Understanding Incoterms: 11 Acronyms Every Freight Forwarder Should Know
Incoterms, short for International Commercial Terms, are a set of 11 standardized trade terms used in international transactions. They define the obligations and responsibilities of buyers and sellers when it comes to the delivery of goods, transportation, and insurance. Incoterms are vital in international trade as they help avoid confusion and misunderstandings between parties from different countries. With the latest update to the Incoterms in 2020 (they update every ten years), it’s essential to understand these terms to ensure a smooth and successful international transaction.
Why are Incoterms Essential to International Trade?
Incoterms are essential to international trade because they provide a clear and concise framework for buyers and sellers to determine their respective responsibilities and obligations in a transaction. They help to prevent misunderstandings and disputes by setting out the terms of the sale in a standardized format that is recognized globally. Incoterms cover critical aspects of international trade, such as the delivery of goods, transportation, and insurance, which are subject to different laws and regulations in different countries. By using Incoterms, businesses can avoid costly mistakes, such as incorrect delivery locations, customs clearance issues, or disputes over payment terms. Overall, Incoterms provide a common language for international trade, ensuring that buyers and sellers from different countries can conduct business efficiently and effectively.
The History Of Incoterms
The history of Incoterms dates back to the early 20th century when the International Chamber of Commerce (ICC) was formed. The ICC recognized the need for a standardized set of trade terms that could be used across different countries to avoid misunderstandings and conflicts in international trade. In 1921, the ICC published the first set of Incoterms, which consisted of 13 terms. These were revised in 1936 and subsequently updated in 1953, 1967, 1976, 1980, 1990, 2000, 2010, and most recently, in 2020. The Incoterms have evolved over the years to keep up with changing global trade practices and advancements in transportation technology. Today, they are widely accepted and used by businesses, governments, and other organizations involved in international trade.
Here are a few important dates concerning Incoterms that are worth knowing:
Are There Any Rules That Incoterms Do Not Cover?
Incoterms are a set of standardized rules that define the rights and obligations of buyers and sellers in international trade transactions. They cover many aspects of the transaction, including the delivery of goods, the transfer of risk, and the division of costs.
However, there are some rules that Incoterms do not cover. Here are a few examples:
- Payment terms: Incoterms do not specify the terms of payment between the buyer and seller. This is typically negotiated separately between the parties and can vary depending on the specific transaction.
- Quality of goods: Incoterms do not address the quality of the goods being sold. This is also typically negotiated separately between the parties, and any specifications or requirements should be included in the contract.
- Intellectual property: Incoterms do not address issues related to intellectual property rights, such as patents, trademarks, or copyrights. These issues should be addressed separately in the contract.
- Dispute resolution: Incoterms do not provide a mechanism for resolving disputes between the parties. This should be addressed in the contract or through other means, such as arbitration or litigation.
While Incoterms cover many important aspects of international trade transactions, there are still other important issues that must be addressed through separate negotiations and agreements between the parties involved. Learn more in our Incoterms half-day class [link to webinar sign-up].
The most recent version of the Incoterm rules was released by the International Chamber of Commerce (ICC) in September 2019 and came into effect on January 1, 2020. The Incoterms 2020 include 11 different terms, which are grouped into two categories: those for any mode of transportation and those for sea and inland waterway transport.
Here are the 11 Incoterms 2020:
- EXW – Ex Works
- FCA – Free Carrier
- CPT – Carriage Paid To
- CIP – Carriage and Insurance Paid To
- DAP – Delivered at Place
- DPU – Delivered at Place Unloaded
- DDP – Delivered Duty Paid
- FAS – Free Alongside Ship
- FOB – Free on Board
- CFR – Cost and Freight
- CIF – Cost, Insurance, and Freight
The first seven terms (EXW, FCA, CPT, CIP, DAP, DPU, and DDP) are applicable to any mode of transport, while the last four terms (FAS, FOB, CFR, and CIF) are only applicable to sea and inland waterway transport.
It’s important to note that each Incoterm specifies which party is responsible for various aspects of the transaction, such as loading and unloading of goods, transport costs, insurance, and customs clearance. It’s also essential to clearly specify the chosen Incoterm in the sales contract to avoid misunderstandings and disputes.
Where Can I Learn More About Incoterms?
Understanding Incoterms is crucial for anyone involved in international trade. However, with the complexity of international trade, it’s normal to have questions about Incoterms. To gain a comprehensive understanding of Incoterms, it’s recommended to take a class devoted to the topic, such as our half-day webinar. This will help to clarify any doubts and ensure that you are properly applying the rules to your specific trade transactions. With the right knowledge, you can confidently navigate international trade and grow your business.