Why Incoterms are needed
Incoterms are rules for the delivery of products in international trade. They specify the rights and obligations of the seller and the buyer in logistics.
Incoterms is a set of terms, each of which sets out certain logistics conditions. They are in effect in many countries around the world, including Europe and America. Thanks to generally accepted standards, it is easier for participants in global trade to conclude supply contracts. The parties do not need to separately agree on each logistics condition: it is enough to indicate a specific term – and it will be clear which rules apply to the transaction.
The Incoterms document standardizes the activities of sellers and buyers. This allows:
- to form a common and understandable legal language, to smooth out differences between legal systems and customs;
- clearly define the rights and obligations of the parties;
- avoid mistakes when interpreting regulations in different countries and bodies;
- simplify the translation of the contract into another language;
- reduce the likelihood of disputes or facilitate their resolution;
- increase business confidence in global trade.
What conditions does Incoterms regulate?
The rules define:
- at what point does responsibility for damage or loss of cargo pass from the seller to the buyer;
- when and where the supplier transfers the goods to the buyer, that is, at what point the obligations are considered fulfilled;
- how transportation costs and responsibilities for insurance, customs clearance, and loading and unloading operations are distributed.
The document does not fix:
- the procedure for transferring ownership of products;
- terms of payment for cargo, registration of accounts and invoices ;
- force majeure and its consequences;
- liability of the parties for breach of the transaction.
These standards are spelled out in the contract as separate clauses.
Classification of delivery terms Incoterms 2020
Incoterms is not a single term, but a whole library of conditions that are divided into groups. It is not easy to remember them all, but the main thing is to understand the logic:
- Group E : The supplier does nothing at all, just delivers the goods to the doorstep of his warehouse. For example, the EXW (Ex Works) condition.
- Group F : Buyer undertakes delivery from a specific location. For example, FCA (Free Carrier).
- Group C: The supplier arranges transportation, but the buyer bears the risks after shipment. CIF (Cost, Insurance, Freight) and CPT (Carriage Paid To) are popular here.
- Group D : Maximum care from the supplier. For example, DDP (Delivered Duty Paid), where the supplier delivers the goods directly to your warehouse, paying all duties and taxes.
Incoterms terms
The document consists of 11 terms. 7 of them are suitable for delivery by any transport, and 4 apply only to transportation by water. The first letter of the term indicates the group to which the rule belongs.
EXW
| Salesman | Buyer | Transfer of responsibility |
| Packs products.Transfers goods to the buyer at its own warehouse or at the enterprise. | Picks up cargo from the transfer point.Loads onto his vehicle.Overseas customs clearance is underway.Delivers goods to its country.Unloads goods.Passes through the customs of his country. | During the transfer of products, when the buyer has accepted the goods. |
To pick up the products from the seller, the buyer usually hires a local carrier. The supplier can help with loading operations, but is not obliged to do so. Therefore, it is better to agree on this condition separately.
FCA
| Salesman | Buyer | Transfer of responsibility |
| Pays customs duties upon export.Transfers the cargo to the carrier.Records the transfer in the transport documentation. | Organizes and pays for delivery.Unloads goods.Pays customs duties upon import. | At the time of transfer of products to the carrier, after customs operations during export. |
FAS
The rule only applies to delivery of cargo by water.
| Salesman | Buyer | Transfer of responsibility |
| Pays for customs upon export.Delivers products to the buyer’s vessel. | Loads goods on board.Delivers to the territory of its state.Unloads.Pays customs duties upon import. | At the time of placing the goods on the pier, near the side. |
FOB
Another rule for transportation by water transport.
| Salesman | Buyer | Transfer of responsibility |
| Pays for customs upon export.Delivers cargo to the ship.Loads products. | Delivers products to its country.Unloads.Pays customs duties upon import. | When the goods have already been placed on board. This moment occurs after the acceptance mark of the goods has been placed on the bill of lading (special documentation). |
CFR
Applies to water shipping only.
| Salesman | Buyer | Transfer of responsibility |
| Pays for customs upon export.Loads products onto a ship.Delivers to the buyer’s port. | Unloads goods.Pays customs duties upon import. | When the goods are placed on board. |
CIF
The latest term for transportation by water.
| Salesman | Buyer | Transfer of responsibility |
| Insures products in favor of the buyer.Pays customs duties and taxes upon export.Loads goods onto a ship.Delivers to the buyer’s port. | Unloads goods.Pays customs duties upon import. | When the goods are unloaded and placed on board. |
In case of damage or loss of goods in transit, the insurance company pays compensation to the buyer. After the goods are placed on the ship, all risks are transferred to the buyer, so communication with the insurance company is considered to be his responsibility.
