Incoterms

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International Commercial Terms (INCOTERMS)

 

The INCOTERMS (International Commercial Terms) is a universally recognized set of definitions of international trade terms, such as FOB, CFR and CIF, developed by the International Chamber of Commerce (ICC) in Paris. It defines the trade contract responsibilities and liabilities between buyer and seller. It is invaluable and a cost-saving tool.  Once exporter and the importer  have agreed on a term like FOB, they can sell and buy at FOB without discussing who will be responsible for the freight, cargo insurance, and other costs and risks, thus saving time and money.

The INCOTERMS wre first published in 1936---INCOTERMS 1936---and are revised periodically to keep up with changes in the international trade. The current version is the eighth version—Incoterms 2010—which was  published on January 1, 2011.

 

The INCOTERMS 2010 groups the terms into E, F, C and D, designated by the first letter of the term (acronym), as follows:

 

International Commercial Terms
(INCOTERMS)

 GROUP 

TERM  

Stands for

E

EXW

Ex Works

 

F

FCA

Free Carrier

FAS

Free Alongside Ship

FOB

Free On Board

 

C

CFR

Cost and Freight

CIF

Cost, Insurance and Freight

CPT

Carriage Paid To

CIP

Carriage and Insurance Paid To

 

D

DAT
Delivered at Terminal

DAP

Delivered at Place

DDP

Delivery Duty Paid

 

In practice, trade terms are written with either all upper case letters (e.g. FOB, CFR, CIF, and FAS) or all lower case letters (e.g. fob, cfr, cif, and fas). They may be written with periods between each individual letter (e.g. F.O.B. and c.i.f.).

In international trade, it would be best for exporters to refrain, wherever possible, from dealing in trade terms that would hold the seller responsible for the import customs clearance and/or payment of import customs duties and taxes and/or other costs and risks at the buyer's end, for example the trade term  DDP (Delivered Duty Paid). Quite often, the charges and expenses at the buyer's end may cost more to the seller than anticipated. To overcome losses, hire a reliable customs broker or freight forwarder in the importing country to handle the import routines.

Similarly, it would be best for importers not to deal in EXW (Ex Works), which would hold the buyer responsible for the export customs clearance, payment of export customs charges and taxes, and other costs and risks at the seller's end.

EXW   (…named place)

Example Usage:: EXW Hamburg or EXW San Francisco
Ex Works

Ex is of Latin origin and means from. Works means factory, mill or warehouse, which is the seller's premises. EXW means that the seller fulfils all his obligations when making the goods available at his  premises. The buyer is responsible for loading the goods on truck or container at the seller's premises, and for the subsequent costs and risks.

In practice, it is not uncommon that the seller loads the goods on truck or container at the seller's premises without charging loading fee. The ICC notes that additions like “EXW loaded” are common, however, an international standard for these modifications does not exist.

The term EXW is commonly used between the manufacturer (seller) and export-trader (buyer), and the export-trader resells on other trade terms to the foreign buyers. Some manufacturers may use the term Ex Factory, which means the same as Ex Works.

FCA   (… the named point of departure)

Example Usage: FCA Hamburg or FCA San Francisco.
Free Carrier

The seller’s obligation is to deliver the goods on truck, rail, car or container at the specified point (depot) of departure, which is usually the seller's premises, or a named railroad station or a named cargo terminal or into the custody of the carrier, at seller's expense. The point (depot) at origin may or may not be a customs clearance center. The buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks.

In the air shipment, technically speaking, goods placed in the custody of an air carrier are considered as delivery on board the plane. In practice, many importers and exporters still use the term FOB for air shipment.

The term FCA is also used in the RO/RO (roll on/roll off) services.

Some manufacturers may use the former terms FOT (Free On Truck) and FOR (Free On Rail) in selling to export-traders.

FAS   (... the named port of origin)

Example Usage: FAS Hamburg or FAS San Francisco.

Free Alongside Ship

The seller has to place the goods in the dock shed or at the side of the ship, on the dock or lighter, within reach of its loading equipment so that they can be loaded aboard the ship, at seller's expense. Buyer is responsible for the loading fee, main carriage/freight, cargo insurance, and other costs and risks.

