Shipping Incoterms

Incoterms 2020 clearly define the point in a transaction where “the risk of loss or damage [to the goods] passes to the buyer.” These terms are categorized into two main groups, based on the delivery method, and include eleven predefined terms.

Categories of Incoterms

Water Transport Rules: This smaller group includes four terms specifically for sales involving water transport. These rules apply only when the condition of the goods can be verified at the loading point.

General Transport Rules: The larger group consists of seven terms that apply regardless of the transport mode, whether by air, road, or rail. They cannot, however, be used for combined transport methods like containerized freight.

The International Chamber of Commerce (ICC) has trademarked “Incoterms,” which stands for International Commercial Trade Words. These terms are crucial in international trade as they clarify the responsibilities, costs, and risks associated with moving goods from sellers to buyers.

Key Elements of Incoterms

1. Point of Delivery: Defines where the seller transfers the goods to the buyer.
2. Transportation Charges: Identifies who covers the freight costs, often indicated by terms like Freight Prepaid or Freight Collect.
3. Export and Import Requirements: Specifies whether the seller or buyer handles the charges and processes related to exporting and importing the cargo.
4. Freight Insurance: Some Incoterms mandate freight insurance, indicating who is responsible for these costs.

Overview of Each Incoterm

• EXW (Ex Works): The seller’s responsibility ends once the goods are packaged and delivered. The buyer handles all subsequent steps, including export, transport, and import.

• FCA (Free Carrier): The seller delivers the shipment to a specified location in their country, usually a shipping terminal. The buyer then takes over, paying for freight and completing the import and delivery process.

• FAS (Free Alongside Ship): The seller manages the export process until the cargo is alongside the ship. From there, the buyer takes over, responsible for loading and transporting the goods to their destination.

• FOB (Free On Board): The seller oversees the entire export process and loads the goods onto the ship. Once loaded, the buyer is responsible for transportation and import costs.

• CFR (Cost and Freight): The seller ships the freight to the buyer’s port. The buyer then unloads, imports, and transports the goods to their final destination.

• CIF (Cost, Insurance, and Freight): Similar to CFR, but the seller also provides insurance up to the port. The buyer takes over upon arrival, handling unloading, import, and final delivery.

• CPT (Carriage Paid To): The seller loads and unloads the shipment at the specified location. The buyer then imports and delivers the freight to its final destination.

• CIP (Carriage and Insurance Paid): The seller ships and insures the cargo to the specified delivery location. Once unloaded and delivered to the terminal, the buyer takes responsibility for the import and final delivery. The seller must obtain freight insurance.

Understanding these Incoterms is essential for smooth international trade operations. Each term clarifies specific responsibilities, reducing the risk of misunderstandings and ensuring a clear transfer of duties and costs between buyers and sellers.

• DAP – Delivered at Place: The seller is responsible for the freight delivered to the final, specified location. Once delivered, ownership of the goods passes to the buyer. The cargo must be unloaded from the vehicle by the buyer. Additionally, the purchaser is liable for import duties, taxes, and customs clearance. 

• DPU – Delivered at Place Unloaded: The seller is responsible for delivering and unloading the shipment at its final destination. Once the freight has been successfully unloaded at the buyer’s warehouse, the buyer assumes responsibility. Import duties, taxes, and customs clearance are the buyer’s responsibility. 

• DDP – Delivered Duty Paid: The seller is responsible for delivering the shipment to the final destination as well as covering all charges including import duty, taxes, and customs clearance. Once the item arrives at its destination, the buyer is responsible for the expenditures associated with unloading the shipment. DDP is the only Incoterm in which the seller is responsible for all duties.

The benefits of using Incoterms

To establish a legally binding contract between the buyer and seller, outlining the manufacturer’s and customer’s responsibilities regarding the delivery of the products.

Although sellers are not required to specify an Incoterm when selling internationally, doing so reduces confusion regarding the parties’ respective responsibilities and obligations.

Due to the prevalence of language barriers and cultural differences in international commerce, these terms describe a significant portion of the process of moving products from seller to buyer.

Consider working with a China to Canada freight forwarder if you are new to importing freight and incoterms and wish to avoid future costly errors.

What Does Incoterms Exclude That I Need to Know as a Buyer?

Incoterms facilitate the communication of a significant portion of the logistics and cargo transfer procedure, which is why the vast majority of international merchants employ them.

While these terms convey a substantial amount of information, they do not explain a significant amount.

As miscommunication frequently leads to misunderstandings and costly mistakes, it is crucial that purchasers comprehend not only what these terms indicate, but also what is not included in each of these terms.

International Commercial Trade Terms facilitate the communication of the terms of delivery for a product purchased internationally.

These conditions do not define the payment terms or any external rights for the product. They do not specify how the consumer should pay for the items nor who is responsible for the shipment in the event of defective, incorrect, or unsuccessful productions.