CIP
This rule is similar to CIF, but applies to transport by any means of transport.
| Salesman | Buyer | Transfer of responsibility |
| Insures products.Pays customs duties and taxes upon export.Loads goods.Delivers cargo to the destination (buyer’s country). | Unloads goods.Pays customs duties upon import. | When the seller has shipped the goods to the carrier. |
CPT
The standard is similar to CIP, but here the seller is not obliged to insure the products.
| Salesman | Buyer | Transfer of responsibility |
| Pays for customs upon export.Loads productsDelivers cargo. | Unloads goods.Pays customs duties upon import. | At the time of shipment of products to the carrier. |
DAP
Unlike CPT, under DAP the seller is responsible for the goods until the buyer receives the products at their destination.
| Salesman | Buyer | Transfer of responsibility |
| Pays for customs upon export.Ships products.Delivers cargo. | Unloads goods.Pays customs duties upon import. | During the transfer of cargo at the destination. |
DPU
This is the only rule where the seller is responsible for unloading the products. If there are problems with the cargo at this stage, the supplier will also be held responsible.
| Salesman | Buyer | Transfer of responsibility |
| Pays for customs upon export.Delivers products.Unloads goods. | Pays customs duties upon import. | After unloading and transfer of goods to the buyer. |
DDP
These are the easiest conditions for the buyer – he is practically freed from liability.
| Salesman | Buyer | Transfer of responsibility |
| Pays for customs duties on export and import.Delivers products to the buyer’s country. | Unloads goods.Accepts cargo. | When the cleared goods are transferred to the buyer. |
Important nuances of Incoterms
Incoterms rules have their own specifics:
Scope. The rules apply only to tangible products. They do not apply to services or intangible goods (such as software, music or video content).
Variations of norms. The document has different versions adopted in different years. Parties to the transaction are not required to use the current Incoterms – they can also use any previous versions of the rules. To do this, you must specify the name of the document and the year of its adoption in the contract.
The meaning of the rules. The rules do not replace the international supply contract, but only help to make it simpler, shorter and clearer.
Insurance. Most rules do not specify who is responsible for insuring the goods. To protect themselves from unforeseen circumstances and losses, the parties must separately clarify this issue in the contract and issue an insurance policy.
Risks. Incoterms do not provide complete protection against all risks associated with buying and selling. If the parties do not understand the rules of world trade well, it is better to hire a specialist who will help to correctly formalize and execute the transaction.
How to choose conditions
The parties must take into account that the price of the transaction largely depends on the selected Incoterms standards. The less liability the company has, the more expensive the contract will be for it. Because the counterparty will include all its logistics costs and a risk premium in the price.
When choosing terms, be guided by your trading experience, personnel composition and willingness to seek professional advice.
Often, the goods are exported by the manufacturer itself, which does not have a special department for international trade. In this case, it is more convenient for the seller if the buyer independently organizes the delivery and takes on as much responsibility as possible. Self-pickup (EXW) is suitable for such companies, where all risks are borne by the importer. It is true that the cost of the transaction in this case will be as low as possible.
If you are a novice buyer, pay attention to DAP and DPU – here almost all responsibilities lie with the seller. This makes the work easier and helps to understand the issues of international trade, establish import, gain experience.
Once you start to understand all the procedures, you will be able to organize the delivery yourself and save money. For this, choose EXW, FCA, FAS, FOB.
Regardless of the terms chosen, the parties must be careful and understand the specifics of the process. Otherwise, they may face large fines, confiscation of products, and other serious problems.
Coordinate contracts with lawyers, seek advice from the customs service and independent international logisticians.