What are Incoterms?
Incoterms are an essential component in international trade.
The term Incoterms comes from the English abbreviation of International Commercial Terms, which translates as International Trade Terms.
The Terms of International Trade are responsible for stipulating when and where the transmission of risks and the obligation regarding costs occurs, also assessing who is responsible for them and other factors related to the transactions.
These terms are usually updated every 10 years in order to advance and adapt to the current market.
Created by the International Chamber of Commerce (ICC) in 1936, they have undergone modifications throughout their history. Until not long ago the 2010 version was being used, but currently the updated 2020 version is already being used.
At Antonio Marco, as agents involved in international relations, we have great knowledge and information about these terms, how they are managed, how they are applied and what updates they undergo.
Incoterms changes in 2020
Currently, the Incoterms updated in 2020 are used, which present various changes compared to their previous version (2010).
His updates are:
DAT is renamed DPU. The Chamber of Commerce states that the name of the DAT rule has been changed to DPU to emphasize that the place of destination could be anywhere and not just a terminal. Although if the place of destination is not in a terminal, the seller should verify that the merchandise can be unloaded in the place where it is planned to be done.
FCA/ DAP/ DPU. Now they take into account that the buyer and the seller can carry out the transport on their own with their own means of transport instead of hiring a third party. In the Incoterms 2010 rules it was assumed that the shipment made from the seller to the buyer was always done by a third company hired for this purpose. The new 2020 rules make it clear that there are other ways.
DAP rule. Delivery occurs before download, it now appears before DPU.
FCA now allows Bills of Lading to be issued after cargo has been loaded.
CIF and CIP establish new agreements at the level of different minimum insurance coverage for the merchandise, although the level of insurance continues to be negotiable between the buyer and the seller.
The allocation of costs between the buyer and the seller is expressed more precisely and at greater length. Regarding the new Incoterms 2020 rules, the costs now appear in article A9/B9 of each Incoterm rule. The change is made in order to facilitate a single list of costs and that the selling or buying company can find all the costs for which it would be responsible in one place.
Security obligations now have a more prominent position. These obligations, linked to transport requirements, have been moved to articles A4 and A7 of each Incoterm rule.
Explanatory notes for users are easier for users. These describe the basics of each Incoterm rule: when it should be used, when the risk is transferred and how the costs are divided between the selling and buying companies.
Types of Incoterms
Once we know what an Incoterm is and its definition, we must differentiate between the different types of Incoterms and the explanation of each of them. To begin with, Incoterms can be divided into two classes depending on whether they are to be used for any type of transport or for maritime transport in particular.
We can differentiate between 11 different types of Incoterms, each of them composed of its conditions for each situation.
What are the 11 types of Incoterms?
- EXW (Ex Works / Ex factory)
The seller or exporter is only responsible for delivering the merchandise to its facilities or external facilities. You have no obligation to load the goods as EXW means the minimum obligation for the seller.
The buyer or importer assumes all costs and bears all risks of collecting the merchandise from the seller’s warehouse. Insurance is not mandatory, but if required it is the responsibility of the buyer.
- FCA (Free Carrier)
The seller or exporter delivers the merchandise to the buyer at a previously agreed point. It assumes all costs and risks until the merchandise is delivered at the agreed point, in addition to the costs of customs clearance for export. It is responsible for internal transportation and export customs procedures, except if the agreed site is the seller’s facilities.
The buyer or importer assumes expenses from the point of loading to the point of unloading, insurance would also be included in the case of being contracted.
- CPT (Carriage Paid To)
The seller or exporter delivers the goods to the carrier or the person designated by the seller at an agreed place. Assume all contracting and transportation costs to bring the merchandise to the defined location.
The buyer or importer assumes the import and insurance procedures. As for the risk, it becomes the buyer’s as soon as the merchandise is loaded on the first means of transport contracted by the seller. The CPT is valid for all means of transport.
- CIP (Carriage and Insurance Paid)
The seller or exporter is responsible for the costs until the merchandise arrives at the agreed destination. The costs of origin, export clearance, sea freight and insurance (mandatory) are the responsibility of the seller.
The buyer or importer assumes the import procedures and delivery to destination. The risk is transferred to the buyer at the moment the merchandise is loaded onto the first means of transport. As a novelty, insurance is mandatory since the products must be insured when they reach their final destination.
- DPU (Delivered to place Unloaded)
The seller or exporter is obliged to pay the costs and risks of all origin procedures such as packaging, loading, export clearance, freight, destination unloading and delivery at the agreed point.
The buyer or importer is only responsible for the import clearance procedures. As a novelty, the DPU replaces the DAT (Delivered to Terminal). This means that delivery, which previously had to be done at a terminal, can now be done at any other agreed location.
- DAP (Delivered At Place / Delivered at a point)
The seller or exporter is in charge of all risks and expenses except for import clearance, origin expenses, freight and internal transport. Insurance is not mandatory, but if contracted, the costs are borne by the seller.
The buyer or importer is responsible for import clearance and unloading costs.
- DDP (Delivered Duty Paid)
The seller or exporter assumes all risks and expenses from the packaging until the merchandise reaches its final destination, including import and export clearance, freight and insurance.
The buyer or importer will only be responsible for receiving the merchandise and sometimes unloading it.
- FAS (Free Alongside Ship)
The seller or exporter delivers the merchandise to the loading dock of the port of origin next to the ship where it will be transported. He assumes all expenses until delivery, including export customs procedures.
The buyer or importer is responsible for loading the merchandise on board the ship. From this point on, the risk and expenses until delivery to the destination, including import clearance and insurance, are assumed by the buyer.
- FOB (Free on Board)
The seller or exporter bears all the costs and risks until the merchandise boards the means of transport, as well as the dispatch and export costs at origin.
The buyer or importer assumes the costs of freight, unloading, import procedures, delivery to destination and insurance (optional). The FOB Incoterm is only used in maritime transport.
- CFR (Cost and Freight)
The seller or exporter assumes all costs until the merchandise reaches the port of destination and includes export clearance, origin expenses, freight and normally unloading expenses.
The buyer or importer is responsible for the import and internal transportation procedures until the merchandise is on board. It is not mandatory to take out insurance.
CIF (Cost, Insurance and Freight / Coste, Seguro y Freight)
The seller or exporter bears all expenses until the merchandise reaches the port of destination, as does the CFR.
How to use Incoterms correctly?
To correctly use Incoterms in international trade, a series of steps must be followed so that all movements are clear for both parties from start to finish.
- First of all, the Incoterm rule that corresponds in each situation must be agreed with the other party before sending the shipment. It will be verified that the rule is suitable for the mode of transport of the operation, and both the place of delivery must be specified as accurately as possible, as well as the place of transmission of the risk in case both places are different.
- The next step is to confirm both parties’ understanding of the responsibilities that are indicated in the sales contract. The agreed Incoterm rule must be correctly indicated on the commercial shipping invoice.
- The Incoterms rules used should be periodically checked and revised if necessary. Rules must be chosen that allow us to control merchandise and costs; It is necessary to specify both the exact place or port of entry and clearly the place of delivery and transmission of the risk when both places are different.
- Finally, the appropriate packaging and labeling measures must be agreed upon, and the security measures that will be carried out to prevent the merchandise from arriving defective.
It is recommended that when using Incoterms you have the help of a specialized transport company, therefore, at Antonio Marco we will inform you about all the requirements to take into account when using Incoterms in addition to any questions you may have about the shipment of goods.
If you want to take full advantage of Incoterms 2022 and send merchandise to any part of Spain and Europe without any risk, you can count on us.