International-trade

All You Need To Know About Inco Terms

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Language is the most important and complex tool of International trade. Minor changes in words can have an impact on all aspects of business agreement and for business negotiations to be effective, there must not be any sense of perplexity among parties and the phrases must mean the same thing throughout the industry. This is when ‘Incoterms” comes into its useful existence.

Inco (International Commercial Terms) terms are the trade terms published by International Chamber of Commerce (ICC) that are commonly used in all type of trade contracts (international and domestic). These terms make international trade easy by helping traders who are in different countries speaking different languages to understand one another.

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Source: http://www.skywaysms.com/inco-terms-2016/

2016 Chart depicting the obligations of sellers and buyers in a trade against various rules.

So as stated above, there are rules and norms regarding buyers and suppliers. Nevertheless, there are separate rules for the trade conducted through water.

 

Rules for international trade by any means of transport

Incoterms Rules
EXW – Ex Works

 

 

 

Places maximum obligations on the buyer and minimum obligations on the seller. Seller makes the goods available at its premises and the buyer pays all the transportation costs and bears all the risks. If parties wish the seller to be responsible for the risks and costs, this has to be made clear right in the contract of sale.
FCA – Free Carrier Seller is responsible for handing over the goods and pays for the carriage to the named point of delivery. He bears the risk until the goods are handed over to the first carrier.
CPT – Carriage Paid To

 

Seller pays for carriage. Buyer is responsible for the risks as soon as goods are handed over to the first carrier.
CIP – Carriage and Insurance Paid To

 

                                                                        

Seller pays for the carriage and insurance. Risk passes to buyer after handing over of goods to the first carrier.
DAT – Delivered at Terminal Seller is responsible for cost of terminal-carriage and risks up to the point of unloading (at the terminal), except for the import clearance costs which is to be paid by the buyer.
DAP – Delivered at Place

 

As same as the DAT rules (above)
DDP – Delivery Duty Paid

 

 

Maximum obligations on the seller and buyer have the minimum obligations. Seller is responsible for everything from delivering the good to the buyers’ place to paying all the included costs along with the import duties and taxes.

 

 

Rules for international trade conducted by water

Incoterms Rules
FAS – Free Alongside Ship

 

 

Seller is only responsible for loading the goods on ship and clearing the goods for export. Typically used for heavy-lift.
FOB – Free on Board

 

Seller must load the goods. Coat and risk are divided among both when goods are actually on board.
CFR – Cost and Freight

 

Seller must pay the costs and freights. Risk is transferred to the buyer once the goods are loaded on the vessel.
CIF – Cost, Insurance and Freight

 

As same as the CFR except the seller pays for the insurance.

 

As we can see, each Inco term specifies:

  • The obligations/responsibilities of each party.
  • The point/terminal in the journey of trade where the risk and freight transfers from one party to another.

And hence by agreeing over these Inco terms and incorporating them in their trade contracts, the buyer and seller can achieve a common understanding of what each party is obliged to do and who is responsible for an event of any loss or mishap.

Evolution of Inco terms:

But these are not such hard and fast rules anyway. After having created in 1936 for the first time, they have been changed for six times to keep pace with the development of international trade. Some significant revisions include:

1980 FCA was introduced; to deal with the case where the receiving end in maritime trade was no longer ships’ rail but rather a point on land prior to landing a board on vessel.
1990 Specification of sellers’ obligation to provide proof of a delivery as EDI messages in replacement of paper documentation provided both the parties are agreed upon communicating electronically.
2000 1) Unlike previous versions, the placing of the export clearance under FAS on the seller (previously on buyer)

2) Seller was made obliged of loading goods on buyers’ vehicles and buyers’ obligation was specified to unload the sellers’ vehicle, under FCA.

There is no right Inco term; there is no bad Inco term. The thing is who is in the best position to do the activity!!

 

6 thoughts on “All You Need To Know About Inco Terms

  1. I am currently grooming myself in readiness to start doing import & exports and this came at a very good time. Thanks for the piece

  2. The best data available for any Purchase office/ engineer who is fresher can use it for creating PO and also to negotiate with vendors for better and faster delivery in less time and money

  3. International Commercial Terms is very important in international trade. These terms helps traders who are in different country to understand one another very easily. Some of the common terms in respect of any means of transport are EXW(Ex Works), FCA(Free Carrier), CPT(Carriage Paid To). CIP(Carriage and Insurance Paid To), DAT(Delivered at Terminal), DAP(Delivered at Place), DDP(Delivery Duty Paid).
    But there are separate rules for the trade conducted through water and below are few of the inco terms used. They are FAS (Free Alongside Ship), FOB(Free on Board), CFR(Cost and Freight), CIF(Cost, Insurance and Freight).

  4. Inco Terms are a series of predefined commercial terms published by International Chamber of Commerce relating to international commercial law. These terms are used in widely used in commercial transactions or procurement.
    Advantage of using inco terms:
    Eliminated inconsistencies of country specific sales and shipping contracts, this makes it easy for buyers and sellers to identify and manage the costs and liabilities of transporting cargo between source and delivery destination.
    The only disadvantage of inco terms would be the difficulty in selecting which to use, but this can be eliminated in a very short period of time with the experience.

  5. Sharp knowledge of incoterms helps SCM proffesional a lot to reduce the total landed cost of an ordered item and could be used as a great tool while negotiations to reduce the price to minimum.

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