Friday, September 8, 2023
Incoterms: concept, application and updates
In a company’s foreign trade management, there are many activities. Import and export operations require attention to a series of bureaucratic processes. In addition, everything must be done according to legislation, in order to avoid fines or headaches.
But that’s not all. Deadlines are equally important. That is, everything needs to be done within the predefined time frame, to guarantee compliance and customer satisfaction.
So many challenges! This work is especially strategic because it also involves trade relations among different countries. That’s why, on this blog post, we’ll introduce Incoterms, an acronym for International Commercia Terms.
Are you curious to know more? Go ahead and read the article!
Incoterms: concept and application in foreign trade
Incoterms is the set of standardized norms that regulate some of the main aspects of foreign trade. They’re fundamental to guide the calculation of expenses for companies that sell abroad.
Incoterms rules indicate a series of practical aspects, such as who pays for the shipping of merchandise, delivery points and the person responsible for contracting insurance.
It’s worth noting that these norms are applied only to facilitate negotiations between exporters and importers. That is, they’re not valid for transport companies, insurance companies and brokers.
Incoterms was created in 1936 by the International Chamber of Commerce. Since then, it’s been updated many times, in view of the evolution of the logistics market.
What are the Incoterms currently used?
The last update of Incoterms took place in 2010. Since then, there are 11 Incoterms separated by categories E, F, C and D. Get to know each one of them below:
CATEGORY E (EX)
The Incoterm of this category is presented by the letters EXW. In practice, the acronym indicates that importers must pick the merchandise up at the manufacturer's address, taking on all the costs and risks.
Incoterm EXW – Ex Works – At the origin (established place of delivery)
Merchandise is available to the buyer at the seller’s place, not cleared for export and not loaded onto any collecting vehicle.
It’s up to the buyer to pay the costs of removing the merchandise from the seller’s place. In this case, the Contract of Purchase and Sale must have an explicit clause on this regard.
Incoterms EXW must not be adopted if the buyer is unable to take on the export formalities. However, it can be used in any mode of transport.
CATEGORY F (FREE)
Here, the importer is responsible for contracting and paying for the main freight and international insurance. Category F encompasses the Incoterms FAS, FOB and FCA. Check out the definition of each one:
Incoterm FAS – Free Alongside Ship
The seller finalizes their participation in the process when they place the merchandise next to the carrier ship, on the dock or in vessels for loading. From that moment on, the buyer takes on all risks and costs with loading, freight payment, insurance and other expenses. This term is exclusive for waterborne transport.
Incoterm FOB – Free On Board
In this term, the seller ends his obligations the moment the merchandise crosses the ship’s rail at the port of shipping. Thereafter, the buyer takes on responsibilities related to losses and damages.
The seller is responsible for the clearance of merchandise for export. This term is used only for waterborne transport.
Incoterm FCA – Free Carrier
In this term, the seller fulfills his part of the process by delivering the product, cleared for export, to the care of the international carrier indicated by the buyer, at a predefined location.
From this moment, the buyer is responsible for expenses related to possible losses or damages to the merchandise.
In this term, the location chosen for delivery is very important. That’s because it guides the definition of responsibilities regarding the loading and unloading of merchandise:
For delivery at the seller’s premises: they’re responsible for loading onto the buyer’s collector vehicle;
For delivery at any other location: the seller’s not responsible for unloading the vehicle. Therefore, the buyer can appoint another responsible person, as long as it’s not the carrier, to receive the merchandise.
In this case, the term is applied to any mode of transport.
CATEGORY C (CARRIAGE)
In this category, the exporter is responsible for contracting and paying for international freight. On the other hand, the importer takes on the responsibility of potential risks and damages suffered in international transport.
The category encompasses Incoterms represented by the acronyms CFR, CIF, CPT and CIP.
Incoterm CFR – Cost And Freight
In this term, the seller’s responsible for paying the costs of loading the merchandise onto the ship, that is, to the designated port of destination. Export clearance is also the seller’s responsibility.
As soon as the merchandise crosses the ship’s rail, risks of loss or damage are taken on by the buyer. To protect the merchandise, it’s ideal to contract insurance.
Incoterm CFR is exclusive for waterborne transport.
Incoterm CPT – Carriage Paid To
This term establishes that the seller must contract and pay for the freight to take the merchandise to the defined place of destination.
When the merchandise is handed over to the carrier’s custody, risk of loss and damage goes to the buyer. The seller is responsible for clearing the merchandise for export.
This clause can be applied to any mode of transport.
Incoterm CIP – Carriage And Insurance Paid To
This term encompasses the attributions of the seller set on the Incoterm CPT, in addition to contracting and paying insurance to the destination.
As soon as the delivery of merchandise is made to the carrier, risk of loss and damages, as well as possible additional expenses, are transferred to the buyer.
As the insurance contracted by the seller has minimum coverage, it’s up to the buyer to assess the need of additional insurance.
This term is applied to any mode of transport.
CATEGORY D (DELIVERY)
This is the category of arrival, that is, the exporter takes on all the risks until the merchandise is delivered. It encompasses the Incoterms DAP, DAT and DDP.
Incoterm DAP – Delivered At Place
As the name suggests, Incoterm DAP consists of delivery made on site.
In this case, the seller is responsible for various steps:
- Merchandise clearance for export in their country;
- International transport;
- Merchandise delivery at the established location.
The buyer is responsible for two processes:
- Merchandise clearance for import at the destination;
- Unloading merchandise.
It’s worth noting that the risk of transport is taken on by the seller until the arrival at the established location. When the product leaves the vehicle of transportation, the risk is transferred to the buyer.
In practice, this term is applied to any mode of transport.
Incoterm DPU – Delivered At Place Unloaded
In this term, the seller also takes on a series of tasks. It’s up to them to:
- Clear merchandise for export in their country;
- Carry out international transport;
- Unload merchandise and deliver it to the cargo terminal indicated in the contract.
The seller’s responsibility ends when they deposit the merchandise at the cargo terminal.
The DPU term is used in every mode of international transport.
Incoterm DDP – Delivered Duty Paid
This is the Incoterm that requires the highest degree of commitment from the seller. That’s because they’re responsible for delivering the product to the buyer and clearing merchandise for import at the indicated destination.
It’s worth noting that the Incoterm DDP is the opposite of the Incoterm EXW.
It can be used in any mode of transport, but it should be avoided when the seller is unable to obtain the necessary documents to enable the merchandise import.
Incoterms 2020: updated version of the terms
The update of Incoterms was studied in 2019 but an Editorial Committee, with the participation of representatives from European countries, China and Australia. As a result of this work, in September 2019, the ICC released the Incoterms 2020.
The new version of the terms took effect in January 2020. Therefore, it’s worth checking out the main changes brought on by the new version. Take a look at some of them. Incoterms 2020:
- Present different levels of insurance coverage for Incoterms CIF and Incoterms CIP;
- Define agreements for transport with proprietary means of transportation for Incoterms FCA, DAP, DPU and DDP;
- Alter the Incoterm Delivered at Terminal (DAT) for Incoterm Delivered At Place Unloaded (DPU);
- Present requirements related to security in obligations and transportation costs.
To learn about the new version in full, you can purchase the eBook in English or the pocket guidebook Incoterms 2020 on the ICC website.
Managing imports and exports is challenging. But knowing the rules makes it easier, right? Keep reading the ASIA SHIPPING blog to learn more and optimize foreign trade processes!
