Shipping Incoterms: The Complete Guide – Guided Imports (2023)

What are Incoterms?

International commercial trade terms, or Incoterms for short, are terms of sale that buyers and sellers use to communicate which party is responsible for the duties, costs, and risks involved in transferring the goods to the buyer in international trade. These are legally binding agreements published by the International Chamber of Commerce (ICC) and followed by virtually all countries.

Every 10 years, the ICC updates the Incoterms to ensure that they are consistent with the current international trade process. Incoterms werelast updateJanuary 1st,2020and include 11 unique types.

When buyers buy products internationally, sellers often add a three-letter abbreviation from one of the 11 Incoterms to define the trade terms. These terms refer to various tasks, costs, risks and logistics of the acquisition of goods, whether by sea, air or land transport.

Each Incoterm defines the following responsibilities and duties:

• place of delivery– This section describes where the goods are transferred from the seller to the buyer.
• The person responsible for transportation costs– The section defines which party bears the freight costs. This component is often referred to as freight prepaid or freight collect.
• Export and import regulations– Each term defines whether the seller or the buyer is responsible for covering the cost and facilitating the export and import of the cargo.
• The person responsible for cargo insurance– Cargo insurance is required in some Incoterms. Each Incoterm defines who has to pay for cargo insurance.

Here is a simplified explanation of each Incoterm:

• EXW– Former factory or warehouse:The seller is responsible for the packaging of the products and the delivery of the merchandise. The freight is delivered to the buyer while the freight is still at the seller's location. The buyer is then responsible for exporting, shipping and importing the cargo to its destination.

• FCA – Free Carrier: The seller is responsible for transporting the cargo to a defined destination within the seller's country, usually a shipping terminal. Once the cargo arrives at the intended destination, the shipment is delivered to the buyer, who must then pay the freight cost and complete the import and delivery process. Depending on the designated place, the loading will be done by the seller or the buyer.

• FAS – Free Alongside Ship: The seller must manage the entire cargo export process until the merchandise is next to the ship or other means of transport. Once next to the boat, the risk passes to the buyer. The buyer is responsible for loading the cargo on the required vessel and shipping the goods to their final destination.

• FOB – Frei an Bord: The seller has to manage the entire process of exporting the cargo and loading the products on the ship. Once the cargo is safely loaded, the products are delivered to the buyer. The buyer has to pay the freight that transports the merchandise to its destination and is responsible for all import costs.

• CFR - Cost and Freight:The seller is responsible for transporting the cargo to the buyer's port. Once the merchandise has arrived at port, the responsibility passes to the buyer. The buyer then has to unload the cargo and import the goods to the destination country, followed by importation and delivery to the final destination.

• CIF – Cost, Insurance and Freight: The seller bears the costs of shipping and securing the cargo to the port desired by the buyer. Once the merchandise arrives at the port, the responsibility for the merchandise passes to the buyer. The buyer must then bear the costs of unloading, importing and delivering their shipment. CIF requires the seller to take out cargo insurance.

• CPT – Free shipping to: The seller must load and unload the cargo from the ship at the designated place of delivery. Once the merchandise is unloaded, the cargo is delivered to the buyer, who is in charge of importing and transporting the cargo to the final destination.

• CIP – Transportation paid and insured: The seller has to bear the transportation costs and insure the cargo to the defined place of delivery. The shipment is released to the buyer after the cargo is unloaded and delivered to the terminal. Once the goods are unloaded and delivered at the defined terminal, the shipment passes to the buyer. The buyer must import and handle the rest of the shipping process in order for the goods to reach their final destination. CIP requires the seller to purchase cargo insurance.

• DAP - Delivered to location: The seller must deliver the cargo to the defined final destination. After delivery, the freight passes to the buyer. The buyer must unload the shipment from the truck. The buyer is also responsible for import duties, taxes, and customs clearance.

• DPU – delivered downloaded on the site: The seller must deliver and unload the cargo to the final destination. Once the shipment has been successfully unloaded at the buyer's warehouse, responsibility passes to the buyer. The buyer is responsible for import duties, taxes and customs clearance.

• DDP- Delivered Customs Clearance: The seller is responsible for delivering the cargo to the final destination and for paying import duties, taxes, and customs clearance. Once the cargo reaches its destination, the responsibility passes to the buyer, who must bear the cost of unloading the shipment. DDP is the only Incoterm that requires the seller to pay all customs duties.

Advantages of using Incoterms

Incoterms communicate a binding agreement between the buyer and the seller that outlines the responsibilities between the manufacturer and the buyer of goods in connection with the delivery of the goods.

Although it is not mandatory for sellers to provide an Incoterm when selling internationally, the benefit of doing so helps to avoid confusion about the roles and responsibilities between the two parties. Because language barriers and cultural differences are common in international trade, these terms simplify an often complicated process and help communicate much of the process of moving goods from seller to buyer. If you are new to importing and Incoterms, consider working with aChina freight forwarderto avoid costly misunderstandings.

What is not included in the Incoterms that I should take into account as a buyer?

