What are ‘Incoterms®’? International Commercial Terms Explained

October 10, 2022
What are ‘Incoterms®’? International Commercial Terms Explained

If you’re new to international trade – or even if you’re not – you can’t get far without knowing the jargon. But don’t worry, we are here to help.

One of the most important terms you’re likely to meet is ‘Incoterms’ – but what are Incoterms, and how do they have an impact on international trade?

In this blog, we reveal everything you need to know about Incoterms – which are officially known as international commercial terms. We’ll also share our easy-to-use 3-page reference guide to all the main terms and how to use them.

The Short Definition

International commercial terms (Incoterms®) are published by the International Chamber of Commerce (ICC). They are a registered trademark of the ICC and define responsibilities between buyer, seller and carrier in international trade. The terms were originally developed in 1936, but since then have been periodically updated in line with changes to transport regulations, goods classifications and so on. The latest version was published in 2020.

What do Incoterms Mean for International Trade?

Incoterms facilitate trade by defining responsibilities in contracts between buyers and sellers. Incoterms cover risk and carriage costs, and make contracts simpler to navigate by applying internationally recognised rules.

Unlike government-enforced laws, the ICC’s Incoterms are part of commercial contracts. They are not law although they are recognised in courts and international arbitration to settle commercial disputes.

You can add amendments to Incoterms within your contract to suit particular circumstances. But, by simplifying key responsibilities, Incoterms reduce the risk of disputes and enable parties to make quicker decisions, manage trade costs, and provide more competitive international sales.

There are 11 Incoterms in total, but most businesses will only use two or three.

The 7 Incoterms 2020 across any mode of transport are:

EXW – Ex Works

FCA  – Free Carrier

CPT  – Carriage Paid to

CIP –  Carriage and Insurance Paid to

DAP – Delivered at Place

DPU – Delivered at Place Unloaded

DDP – Delivered Duty Paid

The 4 Incoterms 2020 for sea and inland waterway transport are:

FAS – Free Alongside Ship

FOB – Free on Board

CFR – Cost and Freight

CIF – Cost, Insurance, and Freight

The most common Incoterms you’re likely to meet are: FCA, DAP, DDP and CIP. For a full explanation of each, as well as example uses, see our Incoterms® 2020 Explainer.

Detailed Examples of Incoterms

DDP (Delivered Duty Paid) gives the greatest ease to the consumer and puts the greatest cost and risk onto the seller. This Incoterm makes it a seller’s responsibility to deliver the goods to the buyer’s premises, with all carriage, duty and taxes paid. Essentially, sellers agreeing to a DDP sale are responsible for everything to the buyer’s premises.

But beware – DDP makes the seller responsible for import VAT. If you don’t have a VAT registration in the country of import, you won’t be able to reclaim VAT.

By contrast, FCA (Free Carrier), puts most of the responsibility on the purchaser, and minimises risk and cost to the seller. The buyer pays for carriage, import duties and VAT and bears the risk from the point of pick up.

It’s important to note, however, that the seller is still responsible for export declarations. They are the exporter of record in law. This is why you should never use EXW (Ex-works) to sell to customers abroad.

Incoterms for Sea and Inland Waterway Transport are used when transporting bulk cargo or chartering a whole vessel. Cost, Insurance, and Freight (CIF), for example, places responsibilities for the goods in the hands of the seller until the goods have reached the named destination port. Cost and Freight (CFR) transfers risk and cost at the port of departure. These include risk of loss or damage and any additional transportation costs.

Potential Issues with Incoterms

While incoterms can be extremely helpful to buyers and sellers, there are also a few potential issues that need to be kept in mind.

Firstly, with a variety of incoterms comes a variety of options and preferences. You will need to be clear with your buyer or seller exactly what your agreement means. Incoterms can also be amended by contract – allowing for flexibility but also increasing the number of things you need to check.

If you are new to trading, check your Incoterms before agreeing a contract. And, if you need help, we are here.

Always specify a location on your agreement. Incoterms define the transfer of risk and costs to and from parties at a place. If that place is not defined, or is unclear you face potential for dispute. This can cause particular difficulties if, for example, a buyer has to spend time and money transporting their new goods to different locations.

Companies importing and exporting also need to consider the checks required if they choose certain incoterms. You should always check your insurance requirements and what responsibilities you must fill within the terms of your insurance.

Buyers may also need to check whether their seller can handle import responsibilities in the buyer’s country. DDP requires this, as the seller will be required to pay local taxes, duty and export clearance fees. Sellers opting for DDP will need to ensure they are able to clear goods through import checks, pay and reclaim import VAT.

Incoterms Info & More, with clearBorder

Avoid common pitfalls of Incoterms by using up-to-date, accessible guidance from experts at clearBorder. To make a start, check out our Incoterms® 2020 explainer – a 3-page guide to everything you need to know.

Whether you’re completely new to the world of international trade or you’re looking to expand your reach and improve your service, we can equip your entire team with the tools and information they need to keep your company within the law and your customers happy.

To find out more about how clearBorder can support your business in delivering goods safely across borders with no difficult hurdles, get in touch directly today or take a look into our ongoing consultancy offering.