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The International Commercial Terms (Incoterms©) feature a series of three-letter trade terms which each presents accurate rules for exchange of goods for international sales contracts, and deal with the passage of risk from the seller to the buyer, and which party bears which costs. Helping to eliminate the ambiguity to the parties,
First published by the International Chamber of Commerce (ICC) in 1936, Incoterms© have been refined every decade, and have gradually developed into the essential trade terms widely recognized in the globe. The statistics from ICC/Paris show that Incoterms© are used in 90% of the global trading contracts, facilitating trillions of dollars annually, with its influence increases in a persistent manner. In the latest edition, Incoterms© 2020, offering in more than 29 languages, include 11 trade terms - some rules remain as in the previous version, while some are rectified after evaluations in international conferences.
The Eleven trade terms under Incoterms© 2020
Seven of them (EXW, FCA, CPT, CIP, DAP, DPU, DDP) can be applied independently by which the goods are transported in a combined multimodal way. Whereas the remaining four terms (FAS, FOB, CFR, CIF) are clauses mainly for water or inland waterway transportation. Some of the most commonly used Incoterms© are introduced as follow:
EXW (Ex Works) – under this Incoterm, the seller shares the minimal duty of getting the goods packed and available for collection by the buyer in the warehouse; whereas the buyer take over the entire responsibility from picking up the goods, loading, taxes, freight and insurance and clearance charges, all the way through delivering them to the destination. Usually, EXW may be the cheapest option offered by the seller, yet buyer should cautiously consider the additional charges for arranging a dedicated delivery, which may end up costing even more than applying other terms.
DDP (Delivered Duty Paid) – On the polar contrary to EXW, DDP implies that the sellers agree to be responsible for all the costs and risks in delivering the goods to the final destination named by the buyer. The buyer only needs to wait for the goods to arrive, and usually offer help in unloading it, despite not a necessity. DDP may probably appear as the most expensive option offered, but the buyers can be freed from the logistics and coordination with which they may not be familiar.
FOB (Free on Board) – Under this Incoterm, seller and buyer share the responsibilities in a relatively even manner, but it merely applies to sea or inland waterway transportation. It dictates that the seller bears the responsibility of the initial carriage, the export clearance, arrangement of transport, until loading the goods onto a ship in favor of the buyer. The transfer of risk happens once the goods are loaded onto the ship. The buyer will take charge of everything from there, including cost of freight, unloading, import clearance, insurance and the cost of transport. FOB can be a cost-effective option for the buyers depending on the negotiable price obtained from the freight forwarder.
Differences with other trade terms
There may be many other trade clauses exist in particular countries and regions, but Incoterms are the one dominating the global trade market. Unlike other domestic trade policies (e.g. the Harmonized Tariff Schedule of the United States), Incoterms© offer universal fair rules uncodified for national purposes, and provide transparency and accuracy for international business.
Whilst every effort has been made to ensure the accuracy of this article it is general in nature and does not constitute legal advice of any kind. You should seek your own personal legal advice before taking legal action. We accept no liability whatsoever for loss arising out of the use or misuse of this article.
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