Incoterms or International Trade Terms are defined as the set of terms that are standardized and used in the case of international trade. Companies that ship goods or companies that receive goods from international markets via ships should be aware of these terms. They help to decide the terms of delivery between the seller and the buyer. It also specifies which party is responsible for the insurance of the goods and which party is supposed to bear the costs of unloading and loading the products. When these terms are clarified between the parties, there is hardly any confusion to deal with. Thus, to facilitate international transactions, Incoterms first appeared in 1936.

ICC is the organization that established these rules that govern cross-border exchanges even today. Many changes to the terms have been incorporated to adapt to changes in the global business environment. The correct and prudent use of incoterms helps companies to enjoy several benefits. The parties must adhere to the shipping rules mentioned in the incoterms for clarity in transactions. The latest amendments to the shipping rules are available in the 2010 Incoterms which have brought many useful modifications to the system.

Risk reduction:

The most important benefit of the shipping rules mentioned in the Incoterms helps to minimize business risks. International transactions are known to take place between different countries that follow different languages ​​and business cultures. Therefore, it is always a good idea to have everything in writing to avoid any kind of misunderstanding. Using correct incoterms makes the contract much more valid and simplified. Therefore, there is no risk when transacting with a foreign company.

The contract of sale must have all the obligations of the seller and the buyer that are dedicated to the export and import of the products. This eliminates any type of confusion related to the rules of transporting the merchandise from one point to another. Therefore, the parties to the transaction know when the risks and costs involved in the goods in the shipping process would be transferred.

Understanding the rules:

  • The E rules: According to this rule, the agreement specifies that the goods must be delivered EXW, that is, “ex works”. This indicates that the merchandise would arrive at the seller’s factory or warehouse. Therefore, the seller is not responsible for any expenses related to transportation, freight charges, and customs fees.
  • The F rules: This rule involved three terms: FOB, FCA, FAS. Here, the seller sends the shipment to the carrier designated by the buyer. In this case, the seller is responsible for bearing the shipping costs and subsequently all other costs are borne by the buyer.
  • Rules C: In this type, the seller contracts the transport but does not take into account any risk or damage of the merchandise after the products are shipped. Related terms here are: CIF, CFR, CIP, CPT.
  • Rules D: The seller assumes any risk involved in delivering the goods to the buyer’s door. The terms used are: DAP, DDP, DAT.

So you will see that each risk factor has been so well defined in the rules that both parties can clearly understand what their obligations are. There is no room for confusion if one understands the terms well. It facilitates not only smooth transactions, but is also useful in strategic logistics management.

Most small businesses prefer to transact under the C terms. This ensures that the buyer has more understanding when shipping is in bulk. Until the moment the cargo reaches the port of origin, all costs are borne by the seller. Subsequently, the buyer assumes responsibility for the costs to the port of discharge. So more or less the burden of risks and costs is divided equally between the parties. The latest version of the Incoterms that came out in 2010 has also defined FOB Incoterms well. This has made the segregations quite understandable and understandable.

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