What Are Incoterms Rules? Understanding Incoterms Rules: Full Guide

What Are Incoterms Rules? Understanding Incoterms Rules: Full Guide | Image Source: Pexels

International trade is executed in many forms worldwide. The procedures could be based on CIF, CNF, & FOB terms that have been agreed to between the importer and the exporter. But while these terms are the most popular standards, there are many more that could govern each international trade transaction, and they’re called incoterms rules.

See Also: How To Use Export Credit Insurance To Protect Your Export Transactions And Ensure You Get Paid No Matter What

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What Are Incoterms Rules?

Incoterms is an acronym standing for international commercial terms. They are rules that form the basic terms of trade for the sale of goods across global borders.

These rules were created to guide importers and exporters trying to do international trade with each other and are applicable whether the parties are trying to package & label a shipment, prepare a purchase order, or prepare a certificate of origin at the port of loading.

 

Who Created And Maintains The Incoterms Rules?

The incoterms rules were created, maintained and published by the International Chamber of Commerce (ICC) because of the gross disagreements, misinterpretation, and varying practices of trade between importers and exporters around the world that created several bottlenecks in international trade between buyers and sellers.

The first Incoterms rules were published by the ICC in the year 1936 and has been developed and maintained by them ever since.

See Also: How Commodity Trading Works: The Complete Guide To International Trade

 

What Incoterm Rules Are Used For International Trade?

The Incoterms rules that help international traders govern their transactions are acronyms that have exact meanings for the international trade of goods worldwide.

The meaning of the incoterms rules are universal for all importers and exporters around the world and once agreed to, the transaction means exactly what the acronym states and the exporter or seller is expected to deliver in accordance to those terms, while the importer or buyer is expected to purchase in accordance to those terms.

The incoterms rules are 11 in number and are separated into two categories, namely:

  • Any mode or modes of transport
  • Sea and inland water transport

The seven incoterms rules used for any mode or modes of transport as defined by the ICC’s website are:

1). EXW – Ex Works

“Ex Works” means that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place (i.e., works, factory, warehouse, etc.). The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable.

2). FCA  – Free Carrier

“Free Carrier” means that the seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.

3). CPT  – Carriage Paid To

“Carriage Paid To” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.

4). CIP –  Carriage and Insurance Paid To

“Carriage and Insurance Paid to” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.

5). DAP – Delivered at Place

“Delivered at Place” means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.

6). DPU – Delivered at Place Unloaded

“Delivered at Place Unloaded” was previously named Delivered at Terminal. The name was changed because the buyer and seller may agree for it to be delivered somewhere else other than at the terminal.

In this situation, the exporter would have cleared the goods for export and bears all forms of risks and costs that come with delivering the goods and unloading them at the terminal at the destination port or place of destination. But now, the buyer would be responsible for all costs and risks from that point onward, including the clearance of the goods for import at the port of destination.

7). DDP – Delivered Duty Paid 

“Delivered Duty Paid” means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.

See Also: How To Ensure The Quality Of Goods You’re Buying Locally, Exporting, Or Importing Meets International Standards

 

The four incoterms rules used for Sea and inland water transport as defined by the ICC’s website are::

1). FAS – Free Alongside Ship

“Free Alongside Ship” means that the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards.

2). FOB – Free on Board

“Free On Board” means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.

3). CFR – Cost and Freight

“Cost and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. the seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

4). CIF –  Cost Insurance and Freight

“Cost, Insurance and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.

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See Also: How To Start An Import/Export Business In Nigeria: A Short Guide

 

What Incoterms Rules Do Not Cover

While incoterms rules govern terms of trade between a buyer and a seller, they do not cover many aspects of the transaction. Some of which are:

  • Does not specify the conditions of the sale
  • Does not ensure inspection and identification of the goods being sold
  • Does not list the price of the goods
  • Does not make any reference to the payment mode or time of payment negotiated between the seller and buyer
  • Does not state when the title or the ownership of the goods will pass from the exporter or seller to the importer or buyer
  • Does not specify which shipping documents must be presented by the exporter or seller to the importer or buyer to facilitate customs clearance in the importers country.
  • Does not address the issue of liabilities for failure on the part of the exporter or seller to provide the goods as agreed in the sales contract, on-time delivery, nor any form of dispute resolution.

 

How Can I Learn More About The Incoterms Rules?

You can learn more about the Incoterms rules by visiting the ICC’s website here.

See Also: 4 Dangerous International Trade Scams You Never Want To Fall Victim To

 

What are your thoughts on Incoterms rules and how it can help your import/export business? Let me know by leaving a comment below.

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