Incoterms: the essential guide to international trade
You've heard of Incoterms but don't quite understand what they mean? Or perhaps you're looking to clarify certain details? Whatever the case, this guide is designed to help you demystify this often complex subject.
What exactly is an Incoterm?
Incoterms, short for "International Commercial Terms", are standardized terms drawn up by the International Chamber of Commerce (ICC ). They clearly define the responsibilities of buyer and seller in a transaction. These terms cover various aspects such as costs, risks, delivery points and customs formalities.
However, it is essential to understand their specific features. Incoterms do not deal with the transfer of ownership of goods, intellectual property rights or import-export prohibitions. Nor do they replace the sales contract, or deal with any disputes arising from it. Their main objective? To clarify responsibilities.
Simply put, Incoterms answer the fundamental question of international trade: "Who does what, where and when?
What are the 11 Incoterms?
Updated every 10 years by the ICC, the latest version of Incoterms came into force on January 1, 2020. These 11 terms have been designed to cover a multitude of situations, from total assumption of responsibility by the seller to almost total liability on the part of the buyer.
1. EXW (Ex Works / À l'Usine):
Seller's obligations: To make the goods available to the buyer at his own premises or at another agreed location (factory, warehouse, etc.).
Buyer's obligations: Assumes all costs associated with transporting the goods from the seller's premises to the destination. Assumes all transport risks.
2. FCA (Free Carrier):
Seller's obligations: Deliver the goods to the carrier designated by the buyer. Goods are cleared through customs for export.
Buyer's obligations: Choose the carrier, pay the freight charges and assume the risk once the goods have been handed over.
3. FAS (Free Alongside Ship):
Seller's obligations: Deliver the goods alongside the ship at the specified port.
Buyer's obligations: Assume all costs and risks once the goods have been placed alongside the vessel.
4. FOB (Free On Board):
Seller's obligations: Loading the goods on board the ship.
Buyer's obligations: Pay sea freight and assume all risks once goods are on board.
5. CFR (Cost and Freight):
Seller's obligations: Pay costs and freight to bring the goods to the port of destination.
Buyer's obligations: Assume risk as soon as goods are on board.
6. CIF (Cost, Insurance, and Freight):
Seller's obligations: Pay costs, freight and insurance to bring the goods to the port of destination.
Buyer's obligations: Assume the risk as soon as the goods are on board the ship.
7. CPT (Carriage Paid To / Port Payé Jusqu'à):
Seller's obligations: To pay for transportation of the goods to the agreed destination.
Buyer's obligations: Assume the risk as soon as the goods are handed over to the first carrier.
8. CIP (Carriage and Insurance Paid to / Port et Assurance Payés Jusqu'à):
Seller's obligations: To pay for transport and insurance to the agreed destination.
Buyer's obligations: Assume the risk as soon as the goods are handed over to the carrier.
9. DPU (Delivered at Place Unloaded):
Seller's obligations: To deliver the goods and bear all costs until they are unloaded at the agreed location.
Buyer's obligations: Take possession of the goods once unloaded.
10. DAP (Delivered At Place / Rendu à Terme):
Seller's obligations: To transport the goods to the agreed destination and assume all risks except unloading.
Buyer's obligations: Unload the goods.
11. DDP (Delivered Duty Paid / Rendu Droits Acquittés):
Seller's obligations: To insure transport, pay all import duties and charges, and assume all risks until delivery at the agreed location.
Buyer's obligations: Take possession of the goods.
Each of these Incoterms has specific implications in terms of costs, risks and responsibilities for both buyer and seller. The choice of the appropriate Incoterm often depends on the nature of the goods, the location of the parties, their specific preferences and requirements, and the customs and tax regulations of the exporting and importing countries.
Incoterms therefore provide a clear structure to reduce misunderstandings between buyers and sellers, avoid disputes and ensure that transactions run as efficiently as possible. They are the backbone of many international commercial transactions.
Which Incoterms are most commonly used?
Although all Incoterms have their own importance and are adapted to different situations, some are favored for their flexibility and adaptability to the majority of transactions. Among the most commonly used are :
- EXW (Ex Works): Because of its simplicity for the seller, it is often chosen for internal shipments or for export beginners.
- FOB (Free On Board): widely used in maritime transport, this clearly defines the distribution of costs and risks between buyer and seller.
- CIF (Cost, Insurance, and Freight): Prized for its clarity of cost coverage and inclusion of insurance.
- DDP (Delivered Duty Paid): Favored by buyers who prefer an "all-inclusive" solution, where the seller takes care of everything up to final delivery.
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Why are some Incoterms specific to maritime transport?
