Understanding International Trade Terms (Incoterms)

What you'll learn:

* what Incoterms are,

* why Incoterms matter for goods exporters,

* the most commonly used terms.

What are Incoterms?

Shipping exported goods to buyers can be a fairly complex process. When negotiating an agreement with a buyer, you'll need to discuss and agree:

* where the goods are to be delivered,

* who arranges transport,

* what insurance is needed and who pays for it,

* who handles the customs procedures,

* who pays any customs duties and taxes.

Incoterms (International Commercial Terms) are a kind of international shorthand system designed to clearly assign, agree and record all your responsibilities, costs and risks connected with exporting products. They're used worldwide, typically in a contract or other form of sales agreement for any goods you export — and should be recorded on your export invoices.

They are drawn up by the International Chamber of Commerce (ICC). The current version is Incoterms 2020. The previous version was Incoterms 2010, and you may still see references to terms from that version in trade documentation.

Incoterms 2020 contains 11 terms. Seven of them cover all modes of transport, and 4 are intended specifically for sea freight.

Incoterms 2020 sets out 11 rules, each best suited to different situations:

1. **EXW (Ex Works)**: The seller makes the goods available at its own premises. The buyer is responsible for all transport and risk. Used when the buyer has better control over the transport process.

2. **FCA (Free Carrier)**: The seller hands the goods over to a carrier appointed by the buyer. A good choice when the buyer wants to control transport and logistics costs.

3. **CPT (Carriage Paid To)**: The seller covers the cost of transport to the named destination, but risk passes to the buyer once the goods are handed to the first carrier. Useful when the seller can secure better freight rates.

4. **CIP (Carriage and Insurance Paid To)**: Similar to CPT, but the seller must also insure the goods during transport. Ideal when the buyer and seller want to share the risk.

5. **DAP (Delivered at Place)**: The seller delivers the goods to the destination, but is not responsible for unloading. Used when the buyer wants to avoid managing logistics.

6. **DPU (Delivered at Place Unloaded)**: The seller is responsible for delivering and unloading the goods. An option for sellers who want to provide additional services.

7. **DDP (Delivered Duty Paid)**: The seller covers all costs and risk, including customs duty and taxes. Ideal for buyers who don't want to deal with customs formalities.

8. **FAS (Free Alongside Ship)**: The seller delivers the goods alongside the ship. Used in maritime trade when the buyer wants to control loading and sea transport.

9. **FOB (Free on Board)**: The seller bears the costs and risk until the goods are loaded onto the ship. Preferred in maritime trade when the buyer has established transport arrangements.

10. **CFR (Cost and Freight)**: The seller covers the cost of transport to the port of destination, but risk passes to the buyer once the goods are loaded onto the ship. Good for sellers experienced in arranging sea transport.

11. **CIF (Cost, Insurance and Freight)**: The seller covers the cost, insurance and freight to the port of destination. Best for buyers who want to be sure of insurance cover during sea transport.

Agreeing the terms

Agree the terms, but make sure both sides know what this means in practice and that each can actually do what it has agreed to. If your buyer is handling customs clearance, does it have the right knowledge and the right documents? Will you need to factor in additional costs or support, for example for insurance or using a customs broker?