Incoterms 2020 – What are they? Which is Best for You?
When exporting or importing goods, sooner or later you are always confronted with the term ‘Incoterms‘. Many customers already know and understand it very well while some have only heard of it recently. However, there are also those who have less experience with trading goods and may not understand these industry-specific symbols and do not know how to read them. Let’s dive in and make sense of these so we can understand which options are best for your situation.
‘Incoterms’ is the abbreviation for ‘International Commercial Terms’, which are the set of international rules that define the terms of sale and are accepted and applicable worldwide. These rules define the cost and responsibility breakdown between buyer and seller and reflect the type of transportation that is agreed upon.
Incoterms were first published in 1936 and have since been revised several times. The most recently published version is Incoterms 2020.
The rules, as currently formulated, apply in both international and domestic commercial settings.
Incoterms 2020 rules clarify who is responsible for specific costs and stages of transport (loading, unloading, insurance, etc.) Each set of rules is identified by a three-letter abbreviation.
Now to explain the specific stipulations each rule below:
EXW (Ex Works) – applies to any form of transportation. Compared to other Incoterms, here the seller has the fewest obligations. Delivery is considered to have been completed when the goods are deposited at the place agreed on by the buyer. From then on, the buyer is responsible for arranging further collection, loading, unloading, transportation and all import, export and transit procedures.
FCA (Free Carrier) – applies to multimodal transport. The seller is responsible for the goods and related costs until they are delivered to the designated place of unloading and handed over to the carrier for unloading. Responsibilities and costs related to unloading, loading, shipping, insurance, customs and tax formalities are covered by the buyer.
FAS (Free Alongside Ship) – applies to inland and sea transport only. In this agreement, the buyer takes responsibility for all costs and risks associated with the transport of the cargo from the moment the goods arrive at the side of the ship. This means that the seller is not obliged to organize the loading of the goods onto the ship, and the buyer is responsible instead.
FOB (Free on Board) – used only in inland waterways and ocean transportation. Extends the seller’s responsibility under the FCA rule to include loading onto the ship. From the moment the goods cross the ship’s side, all costs, risks, and insurance issues are passed to the buyer. FOB is the most popular Incoterms rule for imports from China.
CFR (Cost and Freight) – CFR is implemented only for sea and inland waterway transportation. The seller is responsible for the goods and costs until the goods are delivered to the port of destination. Unloading, further loading, delivery to final destination, insurance, import costs and customs and tax formalities are the responsibility of the buyer.
CIF (Cost, Insurance and Freight) – applies to sea or inland waterway transportation. The rules are very similar to CFR, however the cost and responsibility of insurance is transferred here from the buyer to the seller (until the goods reach the port of destination).
DPU (Delivered at Place Unloaded) – this rule replaced DAT from Incoterms 2010. It applies to all forms of transport. DPU requires the seller to unload the goods at the destination port. However, further loading and delivery to the final destination as well as import costs and customs and tax formalities are the responsibility of the buyer.
DAP (Delivered at Place) – may refer to various forms of transportation. The seller is responsible for the goods and associated costs until they are transported to the designated location. Clearance costs and import tax are the responsibility of the buyer.
CPT (Carriage Paid to) – can be used for multimodal transport, combining several types of transport. The seller is obliged to bear the costs of transportation of goods to the specified destination. On the other hand, the buyer is responsible for insurance, import costs and customs and tax formalities.
CIP (Carriage and Insurance Paid) – this rule is used in multimodal transportation. The seller takes responsibility for the goods up to the final destination and also pays for insurance up to that point. The buyer, on the other hand, is responsible for meeting import duties and taxes.
DDP (Delivered Duty Paid) – applies to any type of transportation. In this scheme, the greatest responsibility and cost, including insurance and duty, is the responsibility of the seller.
Depending on what the buyer’s and seller’s needs are in this regard, appropriate Incoterms rules are selected for each transaction. The choice should take into account pricing, logistical requirements, and the willingness of each partner to bear different costs.