Everything You Need to Know About Incoterms

Plane and boat showing different types of freight

In the intricate world of international trade, understanding the finer details of shipping terms is crucial. This guide is your comprehensive resource on Incoterms, the standardised international trade terms that define responsibilities between buyers and sellers. With over 25 years of experience, Mairon is here to provide you with a broad understanding of Incoterms and their significance in the logistics industry.

Incoterms Meaning

At the heart of every global transaction, Incoterms play a pivotal role in clarifying the terms of shipment, delivery, and risk allocation. But what exactly are Incoterms? Incoterms, short for International Commercial Terms, are a set of pre-defined trade terms established by the International Chamber of Commerce (ICC) to facilitate seamless international trade. The history of Incoterms dates back to their inception in 1936, and they have evolved over time to address the ever-changing needs of the global trade landscape.

These trade terms are more than just acronyms; they are essential tools that help shippers, buyers, and sellers navigate complex logistical processes while ensuring clarity and fairness. As international trade continues to grow, Incoterms have expanded to cover various modes of transportation, including sea freight, air freight, road transportation, and more.

Why Are Incoterms Important?

Incoterms serve as a universal language in the world of trade, transcending language barriers and legal nuances. By clearly defining the responsibilities of both parties involved in a transaction, Incoterms reduce misunderstandings and disputes. They establish guidelines for when risk and ownership transfer from the seller to the buyer, detailing who is responsible for tasks such as transportation, insurance, customs clearance, and more.

What Are the Different Types of Incoterms?

Incoterms are divided into 11 distinct categories, each representing a specific set of obligations for the buyer and seller. These include:

  • 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 – Delivered Duty Paid
  • FAS – Free Alongside Ship
  • FOB – Free on Board
  • CFR – Cost and Freight
  • CIF – Cost, Insurance, and Freight

The Most Commonly Used Incoterms

While all Incoterms have their place, some are more commonly used than others due to their versatility and applicability across various trade scenarios. Understanding these frequently used terms, such as FCA, FOB, and CIF, can greatly enhance your ability to navigate international trade transactions.

FCA – Free Carrier

The FCA incoterm, short for “Free Carrier,” puts the responsibility of delivering goods on the seller up to a specified point. This point could be the seller’s premises, a designated location, or a carrier they choose. The seller ensures the goods are ready for transportation and covers costs up to that point.

This incoterm benefits buyers as they can select the carrier and have more control over the shipping process from the chosen point onward. For sellers, FCA offers flexibility in determining where their responsibility ends and reduces risk by passing it to the buyer once the goods are in the carrier’s hands.

In a nutshell, FCA means that the seller arranges transportation up to a certain point, and from there, the buyer takes charge. It’s like handing off a relay baton in a race, where the seller’s role ends, and the buyer’s journey begins.

FOB – Free on Board

The FOB incoterm, which stands for “Free on Board,” is a shipping arrangement where the seller’s responsibility ends when the goods are loaded onto the vessel at the named port of shipment. This means the seller covers all costs and risks associated with getting the goods to the port and onboard the ship.

Once the goods are “on board,” the responsibility shifts to the buyer. This incoterm is commonly used for sea freight, and it’s as if the seller takes care of everything up until the goods are securely placed on the ship, ready to sail. The buyer then handles transportation, insurance, and any costs or risks from that point onwards.

In simpler terms, with FOB, the seller’s job is to ensure the goods are safely loaded onto the ship, and then it’s the buyer’s turn to navigate the rest of the voyage. It’s like the seller provides the boarding pass, and the buyer takes over for the journey ahead.

CIF – Cost, Insurance, and Freight

CIF, short for “Cost, Insurance, and Freight,” is an incoterm where the seller takes on more responsibilities for shipping. The seller not only handles the costs to get the goods to the port of destination but also arranges and pays for insurance coverage during transit.

In this arrangement, the seller is responsible for getting the goods onto the ship and ensuring they’re properly insured against potential damage or loss during the journey. The seller bears the risk until the goods reach the destination port.

For the buyer, CIF means that the cost of goods, insurance, and shipping is covered by the seller. Once the goods arrive at the destination port, the buyer takes over and is responsible for any additional costs, such as customs duties and onward transportation.

Think of CIF as a package deal where the seller not only provides transportation (freight) but also includes insurance coverage. It’s like booking a flight that includes baggage insurance—until the plane lands, everything is taken care of for you.

What Do Incoterms Not Cover?

It’s important to note that while Incoterms offer a structured framework for trade agreements, they do not cover every aspect of a transaction. For instance, they may not explicitly address issues related to payment terms, intellectual property rights, or the quality of goods. Therefore, it’s advisable to supplement Incoterms with a comprehensive contract that addresses all relevant aspects of your trade agreement.

How Can Mairon Help You?

As a freight forwarding company with over two decades of experience, Mairon can help you navigate these areas. With our experience and expertise, our team is always on hand to answer any questions and to help your businesses make informed decisions. If you are ready to embark on your next global trade journey, our team at Mairon is here to assist you every step of the way. Feel free to visit our contact page to get in touch.

Send us a message or call 01732 464 134