Do you know your Incoterms?

There’s lots you need to know when dealing with international trade. One particularly important term is “incoterms”.

Incoterms is short for International Commercial Terms which are a set of standard rules that define the responsibilities of the buyers and sellers in international trade transactions. They clearly specify who is responsible for the cost, risk and logistics of transporting the goods from the seller to the buyer.

Common Incoterms

The latest version is Incoterms 2020 which details 11 Incoterms. The most common are:

• EXW (Ex Works): The seller’s responsibility ends when the goods are made available at their premises. The buyer bears all costs and risks from that point onward.

• FOB (Free on Board): The seller is responsible for delivering the goods to the port of shipment and loading them onto the vessel. The buyer assumes responsibility once the goods are on board the vessel.

• CIP (Carriage and Insurance Paid to): The seller is responsible for arranging and paying cost of carriage to a nominated person at an agreed place of destination. The risk transfers from seller to buyer where the goods are handed over to the first carrier.

• DAP (Delivered at Place): The seller is responsible for delivering the goods to the buyer’s chosen destination, but the buyer bears the risk and cost of unloading

Why Do Incoterms Matter?

Understanding Incoterms is very important for buyers and sellers engaged in International Trade. By clearly defining each party’s responsibilities, Incoterms help avoid any misunderstandings, disputes, unexpected costs and streamline logistics with smoother transactions across countries.

Insurance and Incoterms

The only Incoterms that need insurance are CIP and CIF (Cost, Insurance and Freight) with the responsibility resting with the seller. The risks of transit, and any subsequent insurance, are accepted by whoever pays the transport costs. So if, for example, FOB terms are agreed, the seller is responsible to the point of loading onto the vessel and should consider taking out adequate insurance up to that point. But from there, the buyer is responsible and should consider taking out adequate insurance for the main transit.

Conclusion

Incoterms play a vital role in International Trade. They provide a common language for buyers and sellers which helps them to negotiate and manage their obligations. They also ensure smoother and more efficient transactions in the global marketplace.

Have a question about Incoterms? Speak to our team today.