Incoterms do not exist to protect consumers from deception or guarantee products in any way.The only term defined by Incoterms is the responsible party during the transportation process.

Incoterms are not a contract for the sale of goods; rather, they allow both parties to communicate a portion of the purchase agreement.

Identifying whether Incoterms protect buyers against the risk of cargo damage, loss, or larceny may be challenging for some buyers.

Each Incoterm can help elucidate each of these concerns; however, only two Incoterms mandate that the seller purchase freight insurance.

Unless freight insurance is agreed upon prior to shipment, the customer must independently acquire cargo insurance.

Where Can I Observe Regarding the Incoterm 2023 Rules?

The International Chamber of Commerce creates new Incoterms every decade.

While businesses such as Paige Logistics rely on adhering to the ICC’s requirements, you can learn more about the rules by visiting the ICC’s website or by obtaining our handbook, which is updated whenever changes are made public.

At Paige Logistics, we are committed to ensuring that the international shipping logistics of our clients are as streamlined and straightforward as feasible.

Whether FCL or LCL, we believe that an informed shipper is a happy shipper.

Therefore, we have compiled a variety of resources to aid you in understanding each Incoterm and how to implement them in international commerce.

Comprehending Incoterms Obligations

Not all Incoterms are applicable to all cargo types. While all Incoterms are valid for canal transport, certain Incoterms can only be used for waterway transport and not for land or air transport.

If you employ a waterway-only Incoterm and ship by an other means, you may incur additional, unanticipated costs.

Below is a collection of Incoterms applicable to all shipping methods.

• EXW — Ex-Works or Ex-Storage

•  FCA – Free Carrier

•  CPT – Transportation Paid To

•  CIP – Transportation and Insurance Coverage Paid To

• DAP – Delivered At Location
• Delivered At Place Unloaded 
• Delivered Duty Paid (DDP)

The following Incoterms can only be used for maritime and inland waterway transport:

• Free Alongside Ship (FAS)
• FOB means Free on Board.
• Cost and Freight (CFR)
• CIF stands for Cost, Insurance, Freight.

What differentiates “Freight Collect” from “Freight Prepaid”?

Freight Prepaid and Freight Collect are terms frequently used between buyers and sellers in international freight transactions.

Freight Collect is one of four Incoterms requiring the buyer to collect and pay for all freight expenses. Freight Collect is connected with the following Incoterms:

1. Ex-Works or Ex-Warehouse (EXW)

2. FCA – Free Carrier

3. Free Accompanying Ship

4. FOB — Free on Board

Freight Prepaid implies that the vendor will cover the cost of shipping. Freight Prepaid consists of the last seven Incoterms.

1. CFR – Price and Weight

2. CIF – Price, Insurance, and Freight

3. Transportation Paid To

4. CIP – Carrier and Insurance Coverage Paid For

5. Delivered At Place (DAP)

6. DPU: Delivered At Place Unloaded

7. DDP — Delivered Duty Paid

When shipping under the CIF and CIP Incoterms, What types of insurance must a seller obtain?

Two International Commercial Trade Terms (CIF and CIP )require the seller to insure the cargo prior to shipment. Each of these words imposes particular requirements on the type of insurance a seller must obtain. 

• CIF, or Cost, Insurance, and Freight, needs an insurance policy with minimum Institute Cargo Clause coverage (C).

• CIP, or Carriage & Insurance Paid To, requires an insurance coverage with a minimum cover equivalent to the Institute Cargo Clause (A).

In response to global user feedback, there is now a higher level of coverage mandated buy the CIP Incoterms® rule, in accordance with the Institute Cargo Clauses (A) or similar clauses.  

Insurance that must be provided in accordance with terms CIF and CIP has also changed, from Institute Cargo Clauses(C) to Institute Cargo Clauses (A). 

Reserved for maritime trade and is frequently used in commodity trading, found under the CIF Incoterms rule, is the Institute Cargo Clauses (C) remains the default level of coverage, allowing parties to agree to a higher level of insurance coverage.

How do the buyer and seller determine which Incoterm to use?

Unless specifically requested by a buyer, sellers frequently use Incoterms that benefit them and their customers.

Frequently, buyers have distinct preferences, which are communicated to sellers, and via this communication, a buyer and seller can agree on the Incoterm that is most suitable for their transaction.

For Incoterms to be contractually binding, the terms must appear on the purchase agreement, sales invoice, or sales contract.

Understanding these contractual obligations, no additional paperwork or form is required when choosing an Incoterm; rather, the term should be included alongside the product price and described as the agreed-upon incoterm.

During the freight shipping order process, Incoterms may alter. An Incoterm could change, for instance, if a shipment was originally intended for maritime transport but, due to delays or unforeseen circumstances, must be sent by air.

As we have already stated, not all phrases apply to air travel.

If there is a change in the terms, purchasers and sellers must convey this change, just as they would express any other change in a purchase agreement.

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