What are Incoterms?
Incoterms are trade rules established by the International Chamber of Commerce (ICC) that define when cost, risk, and responsibility transfer from seller to buyer during transportation. Clear terms enable pre-agreement on transport, insurance, and customs cost allocation and accident liability scope.
Definition of Incoterms
Incoterms are trade rules established by the International Chamber of Commerce (ICC) that define when cost, risk, and responsibility transfer from seller to buyer during transportation. Clear terms enable pre-agreement on transport, insurance, and customs cost allocation and accident liability scope. Confirming use of the latest version (Incoterms 2020) is important.
Major Incoterms
Key terms include EXW, FCA, FOB, CFR, CIF, CPT, CIP, DAP, DPU, and DDP. Sea-only terms (FOB, CFR, CIF) and terms applicable to all transport modes (FCA, CPT, etc.) are distinguished, so select based on the transport type. Each term has different cost and risk transfer points and document responsibilities, so accurately indicate in contracts.
Key Differences Between Terms
FOB means the seller is responsible until goods are loaded on board, after which risk and cost pass to the buyer. CIF means the seller bears marine insurance and freight, but risk transfers at the point goods pass the ship's rail at the port of shipment. DDP is the most seller-burdensome term where the seller bears all costs including duties, taxes, and customs clearance. EXW is factory delivery after which the buyer bears all costs and risks.
Documentation and Customs Responsibility
Export and import customs clearance responsibilities vary by term. Under EXW, the buyer must handle export clearance, which can be problematic without experience. From FCA onward, the seller handles export clearance. DAP/DDP terms assign import clearance and duty burden differently to buyer or seller. Clarifying customs document and certification preparation responsibilities reduces delays.
Use in Quotations and Negotiations
Since freight, insurance, and tax inclusion scope differs by Incoterms, clearly state the term in quotations. Even for the same product, FOB and CIF totals differ significantly, so standardize comparison bases. Proposing terms that consider the buyer's logistics capabilities, local regulations, lead time, and exchange rate/freight volatility risk improves negotiation leverage.
Practical Checkpoints
Specify the same Incoterms condition and location (e.g., FOB Shanghai, DAP New York) in contracts, commercial invoices, and shipping documents. Clear condition interpretation is needed for liability determination in transit accidents or delays. Note latest version applicability, and verify country-specific practices (FOB timing, wharf delivery scope) with forwarders to prevent disputes.
Apply "Incoterms" to your global sales strategy
Rinda AI leverages concepts like Incoterms to automatically discover and reach out to the right global buyers for your business.