What are Incoterms in International Trade?
What are Incoterms®? All You Need to Know
Incoterms – an abbreviation of international commercial terms – are rules that facilitate fair and consistent global trade. They outline the shipping responsibilities of Buyers (Importers) and Suppliers (Exporters).
The International Chamber of Commerce (ICC) introduced the rules in 1923. Since then, there have been several revisions to Incoterms, the most recent edition being ‘Incoterms 2020’.
Incoterms are recognised by numerous countries that engage in international trade.
What are the Types of Incoterms?
At the time of this publication, there are currently 11 Incoterms designed to outline the risks and costs assumed by Buyers and Suppliers in each trade agreement. These are broken into two subcategories:
- Rules for any mode of transport (x7)
- Rules for sea and inland waterway transport (x4)
The 7 Rules for Any Mode of Transport
Group E
- EXW – Ex Works (insert place of delivery) – the Supplier arranges the trade of products, but it’s the Buyer’s responsibility to arrange shipment to the preferred location (which could be the Buyer’s premises or a third party address).
Group F
- FCA – Free Carrier (insert named place of delivery) – the Supplier arranges shipment of goods and assumes responsibility for risks and costs. Once the goods are in with the carrier, the Buyer is then responsible for the risks and costs of the shipment.
Group C
- CPT – Carriage Paid to (insert place of destination) – the Supplier must pay additional freight costs for the goods (even after the Buyer has assumed responsibility for risk) when the carrier receives the item.
- CIP - Carriage and Insurance Paid To (insert place of destination) - the Supplier incurs additional freight and insurance costs for the goods even after the carrier receives the item. The Buyer assumes responsibility for loss or damage to goods during transportation.
Group D
- DAP – Delivered at Place (insert named place of destination) – the Supplier is responsible for all risks and costs of goods being shipped until they reach their destination (regardless of the location). This includes freight and insurance costs but not customs duties, import permits or the costs of unloading goods, which are the Buyer's responsibilities.
- DPU – Delivered at Place Unloaded (insert place of destination) – the Supplier is responsible for the shipped goods - including all risks and costs - until they reach their destination (wherever it may be). This includes all freight and insurance costs and the costs of unloading goods but not customs duties or import permits.
- DDP - Delivered Duty Paid (insert place of destination) - the Supplier assumes all responsibility for risks and costs of shipped goods - including customs and import duties and insurance costs - until they reach their destination.
The 4 Rules for Sea and Inland Waterway Transport
Group F
- FAS – Free Alongside Ship (insert name of the loading port) – the Supplier arranges for the shipment to reach the Buyer’s vessel. At this point, the Buyer assumes responsibility for all risks and costs, including loading, transport, insurance and import costs.
- FOB – Free on Board (insert named port of loading) – the Supplier arranges shipment via vessel to a named Buyer and assumes responsibility for risks and costs.
Group C
- CFR – Cost and Freight (insert named port of destination) – the Supplier pays additional costs to insure the goods until they reach the Buyer or final recipient.
- CIF – Cost Insurance and Freight (insert named port of destination) – the Supplier pays additional freight and insurance costs for commodities even after the Buyer has assumed responsibility at the point that the carrier receives the item.
Incoterms chart – the allocation of responsibility for costs
What Do Incoterms Not Cover?
Incoterms can be used within contracts to define and agree upon shipping terms and responsibilities, but they do not represent a sales contract between a Buyer and a Supplier. There are additional details that must be agreed upon alongside them.
Some of the common trade details not covered by Incoterms include:
- Pricing details, such as those of the goods
- Exact payment details, such as the method or currency of payment
- Details on the quality or condition of goods
- Legal implications of contract breaches
Incoterms 2020
The latest edition of Incoterms is known as Incoterms 2020 and was published in the same year.
This edition is not too different from the previous iteration - Incoterms 2010 - and features the same 11 rules. However, there were some important updates added to the 2020 iteration.
Most significantly, Incoterms 2020 features an in-depth introduction and expanded explanatory notes for each term and trading role, which previous editions did not have. The 2020 edition also outlines best practices for using the terms in global trade deals and their incorporation into sales contracts.
These updates were included to minimise errors and improve efficiency and accuracy in international trade.
Incoterms and Brexit
Incoterms are beneficial when setting expectations between Suppliers and Buyers in international trade agreements. However, many companies are concerned about the impact that Brexit has had - and will continue to have - on the use and validity of Incoterms.
Brexit has not drastically affected the use of Incoterms in international trade. But there is occasional confusion regarding the term DDP (Delivered Duty Paid).
The UK’s withdrawal from the EU has caused confusion about the destinations of goods, such as the places where Buyers receive shipments before they reach their destination.
Furthermore, new rules surrounding custom fees post-Brexit have made this more challenging for Suppliers.
Therefore, Suppliers must pay closer attention to ensure they are applying the correct terms.
Which Incoterms should I use?
The ICC recommends that any new international trade agreements be arranged using Incoterms 2020.
However, any iteration of Incoterms can be used so long as the Buyer and Supplier agree and follow the same terms in the sales contract and related documents.
What are the most commonly used Incoterms?
The most commonly used Incoterms are EXW and DDP. This is because these two agreements see a single party – the Buyer or the Supplier – take full responsibility for shipment risks and costs, reducing the sales contract complexities.
EXW sees the Buyer assume full responsibility for the risks and costs of the shipment, while DDP requires the Supplier to organise and assume responsibility for the shipment.
Incoterms may appear complicated but they are easy to understand once you realise why they are there. The terms exist to reduce errors and delays in international trade, therefore ensuring an easy experience for both Buyer and Supplier.
Stenn hopes the above information has clarified any confusion about Incoterms and their uses in global trade agreements. We recommend that you check whether the Incoterms you use for your shipments are correct and in line with the latest edition.
About the Authors
This article is authored by the Stenn research team and is part of our educational series.
Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.
Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.
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