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All you need to know about INCOTERMS or INTERNATIONAL COMMERCIAL TERMS

Incoterms , shipping yard

Incoterm are terms for selling to which buyers and sellers agree before trading goods and services in International Trade. The chambers of commerce issue these terms, accepted by government and authorities all over the world. It is very important to be updated with Incoterms for exporters and importers because they keep changing and they determine many aspects of trading the goods, like costs, formalities, risks, etc. Incoterms clearly state which costs and the risk that are to be borne by the buyers and what parts have to be kept by the sellers. 

Significance of INCOTERMS in EXIM

The literal meaning of Incoterms is International Commercial Terms set by the International Chambers of Commerce. Most of these terms relate to and work as part of international commercial laws. Entire International Trade and all its participants i.e. Buyers, Sellers, Banks, Shipping Lines, Port Authorities, Customs, and Insurance companies rely on these standard rules that are valid across the world. These terms lay down clear rules and regulations and also work as a proof for future references. The division of costs and risks involved in the sale between the two parties is clearly stated in these terms. Hence, INCOTERMS hold a vital role in exports and imports.

Latest Incoterms that importers and exporters need to know

  1. EXW (Ex-Workers or Ex-warehouse)–Ex Works means that a seller has to deliver the items ordered by the buyer, at the designated premises like the factory, warehouse, etc. In this, the seller is not obliged to load the goods on the vehicles before the exports.
  1. FCA (Free Carrier)–when the seller delivers the goods to the concerned person at any designated place, it is called a free carrier. Here, the risk passes to the buyer, so it is important to specify the addresses and the timings in the documents.
  1. FAS (Free Alongside Ship)–when the seller delivers the goods alongside the ship or vessel in which the cargo is supposed to be loaded, on buyer’s choice, it is called Free Alongside Ship. They transfer the risks and costs to the buyer after this transition of the cargo.
  1. FOB (Free On Board) – Free On Board is a term in shipment that states if the seller and the buyer are liable for any damage or destruction caused to goods. FOB origin means that the buyer pays for the delivery charges of the goods from the warehouse and gains ownership of the item.
  1. CFR (Cost and Freight)—the seller delivers the goods to the ports and from thereon, the buyer bears the risks and costs. They should properly mention this in the contract of sale of goods and the seller must pay for the costs and freight of delivery of the goods at the named port or any destination.
  2. CIF (Cost, Infrastructure, and Freight)–the seller has to contract for simple terms and conditions of the sale. He must pay for the costs, freight, and insurance cover (if any) till the cargo reaches its mentioned destination by the buyer. Thereon, the same costs are borne by the buyer himself.  
  1. CPT (Carriage Paid to)– undercarriage paid to, the seller must bring the goods to be sold to the carrier and pay for the carriage costs incurred.
  1. CIP (Carriage and Insurance Paid to)– under CIP, the seller incurs the insurance costs only for the minimum cover. If the buyer wishes to get extra protection cover, he might do it at his responsibility and costs.
  1. DAP (Delivered at Place)– the seller delivers the goods at the place mentioned by the buyer and bears all the risks until the goods are delivered and unloaded.
  1. PDF (delivered at place unloaded) – the seller, taking all the risks involved in the delivery of goods to ports till unloading them, delivers the goods at the buyer’s disposal.
  1. DDP (Delivered Duty Paid) – once the seller delivers the goods at the buyer’s disposal, it clears the goods for imports on the buyer’s side. All the risks and costs thereafter are on the buyer’s side.

How incoterms have changed from 2010 to 2020

Incoterms 2000 transfer of risk from the seller to the buyer

Few key features of the incoterms have changed in 2020 because of the changes and variations in the markets. However, the meaning of incoterms has remained the same. We will take a sneak peek at the changes.

  1. DPU replaced by DAT–the Delivered at Place Unloaded is a new incoterm which was delivered at the terminal before. It was changed to remove confusions that used to occur because of the word terminal. Under DPU, the buyer or seller can agree on the delivery of goods anywhere and not necessarily at a terminal.
  1. Different levels of insurance cover at CIF and CIP – only CIF and CIP terms state that a buyer will buy insurance for the contract of sales.

The CIF remains the same under Institute Cargo Clause C insurance cover.

The CIP however, unlike before included in clause A with CIF, now requires insurance cover under Institute Cargo Clause A, which covers a more comprehensive level of insurance suitable for manufactured goods than Clause C which was more for commodities.  

  1. Updated costs and listings – incoterms 2020 provides for more detailed regulations for costs and listings that are stated under the A9/B9 sections of the rule. Under this, the allocation of costs is mentioned between the parties. This change is supposed to help the sellers who used to face terminal handling charges.
  1. Buyer’s or seller’s transport – incoterms 2010 assumed that transport will be a third party entity in the contract but incoterms 2020 states regulations on the use of private vehicles of buyers or sellers for the business.
  1. FCA, FOB, and Bill of Lading Process – incoterms 2020 requires the buyer to instruct the carrier to issue a transport document when the goods are loaded. In simple words, a bill of lading is to be provided with a notation of the seller in case it has received the goods from an intermediary.

It is imperative that agreed INCOTERMS for every shipment have to reflect in the underlying Trade Documents – Invoices, Letter of Credit, Customs Documents, etc. . INCOTERMS is a key terminology for EXIM and a fundamental building block for the standardization of International Trade.

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