What are Incoterms?

History of Incoterms

1. Before Incoterms
   • In the early 20th century, international trade faced significant challenges due to varying laws and terms across countries and regions, leading to confusion and disputes.
2. Emergence of Incoterms (1936)
   • The first version, published by the ICC in 1936, included six terms mainly designed for maritime trade.
3. Updated Versions
   • 1953: Added terms for rail and road transport.
   • 1980: Adapted to air and containerized transport.
   • 2000: Simplified and created new terms.
   • 2020: Latest version, focusing on clarification and optimization.

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Categories of Incoterms (2020)

Group E: Delivery at the Seller’s Premises

1. EXW (Ex Works)
   • The seller delivers goods at their premises.
   • The buyer assumes all costs and risks from the seller’s location to the final destination.

Group F: Delivery Without Freight Paid

2. FCA (Free Carrier)
   • The seller delivers goods to a carrier designated by the buyer at a specified location.
3. FAS (Free Alongside Ship) (Maritime Transport)
   • The seller delivers goods alongside the ship at the port. The buyer is responsible for loading and maritime transport costs.
4. FOB (Free on Board) (Maritime Transport)
   • The seller delivers goods onto the ship. Risks and costs transfer to the buyer after loading.

Group C: Delivery with Freight Paid

5. CFR (Cost and Freight) (Maritime Transport)
   • The seller pays shipping costs to the destination port. Risks transfer to the buyer upon loading.
6. CIF (Cost, Insurance, and Freight) (Maritime Transport)
   • Similar to CFR, but the seller also provides insurance for the goods up to the destination port.
7. CPT (Carriage Paid To)
   • The seller covers transport costs to the destination. Risks transfer to the buyer upon delivery to the carrier.
8. CIP (Carriage and Insurance Paid To)
   • Similar to CPT, but the seller also covers insurance costs.

Group D: Delivery at Destination

9. DAP (Delivered at Place)
   • The seller delivers goods to a specified location, excluding customs duties and clearance costs.
10. DPU (Delivered at Place Unloaded)

• Similar to DAP, but the seller is responsible for unloading goods.

11. DDP (Delivered Duty Paid)

• The seller delivers goods to the specified location, covering all costs, including customs duties and taxes.

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Why Are Incoterms Important?

1. Reduce Disputes: Clear definition of each party’s obligations.
2. Transparency in Costs: Specify responsibilities for transport, insurance, and customs.
3. Facilitate Trade: A common language speeds up international transactions.

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Changes in the 2020 Version

1. New Features: Added terms for digital trade and expanded combined transport.
2. Insurance Focus: Clearer insurance responsibility definitions.
3. Term Updates: Some outdated terms were removed or replaced.

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Advantages and Disadvantages of Incoterms

Incoterms for All Transport Types

• EXW (Ex Works)
  • Advantages: Minimal seller obligations, suitable for sellers not managing transport.
  • Disadvantages: Buyer handles all transport and customs, requiring expertise.
• FCA (Free Carrier)
  • Advantages: Fair division of costs and responsibilities.
  • Disadvantages: Requires precise delivery point coordination.
• CPT (Carriage Paid To)
  • Advantages: Seller covers shipping costs to the destination.
  • Disadvantages: Buyer assumes risks once goods are handed to the carrier.
• CIP (Carriage and Insurance Paid To)
  • Advantages: Seller covers both shipping and insurance.
  • Disadvantages: Insurance coverage may be minimal.
• DAP (Delivered at Place)
  • Advantages: Seller delivers to the destination.
  • Disadvantages: Buyer handles customs clearance.
• DDP (Delivered Duty Paid)
  • Advantages: Seller covers all costs, including customs.
  • Disadvantages: High seller risks and expenses.

Incoterms for Maritime Transport

• FAS (Free Alongside Ship)
  • Advantages: Suitable for bulk cargo.
  • Disadvantages: Buyer assumes port risks.
• FOB (Free on Board)
  • Advantages: Seller ensures delivery onto the ship.
  • Disadvantages: Buyer handles risks after loading.
• CFR (Cost and Freight)
  • Advantages: Seller covers shipping costs to the port.
  • Disadvantages: Buyer assumes risks after loading.
• CIF (Cost, Insurance, and Freight)
  • Advantages: Seller includes insurance with shipping.
  • Disadvantages: Minimal insurance coverage.

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Best Shipping Methods and Suitable Incoterms

1. Bulk Goods (e.g., grains, minerals)

• Best Method: Maritime transport.
• Incoterms: FOB, CFR, CIF.

2. Sensitive Goods (e.g., electronics, jewelry)

• Best Method: Air transport.
• Incoterms: CIP, DAP, EXW.

3. Perishable Goods (e.g., food, pharmaceuticals)

• Best Method: Refrigerated air or sea transport.
• Incoterms: CFR, CIP, DAP.

4. Industrial Goods (e.g., machinery)

• Best Method: Maritime or land transport.
• Incoterms: FCA, FOB, CIF.

5. Consumer Goods (e.g., clothing, books)

• Best Method: Air (small items) or maritime (large items).
• Incoterms: EXW, FCA, DAP.

6. Hazardous Goods (e.g., chemicals)

• Best Method: Maritime or land with specialized carriers.
• Incoterms: FCA, CIP, DAP.

7. Luxury Goods (e.g., luxury cars)

• Best Method: Air or maritime.
• Incoterms: CIP.