Trade Terms

WHAT ARE Incoterms

Shipping goods across borders can be tricky. There are so many factors to consider for both importers and exporters. This is why Incoterms were created. In international commerce, Incoterms are a set of three-letter abbreviated trade terms established by the International Chamber of Commerce (ICC) to communicate different aspects of cross-border trade.

There are 11 main Incoterms in use in 2022. Incoterms’ primary function is to set the responsibilities of a seller and a buyer in a shipping agreement. For both seller and buyer, it is important to familiarize yourself with the details of each Incoterm, so you can choose the one that makes the most sense for your next shipment.

Responsibilities connected to Incoterms

First all of, Incoterms define the following rules of the shipment process:

Shipping and freight costs:  Incoterms dictate which party will be responsible for the costs of shipping and freight.

Point of Delivery: Incoterms indicate the point at which the responsibilities are transferred from the seller to the buyer (the delivery point).

Import and export regulations: Incoterms dictate which party organizes the procedures used in importation and exportation.

Insurance cover: Incoterms outline who is responsible for the costs of insurance.

Incoterm groups

Incoterms can also be sorted into 4 groups:

E type (EXW): The seller bears little cost and responsibility.

F type (FOB, FCA, FAS): The seller is responsible for transporting the goods to the buyer’s predefined transport medium, and then the buyer assumes all responsibilities from that point onwards.

C type (CFR, CIF, CPT, CIP): The seller bears all costs and responsibility to the destination port. Then the risks are transferred to the buyers once the goods are loaded on the means of transport

D type (DDP, DAP): The seller bears maximum responsibility for cost and risks.

Mode of transport

Not all Incoterms are suitable for all kinds of international shipments. Depending on your mode of transport (maritime, air, road, rail, etc.), you may have to opt for one over another.

Incoterms that can be applied to any mode of transportation:

EXW (Ex Works)

FCA (Free Carrier)

CPT (Carriage Paid To)

CIP (Carriage and Insurance Paid To)

DAT (Delivered at Terminal)

DAP (Delivered at Place)

DDP (Delivered Duty Paid)

Incoterms that are only suitable for sea and inland waterway transport:

FAS (Free Alongside Ship)

FOB (Free on Board)

CFR (Cost and Freight)

CIF (Cost, Insurance, and Freight)

List and summary of Incoterms

From responsibilities in international shipping to customs clearance, duties payment, and insurance, there are many factors to consider when choosing Incoterms. Below we list out some of the most important and often used Incoterms:

Ex Works (EXW)

Ex Works places a minimal burden on the seller. The buyer must arrange and pay for all transportation and is also responsible for container loading. Seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export.

Free On Board (FOB)

The seller is responsible for all the costs and responsibilities and clearing the goods for export until the goods have crossed the ‘ships rail’ at the origin port. And then the buyer assumes all costs, responsibilities, and risks after that point.

Cost and Freight (CFR)

Seller arranges the transport of goods to named port. The seller delivers goods, cleared for export, loaded on board the vessel. Then the risks are transferred to the buyer once the goods are loaded on board..

Cost Insurance and Freight (CIF)

This Incoterm is the same as Cost and Freight (CFR) with the added responsibility that the seller also pays for the insurance.

Carriage Paid To (CPT)

The seller delivers goods to a carrier (named by the seller) and has full responsibility to cover the cost of the carriage of goods to the destination. All risks and costs transfer to the buyer after delivery of the goods.

Carriage and Insurance Paid To (CIP)

As with CPT, the seller is responsible for delivering the goods to a carrier and also paying the cost of transport. The seller is also responsible for insuring the goods.

Delivered at Place (DAP)

The seller is responsible for delivering the goods, ready for unloading from the arriving means of transport, at the named place. The buyer is responsible for import clearance and any applicable local taxes or import duties.

Delivered Duty Paid (DDP)

The seller assumes all cost, responsibility, and risk until goods are delivered to the buyer. That means the seller also pays for import clearance duties, insurance, and any other expenses related.

As you can see, there are varying levels of risk for the buyer and seller. Reference the graphic below to learn more about the obligations of the buyer and seller under different Incoterms.