Import and export of goods: Incoterms

What are Incoterms?

Incoterms, also known as “International Commercial Terms”, are a set of rules developed by the International Chamber of Commerce (ICC) to facilitate international trade transactions.

Created in 1936, their purpose is to clearly define the respective obligations of sellers and buyers during the delivery of goods internationally. These terms cover various types of transport, whether by land, sea, air, or multimodal, but only with regard to physical goods.

What are Incoterms used for?

Incoterms are designed to structure and secure commercial transactions by clearly defining the roles of the parties involved in import and export operations. They focus on three main areas:

Clarification of responsibilities: By providing precise rules, Incoterms indicate when and for which operations each party is responsible for costs and obligations. This includes loading the goods, transporting them, insuring them, and handling administrative tasks such as customs formalities for both export and import.

Distribution of risks: Incoterms help determine when the risk is transferred from the seller to the buyer. In other words, they specify when the seller ceases to be responsible for the goods in case of damage or loss. This transfer of risk varies depending on the chosen Incoterm and can occur at different points in the logistics process, such as during loading, when the goods are handed over to a carrier, or upon arrival at the destination.

Management of administrative formalities: Incoterms also define which administrative tasks must be performed by each party. This includes preparing customs documentation, taking out insurance, and providing certificates and other necessary documents for transportation.

Use of Incoterms in contracts

Incoterms rules are periodically revised to adapt to the evolving commercial practices. The most recent version, Incoterms® 2020, has been in effect since 1st January 2020. These terms consist of 11 different rules that must be selected and incorporated into international sales contracts. They help establish the parties’ responsibilities across various aspects, such as the sharing of costs and risks, regardless of the mode of transport or destination.

During commercial negotiations, the parties must agree on the Incoterm to be used and clearly incorporate it into their contract. This choice determines the course of the transaction, both in terms of logistics and the distribution of risks.

Categories of Incoterms

Incoterms are divided into four main categories based on the level of responsibility the seller has in the delivery of goods:

• Group E: The seller makes the goods available at their own premises, without taking responsibility for transport. The buyer must organise and pay for the entire shipment.
• Group F: The seller delivers the goods to a carrier chosen by the buyer. The main transport costs are then the responsibility of the buyer.
• Group C: The seller takes care of the main transport, but the risk is transferred to the buyer as soon as the goods are handed over to the first carrier.
• Group D: The seller is responsible for all costs and risks until the goods reach the agreed delivery location.

The different Incoterms

There are two types of Incoterms:

• Incoterms specific to sea transport
• Incoterms applicable to multiple modes of transport (multimodal transport)

Sea Transport Incoterms:

• FAS (Free Alongside Ship): The seller delivers the goods alongside the ship at the port of shipment. From this point, the buyer assumes responsibility for costs and risks.
• FOB (Free On Board): The seller is responsible for the goods until they are loaded onto the ship.
• CFR (Cost and Freight): The seller pays the transport costs up to the port of destination, but the risk is transferred to the buyer once the goods are loaded onto the ship.
• CIF (Cost, Insurance and Freight): The seller assumes the same responsibilities as for CFR, but additionally, the seller must insure the goods against transport risks.

Multimodal Transport Incoterms:

• EXW (Ex Works): The seller makes the goods available at their premises. The buyer takes care of everything else.
• FCA (Free Carrier): The seller delivers the goods to a carrier designated by the buyer, after handling export customs clearance.
• CPT (Carriage Paid To): The seller pays for transport to the agreed destination, but the risk is transferred to the buyer as soon as the goods are handed over to the carrier.
• CIP (Carriage and Insurance Paid To): Similar to CPT, but with the seller also required to take out insurance for the goods.
• DAP (Delivered At Place): The seller delivers the goods, not cleared for import, to the agreed destination place.
• DPU (Delivered at Place Unloaded): The seller delivers the unloaded goods to the agreed destination.
• DDP (Delivered Duty Paid): The seller assumes all costs, including import customs clearance.

How to choose the appropriate Incoterm ? :

The choice of Incoterm depends on several factors, including:

• Type of transport: Some Incoterms, such as FOB or CIF, are specific to sea transport, while others, like EXW or DDP, are suitable for all types of transport.
• Logistics experience: If the seller or buyer lacks extensive logistics expertise, it may be preferable to opt for an Incoterm that simplifies the allocation of responsibilities.
• Political or geographical context: In some cases, an Incoterm that limits the seller’s responsibility may be preferred, particularly in high-risk areas.
• Nature of the goods: Fragile or high-value products may require stricter rules for transport and insurance.
• Payment terms: The chosen payment method can also influence the selection of the Incoterm.

In summary, CSE Global helps you choose the right Incoterm to ensure a smooth international transaction by clarifying the responsibilities of each party, the costs to be borne, and the risks to be considered.