What Are Incoterms ?

Incoterms define the responsibilities of sellers and buyers in international transactions. These terms outline who is responsible for transporting goods, who covers the costs, and at what point the risk of goods is transferred from the seller to the buyer. Incoterms are globally recognized, and using them correctly ensures that both parties are clear on their obligations, reducing potential disputes.

There are 11 Incoterms in the latest version (Incoterms 2024), but here we will focus on the most widely used ones, including FOB, CIF, and EXW, which play a significant role in global logistics.

Commonly Used Incoterms

1. EXW (Ex Works)

EXW places minimal responsibility on the seller. Under this term, the seller makes the goods available at their premises (factory, warehouse, etc.), and the buyer is responsible for everything from there: loading, transportation, customs clearance, and all risks involved in shipping.

Seller’s Responsibility: Only to make the goods available at their premises.
Buyer’s Responsibility: Covers all transport, customs, and risk from the seller’s location to the destination.

When to Use EXW: EXW is often used when the buyer has full control over the logistics process or prefers to manage the transportation and associated costs directly. However, for inexperienced buyers, this term can be risky because they must handle all transport and customs procedures.

2. FOB (Free On Board)

FOB is one of the most common Incoterms used in ocean freight. Under FOB, the seller is responsible for delivering the goods onto the ship, after which the risk and responsibility shift to the buyer. The buyer then assumes the cost of transport and insurance from that point onward.

Seller’s Responsibility: Delivering goods to the port, handling export clearance, and loading the goods onto the ship.
Buyer’s Responsibility: Once the goods are on board, the buyer takes on the transport costs and the risk.

When to Use FOB: FOB is widely used because it offers a clear division of responsibilities. It is ideal for businesses that want the seller to handle export procedures but prefer to control the shipping and insurance once the goods are on board.

3. CIF (Cost, Insurance, and Freight)

CIF shifts more responsibility onto the seller. Under CIF, the seller pays for the cost of shipping, freight, and insurance to the destination port. However, the risk is transferred to the buyer once the goods are loaded onto the ship, just like FOB. The key difference is that the seller is responsible for insuring the goods while they are in transit.

Seller’s Responsibility: Covers cost, insurance, and freight to the destination port.
Buyer’s Responsibility: Assumes risk once goods are loaded onto the vessel and is responsible for unloading, import customs clearance, and delivery to the final destination.

When to Use CIF: This term is beneficial when the buyer prefers the seller to handle shipping and insurance, especially in countries where it is difficult to obtain reliable marine insurance. It’s also common in international sales where buyers may have less experience managing the logistics.

4. DAP (Delivered at Place)

Under DAP, the seller is responsible for delivering the goods to a specific place, which could be the buyer’s premises or another agreed-upon location. The seller covers all costs and risks associated with transportation, but the buyer is responsible for unloading and handling import customs procedures.

Seller’s Responsibility: Delivery to the buyer’s location and covering transport costs and risks up to that point.
Buyer’s Responsibility: Unloading the goods and paying import duties and taxes.

When to Use DAP: DAP is commonly used when the seller wants to offer the buyer a hassle-free solution by handling most of the transport and risks. It’s ideal for buyers who may not have the logistics infrastructure to manage transportation from a port or terminal.

The Significance of Incoterms in Global Logistics

In international trade, shipping goods across borders involves various risks and costs. Using Incoterms ensures that both the seller and the buyer understand who is responsible for different parts of the shipping process, from packaging and shipping to insurance and import duties. This clarity reduces the chances of disputes and helps both parties plan their logistics and budget effectively.

Key Benefits of Using Incoterms:

Cost Transparency: Buyers and sellers have a clear understanding of who bears the costs at each stage of the shipping process.
Risk Management: Clearly defines the point at which risk is transferred from the seller to the buyer.
Efficient Logistics Planning: Helps businesses plan their logistics more effectively by knowing their responsibilities for transport, insurance, and customs.
Global Standardization: Incoterms provide a standardized language that can be understood and recognized by traders, freight forwarders, and logistics providers worldwide.

Incoterms play a vital role in international trade by clearly defining the obligations and responsibilities of buyers and sellers. Whether you are handling ocean freight with FOB or CIF, or managing door-to-door delivery with DAP, understanding and using Incoterms correctly can help streamline your logistics and avoid costly misunderstandings.

For businesses involved in global trade, working with a logistics partner that has a deep understanding of Incoterms is crucial for ensuring smooth, cost-effective, and efficient international transactions.