Incoterms are an important part of international shipping and trade. Short for “International Commercial Terms,” they are specific trade terms published by the International Chamber of Commerce (ICC). Incoterms are commonly used in both international and domestic trade contracts to make trading easier between traders from different countries.
History of Incoterms
Incoterms have a long history in international shipping and trade. The first set was developed in 1936. They have been periodically updated since then so that they continue to conform to current trade practices and laws.
The most recent version of Incoterms is known as Incoterms 2010. It is the eighth version and was published on January 1, 2011. Because of the many updates over time, it is important for trade contracts to specify which version of Incoterms they are going to be using.
How are Incoterms Used?
Incoterms play an important role in international shipping and trade. Because different companies have different rules and regulations regarding trade, a separate set of rules is needed when these countries trade amongst one another. This is exactly where incoterms come into play.
In short, incoterms provide a set of ground rules for different countries trading with one another. They make clear the regulations of both the buyers and sellers. The focus of incoterms is the delivery of goods under sales contractors.
Incoterms apportion transportation costs and trading responsibilities. The newest version, Incoterms 2010, is designed to reflect modern-day transportation practice. The implementation and use of incoterms greatly reduces the amount of misunderstandings among traders (importers and exporters) from different countries. This in itself serves to minimize the amount of trade disputes and litigation in the international shipping and trade industry.
Incoterms 2000 Revisions
To fully comprehend the current use of Incoterms, it is essential to understand why the seventh version, Incoterms 2000, was updated to the most recent version of Incoterms 2010. The newest set of incoterms was developed after an extensive review of world shipping practices and trends. The update was prompted by the rapid expansion of world trade during the previous decade.
Though several small changes were made, the key changes between Incoterms 2000 and Incoterms 2010 focused on a need for improved cargo security and new trends in global transportation. They also had to do with changes to the Uniform Commercial Code in 2004 that greatly affected the terms of U.S. shipment and delivery.
Incoterms 2010 Main Categories
Incoterms 2010 is now organized by modes of transport. They are broken down into two main categories and several subcategories. The goal of this new method of organization is to simplify the drafting of new contracts between buyers and sellers.
The first category of Incoterms 2010 is Group 1. These apply to any mode of transportation. They include Ex Works (EXW), Free Carrier (FCA), Carriage Paid to (CPT), Carriage and Insurance Paid to (CIP), Delivered at Terminal (DAT), Delivered at Place (DAP), and Delivered Duty Paid (DDP).
The second category of Incoterms 2010 is Group 1. These apply to sea and inland waterway transport only. They include Free Alongside Ship (FAS), Free on Board (FOB), Cost and Freight (CFR), and Cost, Insurance, and Freight (CIF).
Is Incoterms 2000 Still Used?
All contracts made under Incoterms 2000 remain valid even after 2011. This is according to the International Chamber of Commerce. Even though the ICC recommends the use of Incoterms 2010 from January 2011 onward, the two parties involved in the contract can use any version of Incoterms they want to. It is essential that the two parties specify which version of Incoterms is being used in their agreement (such as Incoterms 2010, Incoterms 2000, or an earlier version).
Common Incoterms Terms
As mentioned above, there are a number of different terms used in incoterms in both Group 1 and Group 2 categories. An understanding of the most common of these terms is helpful in understanding incoterms as a whole.
- EXW – Ex Works
Ex Works (EXW) is one of the most common incoterms. It relates to a seller that makes the goods available at their premises. This incoterm places the majority of the obligation on the buyer and only the minimum of obligation on the seller. Ex Works is often used for initial quotations for the sale of goods. Basically, the buyer takes on the risk of transporting the goods from the seller’s premises to their final location.
- FCA – Free Carrier
Free Carrier (FCA) is another one of the most common incoterms. In this method of trade, the seller delivers the goods (already cleared for export) to a specific location. Most often, this is a carrier named by the buyer. Sometimes it is another person named by the buyer instead their own carrier.
- CPT – Carriage Paid To
Carriage Paid To (CPT) is a new term for Incoterms 2010. It replaces C&F (Cost and Freight). It also replaces all CFR terms other than those that pertain to non-containerized sea freight. In CPT, the seller pays for the shipping of the goods up to the place of destination. The risk transfers over to the buyer as soon as they handle the goods for the first time.
Learn More About Incoterms 2010
Since they are such an important part of international shipping and trade, there are a variety of great resources that detail the ins and outs of Incoterms 2010. Surprisingly, the Incoterms Wikipedia page is a great basic resource. It offers a thorough breakdown of each term.
Export.gov is another useful research that breaks down Incoterms 2010 in more complex terms. This website also provides a Trade Events Search Database. The database is a great tool to use to find private sector and government organizations that offer workshops, webinars, and seminars related to Incoterms 2010. If you are interested in incoterms in a professional sense, these events are invaluable.
Final Thoughts on Incoterms
Incoterms are a very important part of international shipping and trade. Understanding them is essential for anyone involved in imports or exports. The information above provides the basic groundwork for an understanding of Incoterms 2010.