Shipping Information

What Are Incoterms

By Jericho Betts
March 20, 2024
What Are Incoterms

A common language is essential for the smooth operation of transactions involving parties from different corners of the world in the sphere of global trade. This is where “Incoterms” come into play—a fundamental element of international trade that every exporter and importer should understand. But what are Incoterms, and how do they shape the landscape of international shipping practices?

Allison Shipping is here to guide you through the intricate world of international shipping Incoterms and how they define the trade game.

First, a definition. Incoterms, or International Commercial Terms, are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC). They serve as universally recognized rules that clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods in international trade. These terms are regularly updated to align with changing trade practices, with the most recent update being Incoterms 2020.

The primary purpose of Incoterms is to provide a set of international rules for the interpretation of the most commonly used terms in foreign trade. They effectively reduce misunderstandings among traders and thereby minimize trade disputes and litigation. Incoterms detail:

  • The point at which responsibility for the goods transfers from the seller to the buyer
  • Who pays for what costs, including transport, insurance, and tariffs
  • Who is responsible for the various shipping practices, such as packaging, labeling, and securing cargo

How Incoterms Impact Shipping Requirements

Incorporating Incoterms into contracts clarifies the logistics responsibilities between sellers (exporters) and buyers (importers). Each Incoterm refers to a type of agreement for the sale of goods and determines how costs and risks are allocated. Let’s examine how these terms can affect shipping requirements:

  1. EXW (Ex Works): The seller makes the goods available at their premises, and the buyer is responsible for all other costs and risks involved in taking the goods to the final destination.
  2. FOB (Free On Board): The seller must load the goods on board the vessel nominated by the buyer. Cost and risk are divided when the goods are actually on board of the vessel; the buyer takes responsibility from that point forward.
  3. CIF (Cost, Insurance & Freight): The seller pays for the carriage and insurance to the named port of destination. The buyer assumes responsibility once the goods are handed over to the first carrier.
  4. DAP (Delivered at Place): The seller delivers the goods, ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the specified place.

The Significance of Incoterms in International Shipping

Understanding Incoterms is crucial because they impact the shipping practices and costs for both the seller and the buyer. Here’s why:

Cost Allocation: Incoterms clarify how costs associated with international transportation are allocated between the parties involved. This includes freight charges, insurance, loading and unloading expenses, and customs clearance fees. For instance, under the term CPT (Carriage Paid To), the seller pays for the freight to the named destination, but the risk passes to the buyer once the goods are handed over to the first carrier.

Transfer of Risk: Each Incoterm specifies the point in the transportation process where the risk of loss or damage to the goods transfers from the seller to the buyer. This delineation is crucial for both parties to understand when they need to insure the cargo and protect their financial interests.

Delivery Obligations: They detail the delivery obligations, specifying who is responsible for various actions in the shipping process, such as export packing, labeling, loading the goods on the transport vehicle, and providing the necessary shipping documents. For example, with DDP (Delivered Duty Paid), the seller assumes all risks and costs associated with delivering goods to a named place in the country of the buyer, including duty and taxes.

Customs Clearance: Incoterms determine who handles customs procedures, both at export and import. This can greatly affect the speed of clearance and delivery, especially for terms like EXW, where the buyer has to arrange the export customs clearance, or DDP, where the seller is responsible for import customs clearance.

By setting out these responsibilities and points of risk transfer clearly, Incoterms enable sellers and buyers to negotiate contracts with a precise understanding of what is expected of each party. This minimizes the risks of disputes and confusion, contributing to more efficient and effective international shipping operations.

Incorporating the appropriate Incoterm into sales contracts is a strategic decision that directly influences logistical planning, insurance considerations, and the overall success of international transactions. This is a crucial aspect of what we facilitate at Allison Shipping, ensuring that our clients are well-informed and that their freight forwarding needs are aligned with the best Incoterm to fit their specific scenario.

Best Practices When Working with Incoterms

At Allison Shipping, we pride ourselves on our meticulous adherence to international shipping Incoterms. We work closely with our clients to ensure that every export transaction is clear, with responsibilities well-defined and understood by all parties involved. We facilitate freight movement all around the world in compliance with the ICC’s Incoterms, helping businesses navigate the complexities of global shipping with ease and expertise.

To effectively utilize Incoterms in international transactions, consider the following best practices:

Contract Specificity: Always specify the version of Incoterms being used (e.g., Incoterms 2020) in contracts to avoid confusion, as rules are updated every ten years.

Choose Appropriate Terms: Select Incoterms that suit the mode of transport and the level of responsibility you’re willing to assume. This is crucial for businesses to manage risk and control shipping costs.

Education and Training: Ensure that your sales and logistics teams are well-educated about Incoterms. This will improve internal understanding and communication with clients and vendors.

Consult With Experts: Engage with logistics partners like Allison Shipping who can provide insight into the best Incoterms for your specific needs and help streamline your shipping processes.

Incoterms play a vital role in international trade by standardizing the terms of shipping between sellers and buyers across the globe. They affect everything from transportation costs to risk management and are an essential component of any international trade contract. By fully understanding what Incoterms are and how to use them, businesses can protect themselves against misunderstandings and disputes, making for smoother and more efficient shipping operations.

At Allison Shipping, we consider it our mission to ensure that your freight forwarding needs are met with professionalism and in strict compliance with Incoterms, offering peace of mind and a guarantee of excellence in international shipping practices.

Contact Us to find out more on how we can streamline your international logistics process.

Let Us Earn Your Business

Let’s Work Together