Several terms might seem overwhelming if you're new to the world of import and export. One of these terms is Incoterms. This set of rules helps define the responsibilities of both the importer and the exporter. However, without a proper understanding of these rules, you may pay more than expected.
In this article, you'll learn about incoterms- what they are, the major incoterms, and the best ones for sellers and buyers. We also give you a walkthrough of the Incoterms we use in our company. Keep on reading.
What are Incoterms?
Incoterms is a shipping term established by the International Chamber of Commerce (ICC) and generally used by importers and exporters during a trade. It provides a set of established rules that buyers and sellers must follow when engaging in international trade. Incoterms guide the cost, ownership, and insurance of both parties involved in a trade.
When trading globally, there's the possibility of things going wrong. Due to several barriers, ranging from language to culture, and the possibility of easily misunderstanding each other, Incoterms were created to set clear-cut guidelines to determine how both the importer and exporter should act during a trade.
What are the Major Incoterms?
Understanding what Incoterms are is more important than ever. Incoterms help to offer sellers and buyers a common language, so there are fewer misunderstandings and surprises. Although the ICC provides eleven incoterms, we'll be discussing the five major ones:
Ex-works (EXW)
Under this Incoterm, the buyer is responsible for everything, from picking up your goods from the seller's warehouse to delivering them to where you want them. Although it might seem the cheapest, it would cost you more.
Free On Board (FOB)
This Incoterm states that the seller delivers the goods to a ship the buyer chooses and pays for the goods to get loaded onboard. The buyer then goes ahead and pays everything from there on. Depending on the cost you negotiate with your freight forwarder, this might be a cost-efficient option for the buyer.
Delivered Duty Paid (DDP)
This is the opposite of EXW, wherein the seller agrees to cover the cost of getting the goods to the buyer’s location.
Cost, Insurance, Freight (CIF)
This is another incoterm that applies only to sea transport. Like FOB, the seller would deliver the goods to a ship and load them. However, the seller would also pay for the ocean freight.
Free Alongside Ship (FAS)
This Incoterm applies only to sea transport, and the seller is responsible for transporting the goods to the port. However, it becomes the buyer's responsibility to take it from there.
Best Incoterms for Buyer
You can choose from eleven incoterms, however, as a buyer/importer, you must choose an incoterm that plays in your favor. It would help if you chose an incoterm that gives you the highest control over the cost of shipping. Choosing the right Incoterm for a buyer might be a little tricky, as the major decision depends on many factors, including your relationship with the buyer and the resources you have available. Here are some of the Incoterms that are best for buyers:
1. Freight On Board (FOB)
In this Incoterm, the buyer just has to hire the shipping services. This gives you control over the cost and coordination of the delivery of the goods to your doorstep. One advantage of FOB for buyers is the flexibility it gives them.
2. Delivered At Place (DAP)
This Incoterm is a good pick for buyers because it allows you to buy as cheaply as possible and involves low risk and responsibilities for the buyer. However, you don't have much control over the ocean freight.
3. Ex-Works (EXW)
This is also another good option for buyers. However, this should only be used when familiar with the country's import laws. If you're unsure of the country's laws and regulations, you shouldn't use EXW Incoterm.
Best Incoterms for Seller
As a seller/supplier, there are several incoterms to choose from. However, a few are more advantageous and give you the upper hand when it comes to shipping costs. Here are some of the best Incoterms for sellers:
1. Cost and Freight-Cost, Insurance and Freight (CFR-CIF)
These incoterms are good options for a seller due to their competitiveness and the fact that they don't involve many risks. As a seller, you have control over the shipping cost with these incoterms.
2. Delivered Duty Paid-Delivered At Place (DDP-DAP)
Under these incoterms, the seller is responsible for delivering the goods to the buyer's location. These incoterms provide greater control and competitiveness but have a higher level of responsibilities and risk, especially when exporting to a country you're unfamiliar with.
3. Freight On Board (FOB)
This is one of the most commonly used incoterms in international trade. The seller is only responsible until the goods are loaded on the vessel at their port. You have little control over shipping time and cost. However, it helps when you're not looking to negotiate freight rates or keep track of the shipment.
Which Incoterms Does Camachem Normally Use?
Camachem is a reliable company you can trust with importing and exporting chemicals. With years of experience in importation, we use the best shipping option for our clients to aid mutual benefits. Below are some of the incoterms usually used by Camachem for air freight and sea freight.
Incoterms for Air Freight
There are several incoterms. However, there are specific ones that are exclusive to air freight. At Camachem, we use only the best options to ensure your goods arrive safely.
FOB Incoterm
FOB Incoterms aren't popularly used for air freight. The seller leaves the goods ready for transport, while the buyer is responsible for the cargo insurance and transportation as soon as it gets loaded onto the air vessel.
DDU Incoterm
Delivered Duty Unpaid is an incoterm wherein the seller delivers the goods as soon as they're available to an agreed location in the country where they're imported. DDU requires the buyer to take responsibility for the cost and sometimes the delivery once they agree on the shipment.
DDP Incoterm
Delivered Duty Paid Incoterms are a type that places a heavy burden on sellers. Delivery would occur anywhere at the buyer's location, with the goods not loaded. For instance, if you're shipping goods by airway to Munich, you'd have to arrange air transportation up to Munich's airport, pay the import duties, and arrange for road transport up to the selected location for delivery. However, we make use of this option in the best interest of our clients.
Incoterms for Sea Freight
Sea freight is one of the most popular means of transporting goods during international trade, and there are exclusive incoterms for sea freight. At Camachem, we use only the best options to ensure your goods arrive safely. They include:
FOB Incoterm
FOB Incoterms, also known as Freight On Board Incoterms, is probably the most commonly used Incoterms for sea freight. Under FOB, the seller leaves the goods free on board the sea vessel, packed and ready for transport. The buyer is responsible for the transport and cargo insurance as soon as it's loaded on the boat.
CFR Incoterm
Cost and Freight Incoterms require the seller to deliver the goods on board a vessel or to procure already delivered goods. The seller is responsible for paying the required cost of transporting the goods to their destination.
CIF Incoterm
Cost, Insurance, and Freight Incoterms require the seller to deliver the goods on board a vessel and also contract for insurance cover against any risk of damage or loss to the goods the buyer might face.
DAP Incoterm
Delivered at Place Incoterms ensure that the delivery can occur anywhere, i.e., in the buyer's location with the unloaded goods and not cleared for import. The buyer has to pay for taxes and duties at the seaport when the goods arrive.
Conclusion
Having a proper understanding of Incoterms would aid your involvement in International trade. You'd be better positioned to negotiate your way into the best deals for your business. Likewise, you can rely on our company to recommend the most favorable Incoterms for your importation and during any of your dealings with us.
