If all the entities involved in an international trade transaction did not agree on a specific set of rules, logistics, legal matters, and finances would become unmanageable. Incoterms, the accepted rules for global trade, were created in 1936, and have been updated frequently since then to align with:
- Transportation methods
- Import and export regulations
- Technological advancements
- Economic factors
Although Incoterms are not legally binding, they benefit both buyers and sellers to a degree that few disagree with their use.
Incoterms Explained for International Trade
Eleven Incoterms or international rules of trade exists. Seven of these cover all different modes of transportation (land, ocean, and inland waterways). The others focus on specific transport modes. They were all created by the International Chamber of Commerce (ICC) and our agreed-upon by the vast majority of trade-focused companies all around the world.
Incoterms provide many benefits for every part of the sales and logistics chain. They define specifics like:
- Who is responsible for arranging transportation of goods.
- Providing documentation for export customs.
- Insurance payments.
- Last-mile delivery services.
Following these rules minimizes the risk of miscommunication and financial imbalance between the buyer and seller.
Why the World Needs These Recognized Rules
The complex network of international trade that goes on every day all around the world involves innumerable laws, regulations, and financial challenges specific to individual countries. In order to facilitate smooth and fair import and export of all manner of goods, Incoterms are necessary. If manufacturers, shipping companies, and logistics firms do not agree on the same rules, global trade would quickly become chaotic.
The Most Common Incoterms Used Today
The latest collection of Incoterms is from 2020. Some firms use previous versions, but up-to-date compliance makes the trade process simpler for everyone involved. These should be worked into contract paperwork at the beginning.
EXW (Ex Works)
This common Incoterm puts all responsibility on the buyer for source-to-warehouse logistics, documentation, and all costs and fees.
DDP (Delivered Duty Paid)
This rule makes the seller responsible for shipping, paperwork, and expenses associated with getting their goods to the buyer’s location.
FOB (Free on Board)
This splits the responsibility to make the seller responsible for getting the export shipment onto the freight carrier. The buyer is then responsible for all costs associated with the transportation and final logistics to their warehouse. This is not use for over land or air transport.
FAS (Free Alongside Ship)
Another intercom only for sea or inland waterway transportation, this one makes the seller responsible for everything up until delivery at the seller side port.
CIF (Cost, Insurance, and Freight)
This is an intermediary step between FOB and FAS. The seller is responsible for getting the products to the ship and paying for transport and insurance. The buyer takes over responsibility for costs after receipt on their end at port.
Wrapping Up
Incoterms make it possible for import and export companies and individuals to understand all their responsibilities for transportation, insurance, customs fees, and more. Without these agreed-upon rules of commerce, contract terms would grow much more confusing and contentious.
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