Incoterms stands for international commercial terms. They were developed by the International Chamber of Commerce (ICC) in 1936 and are constantly updated to conform to the changing global trade practices. They provide a common language that people can use when involving in international trades with people from different countries. This is to prevent people from different countries to interpret the same rules differently. Incoterms are published with the intention to promote an open market and global economic trade activities. They help facilitate foreign and domestic trade contracts by reducing confusion between buyers and sellers. Rules, terms, and obligations of importers and exporters are clarified. This helps both parties understand the responsibilities, costs, and risks associated with the process of trades and delivery of goods. Incoterms are mainly classified into two categories by modes of transportation. The first classification applies to any mode of transportation and the second classification only applies to sea and inland waterway transportation.
Category 1 Incoterms: Applies to Any Mode of Transportation
- EXW Incoterms (Ex Works)
- EXW specifies when a seller has made a product available at the designated location
- FCA Incoterms (Free Carrier)
- FCA represents that the seller is responsible for delivering the goods of the buyer to the destination
- CPT Incoterms (Carriage Paid To)
- CPT means that the seller assumes all the risks and losses until the goods have been delivered to the nominated carrier or party
- CIP Incoterms (Carriage and Insurance Paid To)
- CIP is when a seller pays freight cost and insurance to deliver goods to the nominated party or carrier at the designated location.
- DPU Incoterms (Delivery at Place Unloaded)
- DPU is a rule that requires the seller to unload the goods at the designated destination
- DAP Incoterms (Delivery at Place)
- DAP represents a deal in which a seller agrees to pay all potential losses and costs of moving goods to the destination
- DDP Incoterms (Delivered Duty Paid)
- DDP is a delivery agreement in which the seller takes all the costs, risks, and responsibilities associated with the delivery of goods until the buyer transfers or receives the goods at the designated port of destination.
Category 2 Incoterms: Applies to Sea and Inland Waterway Transportation
- FAS Incoterms (Free Alongside Ship)
- FAS indicates that the seller needs to arrange the goods next to a particular vessel in a particular port to be readied to be transferred to another ship
- FOB Incoterms (Free on Board)
- FOB clarifies whether the seller or the buyer is responsible for the goods that are damaged, lost, or destroyed during the shipping of goods.
- CFR Incoterms (Cost and Freight)
- For CFR, sellers are required to arrange goods to the designated port and provide the buyers with all the needed documents to obtain the goods from the carrier. Furthermore, with CFR, the seller is not responsible for the losses or damages of the cargo during transit.
- CIF Incoterms (Cost, Insurance, and Freight)
- CIF represents the expense that the seller pays for insurance, cost, and freight of the goods while they are in transit.
Difference Between 2010 and 2020 IncotermsAs mentioned earlier, Incoterms are continuously updated, every 10 years to be exact. Below are the significant changes that you should know:
- The DAT Rule (Delivery at Terminal) has been renamed to DPU (Delivered at Place Unloaded).
- For the CIP Rule (Carriage and Insurance Paid to), the level of insurance cover required is higher in incoterms 2020 than that specified in incoterms 2010
- In Incoterms 2020, to help people who use FCA (Free Carrier), FCA has been changed to allow buyers and sellers to agree that the seller will be the one to get an on-board bill of lading.
- The Incoterms 2020 now also cover situations where either the buyers or sellers choose to transport the goods under their own vehicles, without using the transportation services of a third party.
- Incoterms now details security requirements for each Incoterms rule.