When it comes to international trade, sea transport plays a predominant role. Indeed, the vast majority of international trade in goods takes place by sea. It is in this context that certain Incoterms have been designed specifically for sea transport. These terms take into account the particularities and constraints associated with this mode of transport, particularly with regard to the loading and unloading of goods. The rules specific to maritime Incoterms reflect the complex nature of maritime transport, where considerations such as the time of transfer of risk or the exact location of delivery are crucial.
What are the 4 maritime Incoterms?
- FOB (Free On Board)
- CFR (Cost and Freight)
- CIF (Cost, Insurance, and Freight)
- FAS (Free Alongside Ship)
And what about other modes of transport?
It's crucial to note that Incoterms are not exclusively maritime. They apply to all types of transport, whether road, rail or air. Terms such as EXW (Ex Works) or DDP (Delivered Duty Paid) are said to be "multimodal", as they apply irrespective of the mode of transport chosen, guaranteeing clarity in the obligations of the parties involved.
Incoterms: The universal language of international trade
Incoterms are to international logistics what the highway code is to driving: they eliminate ambiguities and ensure that everyone speaks the same language. Choosing the right Incoterm is essential, as it directly influences profitability, cash flow and liability. Don't leave your choice to chance. Deepen your knowledge, familiarize yourself with their nuances and, if necessary, consult an expert to guide you through this crucial area of international trade.
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Why is it important to understand Incoterms in international trade?
Incoterms, or "International Commercial Terms", are crucial in international trade, as they clearly define the responsibilities of buyer and seller in a transaction. By providing uniform terminology, Incoterms eliminate ambiguities about who is responsible for costs, risks and customs formalities at each stage of the transport of goods. Understanding these terms helps avoid misunderstandings, reduces potential disputes, and ensures a smooth transaction between the parties involved. What's more, a good grasp of Incoterms can improve profitability and logistical efficiency, which is essential to the success of international business operations.
How to choose the right Incoterm for your international transaction?
Choosing the right Incoterm depends on a number of factors, including the nature of the goods, the location of the parties involved, the specific preferences of the buyer and seller, and the customs regulations of the exporting and importing countries. It's important to consider who will bear the risks and costs at each stage of transport, as well as customs formalities. For example, if a buyer wishes to minimize liability and formalities, an Incoterm such as DDP would be appropriate. Conversely, if a seller prefers to transfer risk early, EXW could be chosen. It is often advisable to consult an international trade expert to ensure that the Incoterm selected corresponds to the logistical needs and capabilities of the parties involved.
What are the four Incoterms specific to maritime transport, and how do they differ from other Incoterms?
The four Incoterms specific to sea freight are FOB (Free On Board), CFR (Cost and Freight), CIF (Cost, Insurance, and Freight), and FAS (Free Alongside Ship). These terms differ from the other Incoterms in that they are specially adapted to the requirements of sea freight. For example, FOB defines the transfer of risk when the goods are loaded on board the ship, while FAS implies that the seller delivers the goods alongside the ship. CFR and CIF include transportation costs to the port of destination, with CIF adding insurance coverage. These distinctions reflect the specificities and logistical requirements of sea freight, which do not necessarily apply to other modes of transport.
What are the most popular Incoterms and why are they so popular?
Among the most commonly used Incoterms are EXW (Ex Works), FOB (Free On Board), CIF (Cost, Insurance, and Freight), and DDP (Delivered Duty Paid). EXW is popular for its simplicity, as the seller only has to make the goods available at its location. FOB is preferred in sea freight, allowing clear allocation of costs and risks until the goods are loaded onto the ship. CIF is appreciated for its cost coverage and the inclusion of insurance up to the port of destination. Finally, DDP is often chosen by buyers who prefer the seller to take care of all formalities, including import duties, until final delivery. These Incoterms are popular because they offer flexibility and clarity for a wide range of commercial scenarios.
Why are some Incoterms specific to maritime transport?
Some Incoterms, such as FOB (Free On Board), CFR (Cost and Freight), CIF (Cost, Insurance, and Freight), and FAS (Free Alongside Ship), are specifically designed for sea freight, due to the unique particularities and complexities of this mode of transport. These terms take into account factors such as the loading and unloading of goods onto and off a vessel, the transfer of risk, and specific maritime formalities. Maritime transport is one of the main means of exchanging goods internationally, and the maritime Incoterms provide a clear structure for managing the responsibilities and obligations associated with these transactions, thus guaranteeing efficient and secure management of maritime operations.
How do Incoterms facilitate international logistics and reduce the risk of misunderstandings?
Incoterms facilitate international logistics by providing a standardized framework that clarifies the responsibilities of buyer and seller at each stage of the goods transportation process. By clearly defining who is responsible for costs, risks and customs formalities, Incoterms minimize misunderstandings that might otherwise arise due to differences in language or interpretation of commercial contracts. This helps prevent disputes, improves transaction efficiency, and ensures that all parties understand their respective obligations. Thanks to Incoterms, international trade is smoother, and commercial operations are more predictable and secure.
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