International Chamber of Commerce (ICC) created Incoterms in 1936 with the aim of providing importers and exporters with a standardized global language that facilitates transparency in international transactions. These rules are accepted by governments, judicial authorities, and professionals as a bridge to standardize trade between countries.
Their importance lies in the fact that any small change in the wording of a sales contract can have a significant negative impact if a problem arises during the transport or delivery of the goods. Therefore, it is crucial that, regardless of the language of each party involved, the rights and obligations in international sales are perfectly defined.
Incoterms prevent interpretation issues regarding contract conditions as they regulate the responsibilities of all aspects of an international trade operation, such as delivery, insurance, costs, and risks for both the seller and the buyer.
Why is it important to choose the right Incoterms?
Using Incoterms avoids problems that could arise from interpreting contract conditions differently. International Commercial Terms regulate the elements that make up the price in an import and establish the conditions, delivery, costs, and risks between the seller and the buyer.
Incoterms clearly define without the risk of double interpretations:
- The transportation costs of the goods
- The person responsible for carrying out or contracting customs procedures
- The party responsible for paying duties and VAT
- The moment of transfer of the goods
- The person responsible for contracting insurance
This way, there are no doubts about who is responsible for shipping costs, who owns the goods at each point of the shipment, or who is liable for paying for damages to the goods in transit.
Updated Incoterms 2010
Incoterms are updated every ten years. The last revision took place in 2010 and will remain in effect until the International Chamber of Commerce publishes new changes, expected in 2020.
The 2010 Incoterms are classified into four main categories:
- Group E. In this case, direct delivery is agreed upon at the departure point, so the seller delivers the goods to the buyer at their own facilities. It includes the EXW term.
- Group F. This Incoterm agrees on indirect delivery without payment for the main transport. This means that the seller must deliver the goods to the carrier, with the buyer responsible for the payment. It includes the terms FCA, FAS, and FOB.
- Group C. This involves indirect delivery with payment for the main transport. The seller arranges the transport but is not responsible for losses or damage to the goods during the journey or for any additional costs. It includes the terms CFR, CIF, CPT, and CIP.
- Group D. (Direct delivery at the point of arrival): In this type of delivery, the seller assumes the costs and risks of transporting the goods to the destination country and transfers them to the buyer at the agreed point. It includes the terms DAT, DAP, and DDP.
According to this classification, there are a total of 11 Incoterms based on the responsibilities of each party and the chosen mode of transport.
To learn more about the meaning of the 2010 Incoterms, you can read the article “Use of Updated Incoterms to Avoid Extra Costs in Import Operations”.
How to Choose the Right Incoterm?
Each Incoterm has an application depending on the different factors involved in the international transport of goods. It is most advisable to choose the mode that provides the most control over time and costs. This way, delays and unexpected expenses are avoided. Our experience in imports from China leads us to the conclusion that the FOB Incoterm is usually the safest and most competitive.
When importing with the FOB Incoterm, the responsibilities fall on the importer. Although it may be more complex, this mode has the great advantage of giving the buyer full control over the shipment. This way, costs can be reduced as there is room for negotiation, and tax advantages can be obtained.
In any case, to choose the right Incoterm, one must consider the competitive advantages of each mode, possible restrictions, export and import costs, and risks.
If you need to know which Incoterms to use for your international trade operations, Bull Importer has experienced staff to advise you
