International trading can pose many problems especially when it comes to the different ways business is carried out between countries. In business, you always want both parties to be on the same page to avoid any potential confusion.
The World Trade Organization (WTO) has produced a list of the most commonly used international trade terms. They provide a comprehensive overview and information ranging from a variety of different international trade terms relating to tariffs, trade associations, licensing and much more. It is recommended you review the list to increase your level of understanding and look up trade related words here.
Fortunately, the International Chamber of Commerce (ICC) additionally provides a series of harmonized “Incoterms” to help ease understanding when it comes to sales contracts. The Incoterms are a 3 letter international trade terms that relate to the most common sales practices. These international trade terms have gone through much iteration and, currently, it is in its eighth version – the “Incoterms 2010.” Furthermore, classification standards for the underlying goods and the industries that they are originating from exist.
Taken together, the international trade terms and incoterms 2010 create a standardized form of communication so that both parties in a trade agreement are on the same page. Incoterms 2010 is produced to avoid misunderstandings between parties, as well as make negotiations and coordination in business much easier.
Incoterms are essential abbreviations commonly used in international trade.
Incoterms Relating to Rules for Any Mode of Transportation
- EXW – Ex Works: This international trade term means that the seller of the goods delivers to the buyer at the seller’s premises or another specified place (factory, warehouse etc.). The seller is not required to load the goods onto the buyer’s vehicle or clear the goods with customs for export if appropriate.
- FCA – Free Carrier: This trade term means the seller of the goods delivers them to the carrier or alternatively a person nominated by the buyer at the seller’s location or named placed. It must be stressed that both parties should specify clearly the point within the name delivery as at this point the risk is transferred to the buyer.
- CPT – Carriage Paid To: This international trade term is similar to the FCA term, however it also means the seller must contract for and pay the costs of delivery for the goods
- CIP – Carriage and Insurance Paid To: Again, the same rules for FCA and CPT apply, however it also mandates that the seller pays for insurance cover against the risk of loss or damaged goods. Please note however only the most basic insurance is required, and if the buyer would like better insurance protection must either agree this with the seller or make their own arrangements.
- DAT – Delivered At Terminal: This Incoterm means that when the seller’s goods are delivered and once unloaded from the transport they are then placed at the disposal of the buyer at a specified terminal, port or place of destination. The term “terminal” refers a place, either covered or not such as a warehouse, quay, container yard, air or rail cargo terminal. The risk is borne by the seller in bringing the goods to the terminal, as well as unloading them.
- DAP – Delivered At Place: The Incoterm DAP means that the goods are placed at the disposal of the buyer by the seller. They are delivered to the named place and are ready for unloading. The seller bears the risks associated with bringing the goods to that location.
- DDP – Delivered Duty Paid: Furthermore than the goods being delivered awaiting unloading as seen in DAP, the goods are also cleared for import on arrival by the means of transport. The sellers has to pay all the costs relating to any duty that needs to be paid on export and import as well as carrying out the customs procedures.
Incoterms Relating To Sea and Inland Waterway Transport
- FAS – Free Alongside Ship: This Incoterm means the delivery by the seller is counted when the goods are placed alongside the vessel (e.g on a quay) chosen by the buyer at a specific port of shipment. The risk of loss or damage is transferred from the buyer to the seller when the goods are delivered alongside the ship.
- FOB – Free On Board: This international trade term is similar to the term FAS however it goes further, with the seller delivering them directly onto the vessel. It is when they are delivered on board the responsibility is transferred and from that moment the buyer bears all costs.
- CFR – Cost and Freight: This Incoterm means the seller delivers the goods onto the vessel and this is when the risk of loss or damage transfers from the seller to the buyer. What should be noted is that the seller must contract for as well as pay for the costs and freight required to bring the goods to the named destination port.
- CIF – Cost Insurance and Freight: As with CFR this Incoterm means the seller delivers the goods onto the vessel and this is when the risk of loss or damage transfers from the seller to the buyer. What should be noted is that the seller must contract for as well as pay for the costs and freight required to bring the goods to the named destination port. However, the seller also contracts for insurance to be taken out to protect the buyer from any risks, but only minimum cover is required. If the buyer wants additional coverage they must provide that themselves or expressly state it with the seller.
Know the existing rules – but feel free bargain about alternative rules
with your business partners.
International Trade Terms: Incoterms Are Not Always Necessary
You should be aware that the uses of Incoterms are not always necessary, they are only recommended to help you and reduce the level of confusion that international trading may cause. If there is a scenario you want that is not encompassed by an Incoterm you are more than able to expressly request it from the supplier. However you should seek out the advice from a logistics professional to ensure the contract is suited to your needs.