goods are unloaded by the buyer.
- Delivered at Terminal – DAT
The seller pays carriage costs for delivery to the terminal. As with DAP, the seller is off the hook for import clearance costs, although they do assume all risks up to the moment the goods are unloaded at the terminal.
- Free Carrier – FCA
The seller delivers goods that have been cleared for export to a specific place named by the buyer. The seller pays for carriage to the place named, and all expenses and risk of loss or damage to the goods passes to the buyer once the goods are delivered at the named location.
Incoterms Related to Sea and Inland Waterway Transport
Incoterms rules are intended to clearly communicate tasks, costs, and risks associated with the transportation and delivery of goods between buyer and seller. In addition, they establish where and when the ownership of goods takes place between the buyer and seller. They are accepted by most governments, legal authorities, and practitioners worldwide for the interpretation of most commonly used terms in international trade. Their intention is to reduce or remove uncertainties arising from different interpretations of the rules in different countries.4
- Cost and Freight – CFR
The seller either delivers the goods on board a vessel or procures said goods after delivery. As with CIF, risk of loss of or damage passes to the seller when the goods are on the vessel. The seller must contract (if required) and cover freight costs necessary to bring the goods to the named port of destination.
- Cost, Insurance and Freight – CIF
“Cost, Insurance and Freight” signifies to an agreement that 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 goods 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. “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.” Read more about 5 reasons buying on CIF terms may not protect your company.
- Free Alongside Ship – FAS
“Free Alongside Ship” refers to an instance where 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 goods are alongside the ship, and the buyer bears all costs from that moment onward.
- Free on Board – FOB
“Free On Board” communicates an agreement that 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 goods are on board the vessel, and the buyer bears all costs from that moment onward.
After reading this post, you are more familiar with the nature of Incoterms and a few common examples. Use this knowledge to increase your own company’s compliance and stay educated about the international trade community by visiting Exporta Wholesale.
About Exporta Technologies
Exporta Wholesale is the largest marketplace connecting suppliers in Latin America with buyers in North America. Today, we have a network of over 5,000 Latin American suppliers serving a variety of consumer goods and product categories in the United States.
Exporta’s marketplace offers buyers a full service experience in the origination, sourcing and managing of products. The platform was founded on the idea that curation and service are the most important elements in the buyer’s journey. Exporta’s marketplace is building technology that addresses the pains of sourcing products internationally at attractive prices.