Understanding Incoterms & Determining which to use when shipping International
Incoterms (international commercial terms), were designed to provide guidance to those participating in the import and export of global trade. These terms specify who is responsible for paying for and managing the shipment, insurance, documentation, customs clearance, and other logistical activities. Incoterms®” is a trademark of International Chamber of Commerce”, registered in several countries.
The International Trade Association (ITA) defines Incoterms as “…a set of 11 individual rules issued by the International Chamber of Commerce (ICC) which define the responsibilities of sellers and buyers for the sale of goods in international transactions”. Of primary importance is that each Incoterms rule clarifies the tasks, costs and risks to be borne by buyers and sellers in these transactions.”
While use of Incoterms is not mandatory, they are extremely helpful to ensuring proper, timely payment of goods and services related the shipments. It is up to the buyer and the seller to agree to each party's responsibilities, as well as the cost and risk of a shipment before it takes place. Most DCL customers shipping internationally will use them.
Incoterms were last updated in 2020 and frequently update yearly.
Per the ITA, the current/most-recent Incoterms ® 2020 rules are listed below:
The seven Incoterms® 2020 rules for any mode(s) 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
Note: the DPU Incoterms replaces the old DAT, with additional requirement for the seller to unload the goods from the arriving means of transport.
The four Incoterms® 2020 rules for Sea and Inland Waterway Transport are:
FAS - Free Alongside Ship
FOB - Free on Board
CFR - Cost and Freight
CIF - Cost Insurance and Freight
How to determine the best Incoterm for an International order?
In order to decide what Incoterm is best suited for your business or an order, it’s important to spend some time to understand the differences between each term. Below are helpful links to describe more detail for each Incoterm.
During DCL customer integration, International requirements will be determined and documented. Our ERP system will default to DDP automatically if no incoterm is provided at the time of order import. This can however be over-ridden on an order by order basis as the seller needs or situation change and will not be uncommon to happen. Both our ERP and eCommerce Applications provide a field for the chosen Incoterm to be populated in the order.
Often, DCL customers will most frequently use or request DDP as it is beneficial to the buyer as the the price of the goods purchased includes everything: transport, import clearance, taxes, etc. This term is highly popular in ecommerce for buyer ease as companies strive to make the purchasing process as seamless for their customers as possible. However, due to the many Incoterms options (various countries' customs customer requirements, etc.), it’s always important to clarify which Incoterms you wish to designate, even if you originally selected a default Incoterm.
Below is a helpful quick reference chart showing where the responsibilities lie for the buyer/supplier.
Helpful links to learn more:
A detailed explanation of each term and easy-to-understand details and reasons for each use
The five most popular Incoterms
Governmental/Trade agencies information on Incoterms:
International Trade Association’s video on Managing export shipping costs and risk with Incoterms
By familiarizing yourself with Incoterms and their meanings, you can make more informed decisions on what Incoterm will be best suited for your international shipments. Doing so will help ensure a seamless experience for you and your end-customers from origin, through all customs ports, and to end destinations worldwide.