What Are Incoterms?

What Are Incoterms?

Let me explain Incoterms to you directly: to make global commerce smoother, the International Chamber of Commerce (ICC) publishes these terms, formally called international commercial terms. They're recognized worldwide and help avoid mix-ups in foreign trade contracts by clearly defining what buyers and sellers must do.

If you're involved in domestic or international trade, you probably use Incoterms as a quick way to communicate and understand the precise details of your deals. Some apply to any type of transportation, while others are only for shipping over water.

Key Takeaways

Here's what you need to know: Incoterms outline the rules and terms for buyers and sellers in both international and domestic trade contracts. The ICC created them in 1936 and updates them as trade practices evolve. Examples for different transport modes include Delivered at Place Unloaded (DPU), Delivered Duty Paid (DDP), and Ex Works (EXW). The 2020 update changed just one term, but it brought notable shifts in security costs. These terms are standard, yet buyers and sellers often negotiate which ones to use based on their preferences.

Understanding Incoterms

The ICC developed Incoterms in 1936 and keeps them current with changing trade needs. Their goal is to support open markets and global prosperity through trade. As a network reaching over 45 million companies in more than 170 countries, the ICC has top expertise in setting these trade rules.

You don't have to follow Incoterms, but buyers and sellers commonly do in their transactions. They offer a shared set of rules that make trade easier, essentially giving traders a common language for deal terms. You can apply them in tasks like completing purchase orders, labeling shipments, filling out certificates of origin, or setting up free carrier agreements (FCA).

Remember this important point: always specify the version in your contracts, like Incoterms 2020, since the ICC updates them regularly.

Incoterms Rules for Any Mode of Transport

Common examples for any transport mode include Delivered Duty Paid (DDP), Delivered at Place (DAP), and Ex Works (EXW). There are seven such terms: CIP (Carriage and Insurance Paid to), CPT (Carriage Paid to), DAP (Delivered at Place), DPU (Delivered at Place Unloaded), DDP (Delivered Duty Paid), EXW (Ex Works), and FCA (Free Carrier).

Take DPU: the seller delivers to a terminal, handling all risks and costs until unloading; then you, the buyer, take over from there to the final spot. With DDP, the seller covers everything—risks, transport, export and import clearance, and duties. Under EXW, the seller just makes goods available at their location, and you handle all risks and costs from pickup.

In 2010, Incoterms were split into categories by transport mode: one for any mode, and another just for sea and inland waterways.

Incoterms Rules for Sea and Inland Waterway Transport

For water transport, specific terms include Cost, Insurance, and Freight (CIF) and Free on Board (FOB). The four terms are: CFR (Cost and Freight), CIF (Cost, Insurance, and Freight), FAS (Free Alongside Ship), and FOB (Free on Board).

Under FOB, the seller gets goods to the vessel and pays costs until loading; then you assume responsibility and further costs. With CIF, the seller delivers to a port, loads the vessel, pays insurance, and handles responsibility until unloading, but you cover main carriage and beyond.

What Do Incoterms Not Cover?

Incoterms have limits; they don't address every sale condition, identify the goods or price, reference payment methods or timing, say when ownership transfers, specify documents for buyer's customs, or handle liability for non-conforming goods, delays, or disputes.

Relying solely on Incoterms can restrict you, so ensure all parties cover these gaps before signing to avoid legal issues and keep transactions smooth.

Incoterms 2010 vs. Incoterms 2020

The 2020 update from 2010 isn't drastic; the main change renamed Delivered at Terminal (DAT) to Delivered at Place Unloaded (DPU) for broader unloading spots. Both have 11 terms. But details differ: CIP now requires more freight insurance, not affecting CIF. The 2020 version handles own-vehicle transport by buyer or seller, unlike 2010's third-party assumption. FCA changes how bills of lading work.

Security costs shifted too: they're tied to transport and fall to the arranging party. Sellers bear export security except in EXW, buyers handle import except in DDP, with higher security and insurance needs overall.

Advantages and Disadvantages of Incoterms

The biggest plus is their standardization, making international trade clear and specific, which simplifies negotiations and saves on legal fees for translating terms. On the downside, buyers and sellers might prefer different terms—like sellers favoring CIF for familiarity, buyers choosing FOB—which turns into negotiation rather than a problem with the terms themselves.

Pros include easy-to-understand terms, global standardization, and updates by the ICC. Cons involve preference mismatches and potential for one side to face higher costs with certain terms.

Can I Still Use Incoterms 2010 After Jan. 1, 2020?

Yes, you can use 2010 Incoterms, but you and the other party must agree in writing to that version or the 2020 one.

What Are the 11 Incoterms?

They are: CIP, CPT, CFR, CIF, DAP, DPU, DDP, EXW, FAS, FCA, and FOB.

Why Are Incoterms Used?

You use them to clarify terms in international trade; their benefits generally outweigh drawbacks, making many deals possible, though you still negotiate specifics before finalizing.

The Bottom Line

Incoterms are practical for international trade, split by transport modes, assigning responsibilities between you as buyer or seller. They don't cover everything, like goods details or liabilities, so use them to clarify but not as your full agreement.