Incoterms (International Commercial Terms): Definition, Role, and Types in International Trade

In the world of international trade, understanding specific terms is a must. One of the terms that often takes center stage in international trade transactions is Incoterms or International Commercial Terms. Incoterms is a term that covers a set of rules for smooth international trade activities. Without Incoterms, the process of exporting and importing goods would be complicated and troublesome.

What exactly are International Commercial Terms? What is their role in international trade? In this article, TransTRACK will discuss the meaning, role, and types of Incoterms, as well as why understanding this term is important before engaging in exports and imports.

What is Incoterms?

Incoterms or International Commercial Terms are a set of international standardized rules that define the duties, responsibilities, and risks between sellers and buyers in international trade transactions involving the shipment of goods. Incoterms was created in 1936 by the International Chamber of Commerce (ICC) to standardize the terms and conditions of agreements for the sale and purchase of goods internationally.

Since then, Incoterms has been revised several times with the latest version being the International Commercial Terms 2020 which came into effect on January 1, 2020. The main purpose of the International Commercial Terms is to avoid misunderstandings and disputes between sellers and buyers, especially related to determining the point of delivery, responsibility for transportation costs and risks, and customs procedures for imports and exports.

The Role of International Commercial Terms in International Trade

The main role of Incoterms is to create a clear framework and standardization in international trade transactions. By establishing the roles and responsibilities of each party, Incoterms help avoid any ambiguity that could lead to conflict or misunderstanding. In the process of buying and selling goods globally, International Commercial Terms play several important roles as follows:

• Defining Seller & Buyer Responsibilities: Incoterms clearly define the obligations of each party regarding shipping, receiving, paperwork, import permits, and other activities.
• Regulates Risk Transfer: International Commercial Terms are a reference to determine the turning point of the risk of damage or loss of goods from the hands of the seller to the hands of the buyer.
• Determining the Point of Delivery of Goods: International Commercial Terms are an important benchmark for knowing when and where the handover of goods occurs.
• Establishing the Location of Delivery: Ensures that both parties have a common understanding of the physical location where risk and ownership of the goods transfer.
• Cost Distribution: Arranges for the sharing of costs, including freight, insurance, and customs fees between the seller and the buyer.

Types of Incoterms

There are several types of Incoterms that are commonly used, and the selection of a particular term depends on the needs and preferences of the parties involved. In general, International Commercial Terms are divided into two main categories, namely:

Incoterms for All Modes of Transportation

This type of Incoterms can be used regardless of the mode of transportation chosen for the international shipment of goods, whether by land, sea or air. International Commercial Terms that fall under this category are:

• EXW (Ex Works): The seller is only responsible until he delivers the goods at his business location, the rest is the responsibility of the buyer.
• FCA (Free Carrier): The seller bears the risk until the goods are received by the buyer’s nominated carrier at the agreed location.
• CPT (Carriage Paid To): The seller bears the cost and risk of shipping the goods to the agreed destination point.
• CIP (Carriage and Insurance Paid to): Same as CPT plus shipping insurance covered by the seller.
• DAP (Delivered at Place): The seller is responsible until the goods arrive at the destination.
• DPU (Delivered at Place Unloaded): The seller bears the cost until the goods are delivered and unloaded at the destination location.
• DDP (Delivered Duty Paid): The seller takes full responsibility until the goods arrive and are ready for use at the buyer’s location.

Specialized Incoterms for Sea & Inland Water Shipping

Incoterms in this category apply only to sea and river modes of transportation. The types of International Commercial Terms included are:

• FAS (Free Alongside Ship): The seller is responsible until the goods are placed on the dock of the loading port.
• FOB (Free On Board): The seller is responsible until the goods are on board at the port of departure.
• CFR (Cost and Freight): The seller bears the cost until the goods arrive at the port of destination.
• CIF (Cost, Insurance and Freight): The seller bears the cost plus insurance until the goods arrive at the port of destination.

The Importance of Understanding Incoterms Terms Before Conducting Exports and Imports

Understanding International Commercial Terms is crucial in avoiding potential conflicts and logistical issues in international trade. With a good understanding, both parties can better manage their expectations, reduce risks, and minimize barriers in global supply chains.

Not understanding the terms in Incoterms can lead to unclear costs, risks, and responsibilities, which can ultimately lead to disputes and financial losses. Thus, a good understanding of Incoterms is very important before exporting and importing goods.

To ensure success in implementing International Commercial Terms, modern technology such as Cargo Tracker from  TransTRACK can make a significant contribution. Cargo Tracker is the leading solution in tracking cargo shipments, providing crucial real-time information for all parties involved in international trade.

Cargo Tracker plays an important role in the context of Incoterms by providing the transparency and visibility needed to understand and manage the transfer of risk and responsibility between sellers and buyers in international trade. Through real-time monitoring, Cargo Tracker helps stakeholders to identify the point at which risk and ownership of goods transfers in accordance with selected Incoterms terms.

By providing accurate information about the cargo journey, Cargo Tracker enables optimizing cost distribution, cargo condition monitoring, and document tracking, all of which are crucial in ensuring compliance with Incoterms regulations and avoiding logistical issues that can arise during the export and import process. Thus, Cargo Tracker not only supports the understanding of Incoterms but also assists companies in managing their operations more efficiently and responsively to the dynamics of international trade.

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