Over 11 billion tons of cargo is shipped annually, representing 80% of the supply chain. However, research shows that shippers lost an average of 661 containers in 2022.
Thus, to avoid this, successful traders must create comprehensive shipment plans to identify how their cargo will reach the final destination, who will pay for losses and damages, and what costs fall into the exporter and importer’s responsibility. Shipping Incoterms are standardized rules and regulations that help you answer these questions!
With these internationally recognized, exporters and importers can enjoy a smooth, seamless, and error-free transaction. Below, we’ll explore the 11 Incoterms and how they benefit sellers and buyers:
Understanding Incoterms 2020
Incoterms are globally recognized selling terms facilitating successful communication and trade between buyers and sellers. These legally binding agreements help traders determine which party is responsible for the cargo’s costs, responsibilities, and risks.
The International Chamber of Commerce updates these rules every ten years to ensure consistency with the latest international trade processes. The ICC revised its instructions on January 1st, 2020, and grouped the rules into two primary categories, depending on the mode of transport.
Let’s take a look at this division:
Incoterms Rules for All Transportation Modes
Carriage & Insurance Paid (CIP)
CIP indicates that the seller will cover the shipping and insurance costs. Once the shipment reaches the pre-determined destination, the cargo transfers to the buyer, making them responsible for the rest of the shipping process.
With CIP, the ICC requires sellers to buy freight insurance.
Carriage Paid To (CPT)
CPT shipping terms designate the shipping costs and unloading responsibilities to the seller. However, the buyer must unload the cargo at the defined delivery spot and transport it to its final destination.
Delivered at Place (DAP)
In DAP, the sellers must deliver the goods to their final destination. Next, the buyer has to unload the shipment and pay for customs clearance, import duty, and customs clearance.
Delivered Duty Paid (DDP)
With DDP, sellers are responsible for the cargo’s delivery to a determined location, including clearing taxes, duties, and clearances. After that, the responsibility shifts to the buyer, who must unload the shipment and cover relevant costs.
Delivered at Place Unloaded (DPU)
DPU terms that sellers must carriage, deliver, and unload the cargo at its final location. Once done, the buyer is responsible for clearing taxes, customs clearance, and import duty.
EXW indicates that the seller is responsible for packing the goods, whereas the buyer must pack and ship the cargo. Moreover, with EXW, the consumer bears the shipment risks.
Free Carrier (FCA)
FCA terms require the seller to transport the cargo to its final destination before transferring responsibilities to the buyer. Therefore, the customer is responsible for unloading and paying for the goods.
Incoterms Rules for Sea and Waterway Transportation
Cost Insurance and Freight (CIF)
With CIF, the seller must pay for the shipping and insurance costs. Once the goods arrive at the requested port, the buyer is responsible for covering unloading and importing expenses.
Cost and Freight (CFR)
CFR involves the seller covering the goods and transportation costs. Next, the buyer must unload and import the goods to the required country.
Free Alongside Ship (FAS)
FAS requires the seller to handle the export process until the goods reach the carrier vessel. After that, the buyer is responsible for the cargo’s loading, costs, and risks.
Free on Board (FOB)
FOB indicates sellers and buyers are equally responsible for overseas transportation costs, risks, and liabilities.
What are the Differences between Freight Collect and Prepaid?
Freight Collect and Prepaid are common international freight terminologies. The phrase “Freight Collect” refers to the following four Incoterms that require buyers to cover freight charges:
Contrarily, “Freight Prepaid” involves the seller paying for the shipping costs, including:
What are Incoterms Responsibilities?
As discussed, not all Incoterms are applicable for all types of transportation. Thus, knowing which Incoterms are valid for inland waterway, land, air, and sea transport is crucial to cover risks, expenses, and liabilities.
Remember the Incoterm mentioned above division to avoid confusion and ensure successful international shipment.
Who Decides Incoterms Rules?
Incoterms are international trade terms that reflect the latest global trade processes. So, the ICC Commission updates these rules every ten years with a party of specialized experts from numerous fields.
What are the Benefits of Using Incoterms?
Incoterms create a binding agreement between the buyer and seller, outlining the responsibilities, costs, and risks. Companies can ensure seamless communication and avoid role confusion with these standardized terminologies.
Language barriers can complicate international trade, so using globally recognized terms can simplify the transfer of goods. Besides, Incoterms facilitates cost and liability management to ensure a successful and error-free shipping process!
What’s not Included in Incoterms- Things to be Aware of as a Buyer
Incoterms are crucial to highlight the responsibilities of the buyer and sellers during overseas transportation. However, these rules do not cover everything:
- It does not identify the sale’s condition, types of foods, and contract price
- It doesn’t outline when ownership of the cargo shifts from the seller to the buyers
- It will not specify the documentation sellers must provide to the buyer for customs clearance
- It does not define the liability for the failure to provide the cargo on time or dispute resolution strategies
Types of Insurance Sellers’ Need when Shipping CIF/CIP Intercom
CIF and CIP Incoterms require sellers to obtain freight insurance before shipment. Both terms have unique requirements, which includes:
- CIP requires sellers to purchase insurance with the Institute Cargo Clause A coverage.
- CIF- Sellers must obtain freight insurance with a minimum Institute of Cargo Clause C coverage.
How Do Buyers and Sellers Determine the Ideal Incoterm?
Most sellers select Incoterms that match their and the buyer’s unique needs. However, buyers can communicate with the trader to agree on the best Incoterm for their cargo.
Moreover, sellers should list the terms on the purchase agreement, contracts, and invoice for Incoterms to be valid. However, no additional documentation or forms are required for selecting an Incoterm.
The Final Words
Interesting Related Article: “All About Freight Services- A Guide“