In the complex world of international trade, clarity and common understanding between buyer and seller are subparagraphs of prime necessity for smooth transactions. This is where Incoterms come in. Incoterms were first published in 1936 by the International Chamber of Commerce. It is a set of standardized rules globally used to define the respective roles of the buyers and sellers in international transactions.
Incoterms 2020 is the latest revision of the 11 terms defining, among other things, transportation costs, risks, and responsibility. Below is the guideline that details these most critical terms for both importers and exporters.
The use of the incoterms provides an international commercial language for all traders, thereby reducing misunderstandings that would result in disputes.
It makes the particular obligations of a buyer and that of a seller absolutely clear, such as delivery points, insurance, and even obligations related to customs duties.
It clearly aligns the risk transfer between the seller and the buyer. As such, it aids in risk management and risk avoidance.
It helps allocate costs regarding carriage in a very clear fashion.
There are, in turn, two chief categories under Incoterms according to modes of transport:
Under this category, there are terms such as EXW, FCA, CPT, CIP, DAP, DPU, and DDP.
These involve terms such as FAS, FOB, CFR, and CIF.
Minimum requirement by the seller. The seller places the goods at the disposal of the buyer at the seller's premises.
All carriage, insurance, and customs clearance forward from the seller's premises to the desired destination.
Goods loaded on board the ship in the port of shipment.
Freight, insurance, and all other costs beyond the port of shipment.
Cost of goods, insurance, and cost of freight to the named port of destination.
Unloading, import duties, and transportation from the port to the final destination.
The named placed in the buyer's country, but minus import duties
Import clearance and associated costs.
Maximum obligation. This covers delivery of the goods to the buyer's premise, but with all costs including import duties paid.
Unloading the goods to their country.
The correct choice of Incoterm for the transaction is the primary importance and must account for a variety of things:
Goods that are fragile or of high value might require terms that devolve more responsibilities from the seller as delivery is made safely.
Doing an analysis of how complex the logistics and customs processes of the place of destination.
Importers or Exporters that have minimal experience could find solace in terms that devolve more responsibilities to the other party involved in the transaction, mainly shifting the risk.
A scrutiny of the overall cost implications of the varied Incoterms will guide an importer or exporter to select the most effective cost-incurred term.
Ensure both parties understand the literal meaning of the selected Incoterm and what is at stake.
Proper documentation is critical in preventing delay and additional cost.
Proper determination of insurance responsibility should be put in place, and enough cover should be ensured.
Knowing and understanding to the full extent how Incoterms work makes international trade transactions much more efficient and secure in the process. Importer or exporter, learning those terms is not an advantage but rather a must in order to build smoother and more dependable trade relations. Global trade is a never-stationary environment, and therefore it is important to stay current with such basic concepts for successful international trade.
Hexalog aims to navigate your global trade with clarity and in every step of your business with our seamless Global B2B Logistics solutions.