Incoterms® (International Commercial Terms) are standardized terms that define the responsibilities of buyers and sellers in international trade transactions. They are used to clearly communicate the terms of a sale and to specify which party is responsible for various aspects of the transaction, such as transportation, insurance, and customs clearance. They are also a registered trademark of the International Chamber of Commerce (ICC).
ICC published the first Incoterms® rules in 1936, and have been updating, developing, and maintaining them ever since. The newest edition of the rules, known as Incoterms® 2020 are the new standard and will help prepare businesses navigate global trade for the future.
There are eleven Incoterms® in total, which are divided into two categories: E terms and F terms. E terms are used for any mode of transportation, while F terms are used for shipments made by sea or inland waterway.
Some examples include:
- EXW (Ex Works): This term means that the seller makes the goods available at their own premises, and the buyer is responsible for arranging and paying for transportation and any other costs associated with the shipment.
- FOB (Free on Board): This term means that the seller is responsible for delivering the goods to the port of shipment, at which point the buyer becomes responsible for the goods and any associated costs.
- CIF (Cost, Insurance, and Freight): This term means that the seller is responsible for delivering the goods to the port of shipment, and is also responsible for arranging and paying for insurance and transportation costs.
Reasons for using the Incoterms®:
- They help to clearly communicate the terms of a sale and to avoid misunderstandings or disputes between buyers and sellers. By specifying which party is responsible for various aspects of the transaction, Incoterms® help to clearly define each party’s obligations and reduce the risk of misunderstandings or disputes.
- Incoterms® help to minimize risk and protect the interests of both buyers and sellers. By specifying which party is responsible for various aspects of the transaction, Incoterms® help to allocate risk and ensure that each party is protected in the event of any issues or delays.
- Incoterms® help to facilitate international trade by providing a standardized set of terms that are widely accepted and understood. This can help to reduce confusion and make it easier for buyers and sellers to do business with one another, regardless of their location.
- Using Incoterms® can also help to reduce costs in international trade transactions. By clearly specifying which party is responsible for various aspects of the transaction, Incoterms® can help to avoid unnecessary costs or duplication of effort.
Need to learn more? ICC offers a range of publications to help navigate the terms. Need more help? Dunlap-Stone University’s TRD-141 Incoterms® is a six week online course centering on the terms and their use.