The FAS term is popular in the break-bulk shipments and with the importing countries using their own vessels.

FOB   (... the named port of origin)

Example Usage: FOB Hamburg or FOB San Francisco.

Free On Board

The term INCOTERM FOB is the most commonly used term in shipping. The seller is obligated to deliver the goods on board the vessel at the named port of origin (loading), at seller's expense. Buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks.

 

Under the rules of the INCOTERMS 1990, the term FOB is used for ocean freight only. However, in practice, many importers and exporters still use the term FOB for airfreight.

 

In North America, the term FOB has other applications. Many buyers and sellers in Canada and the U.S.A. dealing on the open account and consignment basis are accustomed to using the shipping terms FOB Origin and FOB Destination.

 

FOB Origin means the buyer is responsible for the freight and other costs and risks. FOB Destination means the seller is responsible for the freight and other costs and risks until the goods are delivered to the buyer's premises, which may include the import customs clearance and payment of import customs duties and taxes at the buyer's country, depending on the agreement between the buyer and seller.

 

In international trade, avoid using the shipping terms FOB Origin and FOB Destination, which are not part of the INCOTERMS (International Commercial Terms).

CFR   (... the named port of destination)

Example Usage: CFR Hamburg or CFR San Francisco.

Cost and Freight

 

Under this term, the seller at his expense has to deliver the goods to the named port of destination(discharge) at. The buyer is responsible for the cargo insurance and other costs and risks. The term CFR was formerly written as C&F a habit that is not dying out fast. Under the rules of the INCOTERMS 1990, the term Cost and Freight is used for ocean freight only, however, in practice, the term Cost and Freight (C&F) is still commonly used in the air freight.

 
CIF   (... the named port of destination)

Example Usage: CIF Hamburg or CIF San Francisco.

Cost, Insurance and Freight

Under a CIF clause the Seller at his expense has to provide cargo insurance and deliver the goods to the named port of destination (discharge). The buyer is responsible for the import customs clearance and other costs and risks.

Under the rules of the INCOTERMS 2000, the term CIF is used for ocean freight only. However, in practice, many importers and exporters still use the term CIF for airfreight.

CPT   (... the named place of destination)

Example Usage: CPT Hamburg or CPT San Francisco.

Carriage Paid To

The seller at his expense is obligated to deliver the goods to the named place of destination (discharge). The buyer assumes the cargo insurance, import customs clearance, payment of customs duties and taxes, and other costs and risks.

 

CIP   (... the named place of destination)

Example Usage: CIP Hamburg or CIP San Francisco.

Carriage and Insurance Paid To

The seller has to deliver the goods and the cargo insurance to the named place of destination (discharge) at his expense. The buyer assumes the import customs clearance, payment of customs duties and taxes, and other costs and risks.

 

DAT   (... the named terminal)

Example Usage: DAT Hamburg or DAT San Francisco
Delivered At Terminal

The seller, at his expense, has to deliver the goods to the specified terminal. The buyer is responsible for the import customs clearance, payment of customs duties and taxes, and other costs and risks.

 

DAP   (... the named place)

Example Usage:: DAP Hamburg or DAP San Francisco.
Delivered At Place

The seller is obligated to deliver the goods at the place of destination (discharge). The Buyer assumes the unloading fee, import customs clearance, payment of customs duties and taxes, cargo insurance, and other costs and risks.

 

DDP   (... the named point of destination)

Example Usage: DDP Hamburg or DDP San Francisco.
Delivered Duty Paid

The seller is responsible for most of the expenses, which include the cargo insurance, import customs clearance, and payment of customs duties and taxes at the buyer's end, and the delivery of goods to the final point at destination, which is often the project site or buyer's premises. The seller is free not to insure the goods at his own risks.

The INCOTERMS are negotiated and are included in the purchase contract.  Also, INCOTERMS are found in international trade finance. In letter of credit transactions the bank, having been instructed accordingly by the buyer,  will pay the beneficiary (Seller) against presentation of documents. Typically, the banks require presentation of shipping documents, insurance documents, commercial invoice and others. All these documents commonly refer to the Seller’s obligations in regards to shipping and insurance by referencing the INCOTERMS.

 

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