Simplicity has become necessary in today’s supply chain, which is more convoluted than ever. However, achieving that without adequate knowledge, such as that of INCOTERMS, can be difficult in a world heavily reliant on international trade. They are a must-have addition to your vocabulary if you want to work with international transportation.
Any success in coordinating shipping on a global scale will significantly depend on your understanding of the Incoterms. This article breaks down the most commonly used Incoterms so you can enjoy a more seamless buyer or seller experience.
What are Incoterms?
Incoterms is short for International Communication Terms. It is a vocabulary designed to standardize and simplify a fundamentally complex process. Introduced nearly 85 years ago, it has been adjusted several times to keep up with evolving norms. The international chamber, specifically the International Chamber of Commerce (ICC), is responsible for publishing the Incoterms® 2020 rules.
The International Chamber of Commerce plays a crucial role in defining standardized rules for international trade, outlining the responsibilities of buyers and sellers in international transactions. Whether you’re a buyer or a seller, learning these terms will ensure you are not confused about price, experience, or transportation type.
It is also important to remember that depending on the Incoterm you choose, you may have to keep in mind the following obligations:
There are more responsibilities to remember, but we’ll explore them below with the most commonly used Incoterms.
What Are The Most Common Incoterms?
Although Incoterms are famous for their simplicity, some are more common than others. Before diving into that, it is essential to remember that the buyer is any party paying for goods or a service (also known as a Brand Owner).
A seller is a manufacturer or business selling goods, services, or both.
- Ex Works (EXW)
EXW is a sales contract or Incoterm that holds the seller responsible for the goods readily available at the seller's premises, where the seller's responsibility ends and the buyer's responsibility begins. The buyer pays and bears responsibility for the protection and transportation of the goods.
Here is a breakdown of their responsibilities:
- Free On Board (FOB)
The FOB origin is slightly different from the EXW Incoterm in terms of responsibility. The Seller must protect and transport goods until they arrive at a previously agreed-upon port. Upon arrival, the Buyer is responsible for overseeing the goods until they reach the final destination.
Here is a further breakdown of each of their responsibilities:
Key Differences of the FOB Shipping Point Compared to the EXW
- The buyer now has the added responsibility of handling import formalities.
- The seller is now responsible for loading charges, which were the buyer's responsibility under EXW.
- Pre-shipment inspection costs can be negotiated between the buyer and seller, depending on the specific agreement.
- Delivered Duty Paid (DDP)
Last but not least, one of the most common Incoterms is DDP. The seller is heavily responsible for this, so you should only agree to this contract if you trust the person you’re working with.
Here is a breakdown of the responsibility of each party:
Key Takeaway
The DDP Incoterm places the majority of responsibility on the seller. They handle almost every aspect of the shipment, from export formalities to final delivery, including any potential import duties and taxes. The buyer's obligations are minimal, but both parties need to communicate clearly and cooperate to ensure a smooth transaction.
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Other Incoterms Worth Knowing
Beyond the common incoterms highlighted above, others still play a role in today’s shipping operations, which means they are worthy of knowing and understanding how they work.
Here is a review of these incoterms -
- Free Carrier (FCA)
The FCA Incoterm requires the seller to be responsible for export clearance and goods delivery to the designated carrier. Remember that a carrier is any person or business transporting the commodity. These carriers can look like the following:
- Shipping line
- Airline
- Trucking company
- Freight forwarder
- Railway
- Free Alongside Ship (FAS)
Likewise, the FAS Incoterm ensures the Seller pays and takes responsibility for clearing export goods. The name refers to how the Seller needs to place said goods alongside the vessel before departure.
Not just any port will be allowed, either. A loading dock or a barge is acceptable, but not a container port. This Incoterm is considered exclusive to the ocean or inland waterway transport.
- Cost and Freight (CFR)
Most responsibilities in the CFR Incoterm are under the Seller's control, but the Buyer must still be aware of their obligations. A CFR contract requires the Seller to clear goods for export, deliver them to the ship, and pay for transport. The Buyer will then pay for extra transportation costs, such as import clearance.
- Cost, Insurance, and Freight (CIF)
The Seller has a significant amount of responsibility here – required to pay costs, insurance, and freights to the destination country or port. However, the Buyer assumes responsibility for protecting the goods once they’re on the ship.
- Carrier and Insurance Paid (CIP)
The Seller oversees the risks of carriage and insurance costs until the goods reach their first carrier. The Buyer will then accept all the risk responsibility afterward.
- Delivered at Place (DAP)
Under DAP, the seller bears the majority of responsibility for transporting goods to their final destination. The Buyer takes care of all the steps before transportation, such as the customs clearance process or import duties.
Related Article: Maximizing Efficiency in High-Volume Shipping: The Case for Cargo Consolidation
Categories of Incoterms
There are two main categories of Incoterms: those that apply to all modes of transportation, including air and land, and others that cater only to sea and inland water transportation.
Incoterms for all transportation
- Ex Works (EXW)
- Free Carrier (FCA)
- Carriage Paid To (CPT)
- Carriage and Insurance Paid To (CIP)
- Delivered at Place (DAP)
- Delivered at Place Unloaded (DPU)
- Deliver Duty Paid (DDP)
Incoterms for sea and inland waterways
- Free Alongside Ship (FAS)
- Free on Board (FOB)
- Cost and Freight (CFR)
- Cost, Insurance and Freight (CIF)
Final Thoughts
From the blockage of the Suez Canal to a maritime worker shortage, finding the most compatible shipping resource can be challenging when navigating international shipping. That's why Incoterms are vital and could also impact shipping costs. They should be part of your shipping and loading vocabulary. No term is suited for all occasions, so pay attention to the smaller details.
However, your business or supply chain doesn't have to navigate shipping and international terms. There are companies perfectly equipped with expertise, technique, experience, and technology solutions that can make everything run smoothly.
One such company is Silq, a digital freight forwarding platform. Our expertise is in providing shipping solutions that cater to your business needs, whether airborne or sea. We help you understand the Incoterms, including when and how they can be applied. Get started today to see how we can transform your shipping operations!
