Increasing globalisation means that worldwide import and export is rapidly increasing. Do you import or export goods to and from abroad? Then you have to deal with International Commercial Terms, also known as Incoterms. This article provides you with all the relevant information about the applicable 2019 Incoterms and the most important information has been summarised in a useful infographic!
What are Incoterms?
Incoterms (International Commercial Terms) were developed in 1936 by the International Chamber of Commerce. They were introduced to bring clarity to an international trade problem where parties from different countries were interpreting transport agreements differently.
Incoterms are literally standardised international terms of delivery, which serve as a contract between the seller and buyer. They describe all tasks, risks and costs associated with the transaction of goods worldwide and thus constitute the most important trading conditions.
When do Incoterms apply?
Incoterms are used to agree on the most important contractual terms and obligations for global trade. This includes the export, import and transit of goods.
The transport contract, transport insurance, selecting a place of delivery and the transfer of risk, information obligations and more are determined by the Incoterms. Incoterms provide answers to the following questions:
- Which party is responsible for shipping costs?
- Which party is responsible for insurance costs?
- Which party is responsible for import costs?
- Which party is responsible for customs clearance?
- Which party is responsible for customs processing?
- Which party is responsible for transport and where is it going to?
- Which party is responsible for the goods and until when?
In short, Incoterms are the solution to an international trade problem where parties from different countries were interpreting transport agreements differently. Incoterms were first drawn up in 1936 and have been amended seven times since then. Every 10 years they are renewed or adapted to new situations. The current Incoterms are those drafted in 2010.
Make sure to check the website of the International Chamber of Commerce for new terms before the end of this year. You can expect to see some changes in 2020 when the 2020 Incoterms go into effect.
How do you use Incoterms?
Incoterms are a way of formalising trade agreements. If you are shipping products outside of the EU, then add the Incoterms to your commercial invoice.It is also important to reference them in your general terms and conditions. It is important to inform your customers whether they are responsible for customs costs, for example. As seller, you determine which Incoterm to use. Be aware that not all carriers support every Incoterm.
It is worth checking with the carrier you plan to use for your international shipment.
What role do Incoterms play?
Incoterms clearly have an important role to play, they are critical for the international shipment of goods. We have summarised the various functions below for you:
Most important functions of the Incoterms
- Cost allocation: which contract partner is responsible for which cost?
- Allocation of liabilities: which contract partner is liable on which route?
- Risk transfer: which contract partner covers which risk at what time?
Other functions of the Incoterms
- Goods documents: which contract partner buys the relevant goods documents?
- Customs: which contract partner is responsible for customs clearance?
- Shipping documents: which contract partner buys which transport documents?
- Shipping insurance: which contract partner insures the goods for which part of the transport?
- Information: which contract partner informs the other at what point in time and about what?
- Goods inspection: which contract partner carries out the goods inspection?
- Packaging: which contract partner determines the type and packaging method?
What Incoterms are there exactly?
There are 11 different Incoterms in total. The most important difference between these International Commercial Terms is the point at which the risk shifts from seller to buyer. So, at which point is the buyer responsible for
- transport costs;
- shipping risk;
- and insurance?
An overview of all 2010 Incoterms up to and including 2019
The three most common Incoterms
1) EXW – Ex Works (from the factory): seller must give buyer access to the goods at an agreed location. The buyer bears almost all costs and risks during the entire shipping process.
2) DAP – Delivered At Place (free to site): the seller bears the costs and risks during the transport of the goods to an agreed address. Once the goods have arrived at this address and are ready to be unloaded, the risk is transferred to the buyer.
3) DDP – Delivered Duty Paid (free including duties): the seller is liable for the costs and risk of transport, carries out the export and import responsibilities and pays any import duties. Once the goods have arrived at this address and are ready to be unloaded, the risk is transferred to the buyer.
Remaining Incoterms (for all types of transport)
4) FCA – Free Carrier (freight-free to carrier): the seller must deliver the goods at his own risk and expense to the carrier at an agreed place. The seller is also responsible for the clearance of the goods for export.
5) CPT – Carriage Paid To: the seller has the same responsibilities as with FCA, but in this case also pays the delivery costs.
6) CIP – Carriage Insurance Paid To: the same seller responsibilities as with CPT, only in this case the seller is obliged to pay the minimum possible insurance coverage. A more comprehensive insurance must be purchased by the buyer.
7) DAT – Delivered At Terminal: the seller is responsible for the costs and risks associated with the delivery of goods to an agreed terminal. This can be an airport, warehouse, road or container depot. The selling party arranges for all customs formalities and unloads the goods at the terminal. The buyer arranges customs clearance and any associated rights.
Incoterms for sea freight and inland shipping
8) FAS – Free Alongside Ship: the seller bears all costs and risks until the goods have been delivered alongside the ship. From that point the risk is borne by the buyer who must also arrange export and import clearance.
9) FOB – Free On Board: the seller bears all costs and risks until the goods are on board the ship and also arranges the export clearance. As soon as the goods have been delivered to the ship, the buyer bears all responsibilities.
10) CFR – Cost And Freight: the same applies to the seller and buyer as with FOB, but in this case the seller must also pay for the transport of the goods to the port.
11) CIF – Cost, Insurance and Freight: the seller has the same obligations as with CFR, but also pays the (minimum) insurance costs. A more comprehensive insurance must be purchased by the buyer.
To make the differences clear, we have put the 11 Incoterms side by side in one overview. The table below shows exactly which party is responsible for which part of the transport:
Four groups within the Incoterms
To make the biggest differences between the Incoterms more transparent, we’ve divided them into four groups:
Group E: EXW is the only “collection” Incoterm, where nearly all costs and risks are borne by the buyer during the entire shipping process.
Group F: FCA, FAS and FOB are the three Incoterms where the seller does not cover the costs and risks of the main transport. As soon as the goods are handed over to the carrier, the costs and the risk of the main transport are transferred to the buyer.
Group C: CPT, CIP, CFR and CIF are the four Incoterms where the seller is responsible for all costs of the main transport. As soon as the goods are handed over to the carrier, only the risk of the transport is transferred to the buyer. The costs and any insurance remains the risk of the selling party.
Group D: DAP, DAT and DPP are the three Incoterms where the selling party bears all costs and risks until the arrival of the goods at an agreed destination.
Which Incoterms are valid?
At the time of writing this article (March 2019), the Incoterms 2010 described above are still valid. These were implemented as the 7th revision on 1 January 2011. Despite some amendments, the 2010 Incoterms largely correspond to those from 2000.
Incoterms 2010 v.s. Incoterms 2000
Changes in the last version of the Incoterms:
- 11 Incoterms instead of 13 variants
- Deletion of the DAF, DES, DEQ and DDU Incoterms
- DAP and DAT Incoterms added
- Incoterms now also apply nationally
- Redefinition of the risk transfer in FOB, CFR and CIF
- Electronic and paper communication are considered the same
Most commonly used Incoterms in e-commerce
For online shops that sell internationally, DAP (Delivered At Place) is the most commonly used Incoterm. In this case, you as the seller bear the costs and risks until the moment the package arrives at the agreed destination. This can be a residential address or collection point. Are import or customs fees charged? These are then paid by the buyer.
Keep in mind that you are only using the Incoterms listed in the general terms and conditions of your online store. It is also important that the carrier that you have selected to ship your packages supports these Incoterms.
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Incoterms 2010 infographic
Would you like to view all of this in one clear infographic or perhaps share it? Check out our Incoterms 2010 infographic!