Incoterms Guide to use in 2023
It is important to know which Incoterms are applicable in 2023 as they determine the responsibilities of buyers and sellers. Additionally, incorrect Incoterms can result in costly errors or delays in international trade.
Incoterms were first published in 1936 and are continually updated over time to reflect the changing global business environment to be continually used in 2022 and beyond.
The International Chamber of Commerce ICC published the latest version of Incoterms 2020. These changes came into effect on the 1st of January 2020 and will be used in 2023 and beyond, until the next changes are published sometime in future. The ICC originally published Incoterms in 1936 and have continually made updates to reflect the changes to the global trade environment. It’s important that all parties involved in trade clearly understand the changes and how they apply to global supply chains.
Incoterms play such a vital role in the world of global trade. In 2023, it’s imperative that buyers and sellers clearly understand Incoterms 2010 or Incoterms 2020 and clearly understand each party’s obligations along the supply chain.
Note: The content of this article and chart is only for general information purposes and shall not in any circumstances be considered bespoke legal advice or professional advice.
This article explains the top 5 most commonly used Incoterms that international buyers should know.
What are Incoterms?
Put simply, Incoterms are the selling terms that the buyer and seller of goods both agree to during international transactions. These rules are accepted by governments and legal authorities around the world. Understanding Incoterms is a vital part of International Trade because they clearly state which tasks, costs and risks are associated with the buyer and the seller.
The Incoterm states when the seller’s costs and risks are transferred onto the buyer. It’s also important to understand that not all rules apply in all cases. Some encompass any mode or modes of transport. Transport by all modes of transport (road, rail, air and sea) covers FCA, CPT, CIP, DAP, DPU (replaces DAT) and DDP. Sea/Inland waterway transport (Sea) covers FAS, FOB, CFR and CIF.
Why are Incoterms vital in International Trade?
Incoterms are referred to as International Commercial Terms. They are a set of rules published by the International Chamber of Commerce (ICC), which relate to International Commercial Law. According to the ICC, Incoterms rules provide internationally accepted definitions and rules of interpretation for most common commercial terms used in contracts for the sale of goods’.
All International purchases will be processed on an agreed Incoterm to define which party legally incurs costs and risks. Incoterms will be clearly stated on relevant shipping documents.
5 commonly used incoterms
CIF – Cost, Insurance and Freight
Cost Insurance Freight (CIF) is a prevalent option in global trade. That’s mainly because it is beneficial to both the exporter and the buyer. It’s primarily used to transport non-containerized goods like vehicles, machinery, and commodities.
Under CIF rules, the seller is responsible for transporting the goods to a named place or destination country. But unlike some other trade terms, the seller doesn’t carry the risk of loss or damage to the goods. Instead, that risk passes to the buyer from the point of origin.
Conversely, the buyer doesn’t have to arrange or pay for transportation costs. But to offset some buyer risk during the voyage, CIF requires the seller to insure the goods for a minimum amount. Therefore, CIF balances risk and responsibility almost equally between the parties.
DDP – Delivered Duty Paid
Any buyer that has bought goods from an online marketplace like Alibaba.com is likely acquainted with this Incoterm.
Delivered Duty Paid (DDP) has become very common due to the rise of e-commerce. The term requires the seller to handle everything including shipping, customs, import duties, taxes, etc. Delivery is only complete when the goods reach the buyer’s door, and risk only passes at that point. As a result, this makes it a very convenient option for buyers.
However, most sellers will include the costs of delivery in the price of their goods. Therefore, buyers will probably bear the ultimate costs of receiving the goods.
FOB – Free On Board
Free on Board (FOB) requires the seller to transport the products from their warehouse or factory to the ship. Additionally, they’re obligated to load the cargo onto the ship, and risk only passes to the buyer at that point.
FOB is not meant for containerized cargo, though; it mostly applies to ocean freight or transport by inland waterways. The Incoterm typically applies to shipments of easily movable goods like grain, iron ore, etc.
FCA – Free Carrier
Free Carrier (FCA) is another term that could be highly favorable for sellers.
Just like Ex Works (EXW), FCA puts the responsibility and risk of shipment on the buyer. All the seller has to do is deliver the goods to the “place of delivery.” This could be a seaport, airport, train station, or even the seller’s warehouse.
However, EXW is slightly different in that the seller may still have to handle export reporting and clearance. Meanwhile, with FCA, all of the seller’s obligations end at the place of delivery.
FCA is common among sellers who don’t want additional responsibilities or risks and buyers who don’t mind the extra effort.
FAS – Free Alongside Ship
Free Alongside Ship (FAS) applies mainly to so-called out of gauge (OOG) cargo. These are goods that don’t fit into a container, such as large machinery. FAS is the most common shipping option for goods of this nature.
Under these terms, the seller is only obligated to deliver the goods alongside the vessel. Risk also passes at that point, and everything that happens afterward is the buyer’s responsibility.
What Incoterms are best for you?
Many factors determine what Incoterms to pick. Here are some factors to remember as you negotiate the sales contract:
- The type of shipping. Some Incoterms are suited to sea shipping alone, while others fit sea and non-sea shipping. For instance, CIF, FOB, and FAS are meant for sea shipping, while DDP and FCA are excellent for all shipping types.
- The extent of obligations. Does the buyer have the resources and connections to process customs clearance or pay duties and taxes? For example, DDP is extremely convenient since it takes all of the responsibility for shipping and customs off buyers. Comparably, FCA and EXW will require much more buyer involvement.
- Shipping destination. Shipments to a far destination can be expensive, so buyers need to consider if they’re willing to take on that cost. Additionally, certain Incoterms, like EXW, are not suited for international shipping because they present many cross-border difficulties.
- The nature of the goods. Hard-to-ship goods like heavy machinery can be problematic. If the seller has special expertise in shipping these goods, it might be best to leave most of the process to them. Likewise, FAS works best for OOG cargo, so that’s something to consider when negotiating with the seller.
Incoterms can save buyers money and prevent disputes when properly understood and applied. Hopefully, this article can help buyers build a better knowledge of these trade terms and their uses.
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