Incoterms
Incoterms (International Commercial Terms) are standardized trade terms published by the International Chamber of Commerce that define responsibilities for shipping, insurance, customs, and risk transfer between buyers and sellers in international trade. Using standard Incoterms prevents misunderstandings about who is responsible for what during shipment.
Examples
EXW (Ex Works): The seller makes goods available at their premises. The buyer arranges and pays for all transportation, assumes risk when goods are picked up, and handles all export and import formalities.
FOB (Free on Board): The seller delivers goods on board the vessel at the port of shipment. Risk transfers when goods cross the ship's rail. The seller handles export clearance; the buyer pays freight and insurance from that point.
DDP (Delivered Duty Paid): The seller delivers goods cleared for import at the destination, bearing all costs and risks including duties and taxes. The buyer simply receives goods at the specified location.
Definition
Incoterms serve critical functions in international trade: defining who pays for transportation at each stage, specifying where risk of loss transfers from seller to buyer, determining responsibility for insurance, and clarifying customs clearance obligations.
The current version, Incoterms 2020, includes 11 terms ranging from EXW (minimum seller responsibility) to DDP (maximum seller responsibility). Terms in between allocate various responsibilities. Selecting the appropriate term depends on capabilities, preferences, and negotiating leverage.
Incoterm selection affects total cost and risk allocation. A lower unit price with EXW terms may cost more overall when the buyer adds freight, insurance, and customs handling. Comparisons should use common terms or adjust for term differences.
Proper Incoterm usage includes specifying the version year, the term abbreviation, and the named place. For example: "FOB Shanghai, Incoterms 2020" clearly defines where risk transfers and what obligations apply.
Frequently asked questions
What are Incoterms in simple terms?
Incoterms (International Commercial Terms) are standardized trade terms published by the International Chamber of Commerce that define responsibilities for shipping, insurance, customs, and risk transfer between buyers and sellers in international trade. Using standard Incoterms prevents misunderstandings about who is responsible for what during a shipment.
How many Incoterms are there?
The current version, Incoterms 2020, includes 11 terms ranging from EXW (minimum seller responsibility) to DDP (maximum seller responsibility). Under EXW the buyer arranges and pays for all transportation and handles all export and import formalities, while under DDP the seller delivers goods cleared for import at destination, bearing all costs and risks including duties and taxes. Terms in between allocate the responsibilities in varying splits.
How do you write an Incoterm correctly?
Proper Incoterm usage specifies the term abbreviation, the named place, and the version year, for example 'FOB Shanghai, Incoterms 2020'. That format clearly defines where risk transfers and what obligations apply. Omitting the place or the version creates exactly the ambiguity the terms exist to prevent.
How do Incoterms affect price comparisons between suppliers?
Incoterm selection affects total cost and risk allocation, so quotes on different terms are not directly comparable. A lower unit price with EXW terms may cost more overall once the buyer adds freight, insurance, and customs handling. Comparisons should use common terms or adjust for the term differences.
Which Incoterm should a buyer choose?
Selecting the appropriate Incoterm depends on capabilities, preferences, and negotiating position. Buyers with strong freight contracts often prefer terms like EXW or FOB that let them control transportation and risk from early in the journey, while buyers without international logistics capability may prefer DDP, where the seller delivers goods cleared for import at the destination.