What is Incoterms?

The International Chamber of Commerce (ICC) has developed a series of legal principles called Incoterms to support and control international commerce and trade. The terms in it are properly involved in international commercial phrases and are accepted all around the world.

Understanding Incoterms

The primary goal of these terms is to accurately specify the duties and expenses of the sender and receiver. The parties to a contract negotiate a purchase agreement in which they must carefully evaluate all aspects of duties, shipping, taxes, and, in some cases, insurance.

Each Incoterm rule contains a summary that describes and specifies the parties associated with obtaining export and/or import permit (according to whether the contractor is the trader) and following the required export or import customs laws. The proposition also defines who is accountable for the duties (e.g., acquiring formal import/export clearance, etc.).

Furthermore, incoterms specify which group is actually paying for transportation of the buyers, cargo insurance benefits, packaging of the products, pre-shipment audits, cargo dispatch, and so on. In an international purchase agreement, it is not always straightforward to define your duties and liabilities.

Incoterms for Transportation

The following are the seven Incoterms for any form of transportation:

  1. EXW: Ex Works
  2. FCA: Free Carrier
  3. CPT: Carriage Paid To
  4. CIP: Carriage and Insurance Paid To
  5. DAP: Delivered at Place
  6. DPU: Delivered at Place Unloaded
  7. DDP: Delivered Duty Paid

Incoterms 2010

Incoterms 2010 is a set of 13 internationally standard trade terms which allows the parties to designate a point at which the costs and risks of transport are precisely divided between the sellers and buyers. It came into effect on 1 January 2011. 

Much has changed in global trade in the past two decades and cargo security is now at the forefront of the transportation agenda for many countries. In addition, the USA's Uniform Commercial Code (UCC) was revised in 2004, resulting in a deletion of US shipment and delivery terms. 

The latest version of these terms reflects these changes and others. The latest version is Incoterms 2020, which came into effect on 1 January 2020.

Practical Example

A businessman, Andy works in cargo delivery. For him, each incoterm rule establishes the vendor's responsibilities for cargo delivery and defines when delivery occurs. Each regulation also states when the responsibility of losses or damages to the items being transferred passes from the seller to the buyer in relation to the delivery clause.

In Sentences

  • Incoterms are standards and measures that allow sellers and purchasers to communicate clearly.
  • The Incoterm regulations are updated as needed and are split into two groups based solely on the transaction system.

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