The Incoterms® is a widely used sale term issued by the International Chamber of Commerce (ICC). The Incoterms® itself is an acronym of international commercial words. In today’s world, to succeed in exporting and importing, trade professionals must understand the strategies and knowledge required for successful international trade transactions.
The success and timeliness of these transactions impact an organization’s bottom line and are more likely to know payment options, risk mitigation strategies, export pricing strategies, contracts and effective cash flow management techniques and plans to manage disputes should they arise.
An essential part of learning these strategies and skills is knowing how to speak the language of international trade terms, as it’s filled with specialized terminology that may trip up even more experienced professionals from time to time.
What are Incoterms® 2020?
The Incoterms® are 11 individual rules that define some critical responsibilities of sellers and buyers in the international sales of goods. Each Incoterm® is expressed as a three-letter acronym with the place of delivery. For example, DAP is for Delivered at Place, and DDP is for Delivered Duty Paid. These terms hold universal meaning for buyers and sellers around the world. They are critically important because they are legal, commercial terms used to determine who (i.e., the buyer or the seller) is responsible for what during the shipping process. If you choose or agree to the wrong Incoterms in the contracts during negotiations with your international buyer, you could risk a financial hit.
Incoterms® are tool to specify who is responsible for paying for and managing various elements of the shipping process, including the item below:
- Transportation of the shipment, loading, unloading, and terminal charges.
- Cargo insurance.
- Export clearance, security documentation, export license (if required).
- Export formalities, packing, pre-shipment inspection.
- Customs clearance and import documentation, import license (if required).
- Import duties and taxes.
- Cargo unloading and delivery to the agreed-upon place
It also defines when the risk of loss and damage to goods transfers from the seller to the buyer. There are other risks to consider in an export transaction, such as liability for export compliance obligations and the cost of potential customs delay.
Can’t remember or don’t know what a specific International trade term means? Here are 11 helpful definitions of standard trade terms to make your next transaction or negotiation go more smoothly. The Incoterms® are divided into two categories based on modes of transport. The first is any mode of transportation and the second is transport using sea or inland waterway.
The 7 Incoterms® 2020 rules for any mode of transport.
EXW – Ex Works (insert place of delivery)
FCA – Free Carrier (insert named place of delivery)
CPT – Carriage Paid to (insert place of destination)
CIP – Carriage and Insurance Paid to (insert place of destination)
DAP – Delivered at Place (insert place of named destination)
DPU – Delivered at Place Unloaded (insert of the place of destination)
The 4 Incoterms® 2020 rules for Sea and Inland Waterway transport
FAS – Free Alongside Ship (insert name of the port of loading)
FOB – Free on Board (insert name port of loading)
CFR – Cost and Freight (insert name port of destination)
CIF – Cost Insurance and Freight (insert name port of destination)
Why use Incoterms® 2020?
Incoterms communicate a binding agreement between the buyer and seller that outlines the responsibilities between the manufacturer and purchaser of goods regarding the delivery to the products. While it is not a requirement for sellers to quote an Incoterm when selling internationally, the advantage of doing so helps avoid confusion over roles and responsibilities between the two parties. As language barriers and cultural differences are commonplace in international trade, these terms simplify an often-complicated process and help communicate a large portion of transferring the goods from the seller to the buyer.
When will I use Incoterms® 2020?
Unless specifically requested by a buyer, sellers often have preferred Incoterms they use that work best for them and their customers. Buyers can often have unique preferences, which are conveyed to sellers. Through this communication, buyers and sellers can agree on the ideal Incoterm for their deal.
For Incoterms to be contractually valid, the terms should be listed on the purchase agreement, sales invoice, or sales contract. As these are contractual terms, buyers and sellers should be clear with their agreement and not rely on verbal communication to define the responsibility of each party when shipping products internationally.
There is no special documentation or form needed when selecting an Incoterm; instead, the term should be listed in conjunction with the product price and defined as the agreed-upon incoterm.
Incoterms can change during an order process. For example, if a shipment was intended for sea, but due to delays or unforeseen circumstances, the load needs to be shipped via air, an Incoterm could change. As we discussed above, not all terms are valid for air travel. If there is a change in the terms, buyers and sellers would need to communicate this change, just as they would communicate any other change in a purchase agreement.
What Incoterms® 2020 do not cover?
Incoterms help communicate a large portion of the logistics and cargo transferring process, which is why most international traders opt to rely on them. While these terms share a lot, they don’t explain a significant amount of information. Buyers should be fully aware of what these terms mean and not included in each of these terms, as miscommunication could easily lead to misunderstandings and costly mistakes.
International Commercial Trade Terms help communicate the delivery terms of a product purchased internationally. These terms do not define the payment terms or other outside rights. They do not explain how the buyer should pay for the goods, and they do not determine who is responsible for the cargo in the event of defective, incorrect, or failed productions.
Incoterms do not exist to protect the buyer from fraud or guarantee the products in any way. The only term Incoterms defines is which party is responsible for the transportation process. Incoterms do not act as a contractual agreement for the sale of a product; instead, they help communicate a portion of the purchase agreement to both parties.
An aspect that can be confusing to some buyers is determining whether or not Incoterms protect buyers from the risk of damage, loss, or theft of cargo. Each Incoterms can help define these concerns; however, it is essential to point out that only two Incoterms require the seller to purchase insurance on the freight. Unless freight insurance has been agreed upon before a shipment, the buyer would need to buy insurance on the cargo separately.
How can I get help to manage my shipping terms?
Incoterms® 2020 is only a tiny part of the international shipping process. If you want to focus on your business more and outsource the international shipping matters, AnsarComp (M) Sdn Bhd is a suitable company that can help you with this. AnsarComp (M) Sdn Bhd can act as the legal importer and exporter of goods without owning them. While being technically responsible as the importer and exporter, Ansarcomp (M) Sdn Bhd’s job scope for Importer of Record (IOR) and Exporter of Record (EOR) service for our clients involves liaison such as courier services and/or forwarding agent companies for both shipment clearance and the client’s delivery. We are responsible for obtaining import permits and labels from SIRIM wherever necessary. We are offering our clients trade compliance solutions. Please click here to contact us.