Incoterms: what are they and what is their importance for international businesses?

Exporters, importers, and people who work in shipping agencies have probably already heard of Incoterms. After all, they were established to facilitate and regulate the import and export activities.

However, what do they really mean? With that in mind, we’ve developed this article. By reading it, you’ll understand the importance of these terms for international commerce, the categories in which they are divided, and how they organize certain aspects.

Let’s go!

After all, what are Incoterms?

Incoterms — short for International Commercial Terms — are nothing more, nothing less than a set of standards developed to make import and export processes more efficient and transparent. The current version, organized in 2010 and in force since 2011, was developed by the International Chamber of Commerce (ICC).

The idea of the standards is to promote harmony on international businesses. Therefore, they are a support for the buyer and for the seller who act on the foreign trade. To achieve that goal, the following factors are prioritized on the document:

• risk of transport;
• place of delivery;
• customs duties responsibility.

In general terms, they are made up of 11 terms, which are divided into 4 great categories: E, F, C, and D. This division is unofficial, that is, it’s not originally a part of the determinations proposed by the regulation. Even so, it’s frequently used, since it facilitates the comprehension of the propositions for those involved.

It’s worth emphasizing that, despite its importance as a whole, the most common regulations on the international maritime market are FOB, CIF, or CFR. We’ll discuss more about all of them on the next topic.

Incoterms and their categories. Know them!

Category E

EXW — Ex Works

The merchandise is disposed to the buyer on the seller’s establishment, which can be a factory, a warehouse etc. The merchandise’s export and total cost of transport are responsibilities of the importer.

Category F

FCA — Free Carrier

The merchandise is delivered to the importer in a determined location already “unencumbered”, that is, with the export procedures already dealt with. The exporter is responsible for transporting the cargo until the port/airport, as well as for all the processes and costs that follow.

FAS — Free Alongside Ship

The merchandise is taken to the seller/exporter by ship, at the terminal port. The loading operation and the international transport are responsibilities of the buyer.

FOB — Free On Board

In the FOB category, the exporter is not only responsible for transporting the merchandise until the port, but he or she must also load it on the ship. Therefore, the port operation costs fall to the exporter. This term is exclusive for sea shipping.

Category C

CFR — Cost and Freight

From this modality onwards, the exporter is the one who takes care of international transport. He or she also holds the responsibility of hiring a ship and paying for sea freight shipping. This only refers to transport by sea.

CIF — Cost, Insurance and Freight

It’s similar to CFR, but with the increase that the exporter hires insurance against the risk of loss or damage to the merchandise during international maritime transport.

CPT — Carriage Paid To

Conditions also similar to CFR, but applied to other means of transport other than maritime. The exporter is the one who hires transport.

CIP — Carriage and Insurance Paid To

Similar to CPT, but the exporter also bears the costs of insurance and of transporting the merchandising to a determined location.

Category D

DAT — Delivered At Terminal

The seller must deliver the merchandising discharged —  dealing with the discharge operation at the port — at the terminal designated by the buyer.

DAP — Delivered At Place

The seller assumes the commitment of delivering the merchandise at a location previously designated by the buyer.

DDP — Delivered Duty Paid

It’s the opposite of EXW. The exporter delivers the merchandise at the final destination, bearing the costs of the whole transport process until the location in which the merchandise will be used by the importer.

How are the deals chosen on an export/import contract?

In general, it can be said that that’s negotiated. Basically, the more responsibility one of the parties has in the process, the more money they make out of it. For those with limited knowledge about foreign trade and chartering, it’s more advantageous to choose a term that implies less responsibility, for example, because then the risks will be lesser.

On the other hand, those involved with more responsibilities in the process optimize their chances of higher earnings, since they can add value to their product. Thus, identifying these details is one of the central points of this kind of negotiation. Therefore, it’s fundamental to have expertise about the market and to know the uses and habits of each sector.

An example: a good part of Brazilian companies sell products in bulk (soy, ore etc.) using the FOB model and assume the encumbrance of bringing the merchandise to the port and loading it on the ship. From that moment on, the responsibility falls to the buyer.

For whom are Incoterms more useful?

It’s timely to highlight that they are not a contract in themselves. The composition of an international purchase and sale contract is defined when those involved negotiate, and the Incoterms act as guides to determine who will hire forwarding agents, shipping agents etc. Therefore, they are more relevant to exporters and importers.

Even though they are present only at that moment (export and import), there are a series of parallel contracts in between the productive chain, storage, and so forth. It is not for nothing that, in some cases, it’s important for intermediary agents to know which Incoterms were used so they can know for a fact who hired them.

What significant changes were made to Incoterms in 2010?

One of the most relevant changes is associated with the use of electronic means of communication. With the growing use of them, there are many emails that, today, have the validity of a document.

Nowadays, some shipping agency contracts are basically done as follows: the shipowner and the charterer send a contract template by email and use a digital signature, eliminating the need for printing, for a certified translation, or for a registry. Thereby, the procedures become much more dynamic, allowing many companies to close various deals daily and to save time and resources.

Finally, when thinking about purchase and sale contracts, you need to keep in mind that Incoterms are a suggestion, not an obligation. They are an international reference, helping to eliminate communication noises and giving the necessary fluency for contracts to be closed with less bureaucracy.

Now that you know everything about the subject, don’t miss out on the chance of leaving a comment with your doubts, impressions, and opinions!