An Introduction to Incoterms for Beginners
Part 1: What are Incoterms?
Today, we’re going to take a look at Incoterms—what they are and how they originated. Next time, we’ll discuss how to apply Incoterms, how exporters benefit from them, and why they matter, so stay tuned!
What are Incoterms, and who uses them?
International Commercial Terms are the official International Chamber of Commerce (ICC) rules that explain trade terms. They are a voluntary, authoritative, globally-accepted and adhered-to text for determining the responsibilities of buyers and sellers for the delivery of goods under sales contracts for domestic and international trade. Incoterms closely correspond to the U.N. Convention on Contracts for the International Sales of Goods. Incoterms are known and implemented by all major trading nations.
Incoterms are only part of the whole export contract. They don’t say anything about the price to be paid or the method of payment that is used in the transaction. Furthermore, Incoterms don’t deal with the transfer of ownership of the goods, breach of contract, or product liability; all of these issues need to be considered in the contract of sale. Also, Incoterms can’t override any mandatory laws.
The Origin Of Incoterms
Differences in trading practices and legal interpretations between traders of different countries necessitated a need for a common set of rules. These rules needed to be easy to understand by all of the participants in order to prevent misunderstandings, disputes and litigation. Incoterms were first created in 1936 and were designated Incoterms 1936. Since then, Incoterms have evolved into a codified worldwide contractual standard. They are periodically updated as events in international trade occur and require attention. Amendments and additions were made in 1953, 1967, 1976, 1980, 2000, and 2010.
The most current revision of the terms, Incoterms 2010, came into effect on January 1, 2011, and consists of 11 Incoterms. The latest revision categorizes the terms by modes of transport, and according to the export.gov website, reflect “a need for improved cargo security, changes to the Uniform Commercial Code in 2004 that resulted in a deletion of U.S. shipment and delivery terms, and new trends in global transportation.” You'll find an excellent discussion of the Incoterms 2010 and how to use them in this three-part series of articles by Dr. Roberto Bergami.
While you can still use previous versions of Incoterms, like Incoterms 2000, it’s not preferred, and it’s going to be more of a hassle; if you’re not using Incoterms 2010, you must clearly state which version you’re using and make sure your documentation is correct throughout the transaction. If you’re looking to streamline that tedious process, our software can help.
Incoterms that apply to any mode of transport are:
- 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 apply to sea and inland waterway transport only:
- FAS (Free Alongside Ship)
- FOB (Free on Board)
- CFR (Cost and Freight)
- CIF (Cost, Insurance, and Freight)
We’ll discuss each of these terms in detail in our next article in this series. If you’d like to know more, you'll find books and seminars that explain the Incoterms 2010 in more detail at the International Business Training website, or consult the Incoterms 2010 Chart of Responsibility for more information.