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What are Incoterms?
Incoterms (International Commercial Terms) are a set of standardized international rules that define the responsibilities of buyers and sellers in international business transactions. They establish who pays for transportation, who bears the risks, and where ownership of the merchandise is transferred.
The current version, Incoterms 2020, has 11 terms divided into two main categories: those that apply to any mode of transport and those exclusive to maritime transport.
Incoterms for any mode of transport
EXW (Ex Works - In factory)
The seller makes the goods available to the buyer at his premises. The buyer assumes all costs and risks from that point on.
Example: A company sells EXW machinery from its factory in Germany. The buyer must arrange transport from the German factory, pay all transport costs and assume all risks from the moment he collects the goods.
FCA (Free Carrier - Free Carrier)
The seller delivers the goods to the carrier designated by the buyer at the agreed place. The risk is transferred when it is delivered to the carrier.
Example: An exporter delivers containers at the local port to the buyer's carrier. Once delivered, the buyer assumes the risks and costs of international transportation.
CPT (Carriage Paid To)
The seller pays for transportation to the agreed destination, but the risk is transferred to the buyer when the goods are delivered to the first carrier.
Example: A seller pays for air freight for electronics to the destination airport, but if the merchandise is damaged during the flight, it's the buyer's responsibility.
CIP (Carriage and Insurance Paid To)
Similar to CPT, but the seller must also purchase minimum coverage insurance. The risk is transferred when it is delivered to the first carrier.
Example: A textile exporter pays for transportation and insurance to the buyer's warehouse in another country. Although he pays for these services, the risk passes to the buyer from the moment he delivers the goods to the carrier at origin.
DAP (Delivered at Place)
The seller delivers when the goods are ready for unloading at the agreed place of destination. The seller assumes all risks up to that point.
Example: A supplier delivers furniture to the customer's warehouse in another country. The seller manages all transportation and assumes the risks until the truck reaches the warehouse, but the buyer unloads.
DPU (Delivered at Place Unloaded)
The seller delivers the unloaded goods to the agreed place of destination. It is the only Incoterm where the seller must download.
Example: A steel exporter delivers and unloads the plates at the destination port. The seller assumes all costs and risks including unloading.
DDP (Delivered Duty Paid - Delivered with rights paid)
The seller assumes maximum responsibility: delivers the goods to the agreed place with all expenses paid, including import duties and taxes.
Example: A technology company sells DDP computers to an office in another country. The seller manages all logistics, pays all taxes and delivers ready equipment to the customer's office.
Exclusive Incoterms for maritime transport
FAS (Free Alongside Ship - Franco on the side of the ship)
The seller delivers the goods to the side of the ship at the port of origin. The buyer assumes costs and risks from that point on.
Example: A grain exporter places the containers on the pier next to the ship. From that point on, the buyer is responsible for loading them to the ship and transporting them by sea.
FOB (Free on Board)
The seller delivers when the merchandise is on board the vessel. The risk is transferred when the merchandise crosses the ship's board.
Example: A coffee vendor loads the containers onto the ship. Once on board, the buyer assumes the risks of the maritime trip and pays for the freight.
CFR (Cost and Freight)
The seller pays for shipping to the port of destination, but the risk is transferred when the goods are on board at the port of origin.
Example: A timber exporter pays the sea freight to the port of destination, but if the cargo is damaged during the voyage, it's the buyer's problem.
CIF (Cost, Insurance and Freight)
Like CFR, but the seller also takes out basic marine insurance. The risk is transferred when the merchandise is on board at origin.
Example: A chemical seller pays for shipping and insurance to the destination port. Although he pays for these services, the risk passes to the buyer when the goods board the ship at origin.
How to choose the right Incoterm
Choosing the right Incoterm depends on several factors: experience in international trade, logistical capacity, knowledge of the destination market and desired level of control over shipping.
For new exporters, terms such as FCA or FOB are often good starting points. Experienced importers may prefer EXW for maximum control. DDP is ideal when the seller knows the target market well.
Key Things to Remember
Incoterms define liabilities but they don't transfer ownership, that's what the purchase agreement defines. Always specify the exact place of delivery and use the current version (currently Incoterms 2020).
Each term involves different costs and risks. Analyze your specific operation and choose the Incoterm that best suits your business needs and logistics capabilities.
Do you need specialized advice for your international trade operations? At ACONISA we have experts in international logistics who can help you optimize your imports and exports. Contact us for a personalized consultation.
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