Incoterms Defined in 100 Words
Definition of Incoterms
Incoterms, an abbreviation for international commercial terms, outline the details on how an international trade will occur.
Incoterms give specific direction as to the responsibilities of the buyer and seller, as the shipment moves from origin to destination for the following topics:
- Party responsible for insuarnce, license, permit and other formalities.
- Party responsible for the transport of the product in its journey.
- The point where the costs and risks transfer from the seller to the buyer.
In other words, incoterms are the "language of trade" that summarize how the goods will change hands and how the shipments will be cleared for import and export of good.
For those companies shipping internationally, we woud recommend getting familiar with The Incoterms® rules .
Incoterms were set to standardize the world's understanding of international trade.
The critical points of incoterms are the cost division and liability of both parties involved in the international transaction. While the incoterms mostly highlight the process of the goods moving from buyer to seller, it does contain the legal terms of a contract.
It is important to know that although there are a handful of several common incoterms, some might not apply, or be the “best fit” to your shipment. Therefore, your company should be prepared to negotiate incoterms.
Keep in mind that property rights are not under incoterms.
The International Chamber of Commerce (ICC) takes responsibility to publishing these terms and the last time the rules were updated was 2010 (pictured below), and are updated every ten years with the next revision coming in 2020.
FOB (Free On Board), EXW (Ex Works) and FCA (Free Carrier) are the most commonly used incoterms, but as outlined below, there are several others. The key for shippers to know is to ask questions before signing an agreement because incoterms are written from a legal perspective, which can make them confusing and if issues arise can become a major problem for the party in the transaction that does not fully understand what they signed.
INCOTERMS Freight Terms for Any Freight Mode
- EXW: EX Works
- FCA: Free Carrier
- CPT: Carriage Paid To
- CIP: Carriage & Insurance Paid To
- DAT: Delivered at Terminal
- DAP: Delivered at Place
- DDP: Delivered Duty Paid
INCOTERMS Freight Terms for Maritime Only
- FAS: Free Alongside Ship
- FOB: Free on Board
- CFR: Cost and Freight
- CIF: Cost of Insurance