What are Incoterms®?
Incoterms® meaning
Incoterms®, or International Commercial Terms, are a set of standardized rules defining responsibilities, costs, and risks for buyers and sellers in international trade transactions. The set of 11 globally recognized trade terms is published by the International Chamber of Commerce (ICC).
Why are Incoterms® essential in international shipping?
A shipping Incoterm® outlines clear responsibilities, transportation costs, and risks for buyers and sellers in global trade. It states when risk transfers from seller to buyer and who manages transport, insurance, customs clearance, and delivery tasks.
The responsibilities for buyers and sellers may differ depending on which delivery term is used. For example, under FCA Incoterms®, the seller delivers goods to a carrier chosen by the buyer. However, under DDP Incoterms®, the seller handles all shipping costs, import duties, and taxes-making it a popular option for e-commerce businesses seeking to provide a seamless customer experience.
Setting clear Incoterms® helps buyers and sellers avoid potentially costly misunderstandings and disputes.
Advantages and disadvantages of Incoterms®
Incoterms are an effective way to standardize global trade contracts and clearly define buyer and seller responsibilities, but they also have some limitations.
| Advantages | Disadvantages |
|---|---|
| Standardization: Incoterms® are globally recognized and reduce ambiguity in contracts | Incomplete contract: Incoterms® don’t cover ownerships, payment terms, or liability for breaches |
| Clear communication: Incoterms® define buyer/seller roles, responsibilities, and risk | No dispute guidance: Incoterms® don’t offer guidance for resolving logistics disputes |
| Apply to all transport modes: Incoterms® can be used for sea, air, road, rail, and multimodal freight | Possible misuse: Incoterms® can be misused if buyer/seller has limited understanding of how/when to apply them |
| High degree of relevance: Incoterms® are periodically updated to reflect changes in global trade | Open to interpretation: Some businesses or courts may interpret Incoterms® differently |
Incoterms® 2020 and their applicable mode of transport
First introduced in 1936, Incoterms® have been updated every decade to reflect modern trade practices. Incoterms® 2020 is the current version.
| Incoterms® 2020 rules for any mode(s) of transport | Incoterms® 2020 rules for sea and inland waterway transport |
|---|---|
| EXW Incoterms® – Ex Works Buyer takes on almost all risk and cost from the seller’s site. |
FAS Incoterms® – Free Alongside Ship Seller places goods next to the ship; buyer takes over from there. |
| FCA Incoterms® – Free Carrier Seller delivers goods to the buyer’s chosen carrier. |
FOB Incoterms® – Free on Board Seller loads goods on the vessel; buyer assumes cost and risk from that point. |
| CPT Incoterms® – Carriage Paid To Seller pays carriage costs; buyer takes risk once carrier receives goods. |
CFR Incoterms® – Cost and Freight Seller pays transport to the destination port; buyer takes risk once goods are on board. |
| CIP Incoterms® – Carriage and Insurance Paid To Like CPT, but seller provides full insurance cover for buyer’s risk. |
CIF Incoterms® – Cost Insurance and Freight Like CFR, but the seller must insure goods during sea freight. |
| DAP Incoterms® – Delivered at Place Seller bears costs and risks until goods reach the agreed place, ready for unloading. |
|
| DPU Incoterms® – Delivered at Place Unloaded Seller unloads goods at the agreed place; replaces the DAT in incoterms 2010. |
|
| DDP Incoterms® – Delivered Duty Paid Seller covers all costs and risks, including import duties and taxes. |
It is vital to name the correct Incoterms® version in all contracts. Incoterms® 2025 are expected soon, so regularly check the latest updates.
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