Incoterms help communicate much of the logistics and freight transfer process, which is why most international traders choose to rely on them. While these terms say a lot, there's a lot of information they don't explain. Buyers should not only be aware of what these terms mean, but also what is not included in each of these terms, as misunderstandings can easily lead to costly misunderstandings and mistakes.

International Trade Terms help communicate the terms of delivery for a product purchased internationally. These terms do not define the terms of payment of a product or other external rights. They do not explain how the buyer should pay for the goods, and they do not determine who is responsible for the freight in case of defective, incorrect or failed production.

Incoterms do not exist to protect the buyer from fraud or to guarantee the products in any way. The only condition that Incoterms define is which party is responsible during the transportation process. Incoterms are not considered a contractual agreement for the sale of a product; Instead, they help communicate part of the sales contract to both parties.

One aspect that can be confusing for some buyers is whether or not Incoterms protect buyers from the risk of cargo damage, loss or theft. Each Incoterm can help define each of these concerns; However, it is important to note that there are only two Incoterms that require the seller to purchase cargo insurance. Unless cargo insurance has been arranged prior to shipment, the buyer must insure the cargo separately.

Where can I get more information about the Incoterm 2020 rules?

The International Chamber of Commerce publishes updated Incoterms every ten years. While companies like Guided Imports rely on them to ensure they are up to date with the terms of the ICC, you can learn more about the rules at theICC website, or directly download our guide that follows all published updates.

PDF Incoterms-Tabelle

At Guided Imports, we focus on ensuring that our international logistics are as seamless and hassle-free as possible for our customers. We believe that a knowledgeable shipper is a happy shipper. That's why we've created several resources to help you understand each Incoterm and use it in international trade.

We have created "The Complete Shipper's Guide to Incoterms and What They Mean". to help you better understand these critical terms and enhance your understanding of international trade.

In this free guide, we share an easy-to-understand Incoterms table that explains each term at a glance. We also explain what the individual terms mean, how they work in a sales contract, and what you should pay attention to.

Click the link below to download our guide to Incoterms, which includes an easy-to-understand table and explanation of each international trade term.

Understanding Incoterms responsibilities

Not all Incoterms apply to all shipping methods. While all Incoterms apply to transportation by water, some can only be used for transportation by water and not by land or air. Knowing these differences can be crucial because if you only use Incoterms for inland waterways and use an alternative method, you may have to pay unexpected additional charges.

Below is a list of Incoterms that you can use for all kinds of shipping methods;

• EXW – ex factory or ex warehouse
• FCA – Free Carrier
• CPT – Carriage paid to
• CIP - Carriage Paid and Insured
• DAP: delivered locally
• DPU – Delivered downloaded on site
• DDP - Delivered Duty Paid

Below you will find Incoterms that you can only use for maritime and barge transport:

• FAS - Free Alongside Ship
• FOB – Free on board
• CFR - Cost and Freight
• CIF – Cost, Freight Insurance

What is the difference between "Freight Collect" and "Freight Prepaid"?

Freight prepaid and freight collect are terms commonly used between buyers and sellers when talking about international freight. When a seller mentions "Freight Collect," they mean one of four Incoterms that require the buyer to collect and pay all freight charges. The Incoterms associated with Freight Collect are:

1. EXW – ex factory or ex warehouse
2. FCA – Free Carrier
3. FAS - Free Alongside Ship
4. FOB – Free on board

Freight prepaid indicates that the seller pays the freight costs. The remaining seven Incoterms consist of Freight Prepaid:

1. CFR - Cost and Freight
2. CIF – Cost, Insurance and Freight
3. CPT – Carriage paid to
4. CIP - Carriage Paid and Insured
5. DAP: delivered locally
6. DPU – Delivered downloaded on site
7. DDP - Delivered Duty Paid

What types of insurance does a seller need to buy when shipping under CIF and CIP Incoterms?

Two international trade regulations require the seller to insure the cargo before shipment. These two terms are CIF and CIP. Each of these conditions has unique requirements for the type of insurance a seller must purchase.

• CIF or Cost, Insurance & Freight requires an insurance policy with minimum coverage of Institute Cargo Clause (C).
• CIP or Carriage and insurance paid up requires an insurance policy with minimum coverage of the Institute Cargo Clause (A).

How do buyers and sellers agree which Incoterms to use?

Unless specifically requested by a buyer, sellers often have the preferred Incoterms they use that work best for them and their customers. Buyers can often have unique preferences that are communicated to sellers, and through this communication, buyers and sellers can agree on the most ideal Incoterm for their deal.

For Incoterms to be contractually valid, the terms must appear on the sales contract, bill of sale, or bill of sale. Because these are the terms of the contract, the buyer and seller should make their agreement clear and not rely on verbal communication to define each party's responsibilities when shipping products internationally.

When choosing an Incoterm, no special documents or forms are required; Instead, the term should be listed in relation to the price of the product and defined as an agreed Incoterm.

Incoterms may change during an order process. For example, if a shipment was intended for ocean transportation but must be shipped by air due to delays or unforeseen circumstances, an Incoterm might change. As discussed above, not all conditions apply to air travel. If the terms change, the buyer and seller must give notice of that change just as they would any other change to a sales contract.