Incoterms

Incoterms are rules that establish the guidelines for international commerce. They are used by all parties involved in trading goods to establish responsibilities for payments and transport of goods sold between countries, as well as those for paying taxes, tariffs, and other fees. Incoterms are administered by the International Chamber of Commerce (ICC) and protected by a copyright held by the chamber. The use of Incoterms began in the early twentieth century, and they have been updated several times to reflect changes in how the world does business.

Background

The International Chamber of Commerce (ICC) began in 1919. A group of international financial leaders created it to help stimulate international trade in the days following World War I (1914–1918). They foresaw the ICC as a way to establish standards that would govern international business in a way that was orderly and fair to all parties.

Within a few years of the establishment of the ICC, its members ordered the study of the terms that were used by businesses around the world related to international commerce and shipping. After investigating how six of the most frequently used terms were interpreted in several key countries, the ICC determined that there was little commonality in how the terms were applied. The efforts to understand how international trade terms were understood were expanded in 1928 with another study that included dozens of countries around the world.

Following this second study, the ICC developed guidelines for six of the most commonly used terms. These included guidelines pertaining to free alongside (FAS), free on board (FOB), cost and freight (CFR), cost, insurance and freight (CIF), delivered ex ship (DES), and delivered ex quay (DEQ). These rules were established in 1936 and called the International Chamber of Commerce Terms, or Incoterms.

The challenges of World War II (1939–1945) hindered international trade, and no changes were made to the Incoterms. As trade normalized in the years following the war, new revisions were considered. In 1953, a new version of the Incoterms was released. Prior to that time, the rules dealt primarily with international trade conducted by sea. The 1953 revision included three new rules aimed at commerce transported by means other than an ocean-going vessel. These included delivered costs paid (DCP), free on rail (FOR), and free on truck (FOT). Due to misinterpretations of some of these rules, an additional revision was issued in 1967. This one added two new guidelines related to delivery at frontier (DAF) and delivered at place (DAP). In 1974, an additional revision addressed the fact that more merchandise was transported via airplane and added free on board airport (FOB Airport) to Incoterms.

Six years later, another revision addressed the use of freight containers for shipping and added the term free carrier named at point (FRC). In 1990, a substantial revision combined several terms, including FOR, FOT, and FOB Airport, into the more inclusive single term FCA, or free carrier at the named point. The revisions over the next three decades addressed the addition of modern technology, such as electronic messaging, and further simplified the Incoterms by combining several terms for specific forms of transactions into broader groups. The ninth edition was released in 2020, which changed Delivered at Terminal (DAT) to Delivered At Place Unloaded (DPU), along with several changes to security costs.

Overview

Incoterms provide a uniform and universal way for buyers and sellers to conduct international business. They are important because they eliminate a number of problems caused by differences in laws, practices, and cultures. The terms make it easier to conduct trade across international borders.

Incoterms also make it easier to do international business by making the full cost of doing business more understandable. The consistent terms established through Incoterms make it clear which party in the transaction—buyer or seller—is responsible for different costs and when they will be paid. This makes it possible for each party to determine the actual cost of the merchandise in advance and make informed decisions about the purchase or sale.

Each Incoterm describes a specific type of transaction and defines who pays for what. Like the 2010 revision, the 2020 edition outlines eleven Incoterms. Seven of them apply to merchandise delivered by all means of transportation and four apply to goods transported by water.

The terms that apply to all means of transportation include the following:

• Ex Words (EXW)—The seller is responsible for moving the merchandise to the buyer’s place of business or other designated site. The buyer then becomes fully responsible for the merchandise, including any fees, export clearances, or loading that may be necessary.
• Free Carrier (FCA)—The seller delivers the merchandise to another person or carrier, such as a shipping company, designated by the buyer, who then becomes fully responsible for the merchandise and all related fees.
• Carriage Paid To (CPT)—The seller delivers the merchandise to another carrier chosen by the seller and pays the costs of transportation to get the merchandise to its final destination.
• Carriage and Insurance Paid To (CIP)—The seller is responsible for moving the goods to the designated location as well as paying for insurance to cover what the buyer has paid if something happens to the merchandise.
• Delivered At Place Unloaded (DPU)—The seller is responsible for the merchandise until it reaches a terminal or port and unloaded. In the 2010 edition, DAP is listed as Delivered at Terminal (DAT).
• Delivered at Place (DAP)—The seller is responsible until the vehicle containing the merchandise arrives at the designated place and is ready to be unloaded, at which point the buyer becomes fully responsible.
• Delivered Duty Paid (DDP)—The seller is responsible for transporting the merchandise until it is fully available to the buyer, including clearing both export and import requirements and paying any duties and tariffs.

The terms that apply to transport via ocean or inland waterways include the following:

• Free on Board (FOB)—The seller is responsible to deliver the merchandise to a vessel at a port determined by the buyer. The buyer is fully responsible for the merchandise and all costs related to it once it reaches this point.
• Free Alongside (FAS)—The seller is responsible for the merchandise until it is alongside the ship at the port determined by the buyer. The buyer then becomes fully responsible for the merchandise and all costs.
• Cost and Freight (CFR)—The seller is responsible to deliver the goods on board the vessel, at which point responsibility transfers to the buyer.
• Cost, Insurance, and Freight (CIF)—The seller is responsible to deliver the merchandise to the vessel and provides insurance to cover losses incurred by the buyer. The buyer becomes responsible once the merchandise is on board.

Bibliography

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