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WHAT ARE INCOTERMS AND WHEN ARE THEY
USED?
Incoterms is an abbreviation of International Commercial Terms, which were
first published in 1936 by the International Chamber of Commerce. Since that
time there have been six different revisions and updates to the Incoterms.
The Incoterms provide a common set of rules for the most often used
international terms of trade. The goal of the Incoterms is to alleviate or
reduce confusion over interpretations of shipping terms by outlining who is
obligated to take control of and/or insure goods at a particular point in
the shipping process. Furthermore, the terms outline the obligations for the
clearance of the goods for export or import and packing requirements. The
Incoterms are used quite frequently in international contracts and an
official version of the Incoterms should be referenced in the text of the
contract.
Although the Incoterms are widely used and
exceedingly handy, they are not appropriate for every type of contract. The
terms used in a contract state exactly when the shipper unloads and
relinquishes obligation and when the buyer takes responsibility for carriage
and insurance. The Incoterms are not meant to replace statements in a
contract of sale that outline transfers of ownership or title to goods.
Therefore, the Incoterms may not be of use when looking to resolve disputes
that may arise regarding payment or ownership of goods.
WHAT ARE SOME EXAMPLES OF INCOTERMS?
Incoterms fall into four different groups: Departure (E), Main Carriage
Unpaid (F), Main Carriage Paid (C) and Arrival (D). The point at which
liability and carriage transfer from the seller to the buyer distinguishes
the groups and each group’s letter corresponds to the first letter of an
INCO Term. For example, if your agreement with a buyer calls for the seller
to release goods at the seller’s location (Departure group), the INCO Term
Ex Works (EXW) would be used. Ex Works states principally that the
buyer takes over carriage and insurance responsibilities at the seller’s
dock. Alternatively, if the seller were to deliver goods to the buyer’s
dock, including all carriage and insurance, a term from the arrival group
such as DDP (Delivered Duty Paid) would be appropriate. DDP requires that
the seller deliver goods to the buyer’s dock with all carriage, insurance
and duties paid. In the range of Incoterms, DDP entails the most obligations
for the seller, whereas EXW represents the least.
Caution must be exercised when using Incoterms
because they relate to particular modes of transportation. For example,
Incoterms such as FOB (Free on Board) and CIF (Cost, Insurance and Freight)
are only applicable to sea transport. FOB indicates that the shipper
(seller) has upheld his/her part of the agreement when the goods pass the
ship’s rails at the port of exit. The receiving party (buyer) assumes risk
and costs associated with the goods once they pass the ship’s rail in the
seller’s homeport. Due to the specific mention of the ship’s rails, an
aircraft or other mode of transport should not be used with FOB. For a
shipment scheduled for delivery by air, rail, or some other form of
transport with the same agreement as FOB one would need to use the Incoterm
FCA, or Free Carrier. FCA can include other modes of transportation such as
road, rail, inland waterway and air. Whereas transfer under FOB takes place
when the cargo passes the ship’s rails, transfer with FCA occurs when
delivery of goods has been made at a destination previously outlined by the
buying party.
These examples are not an exhaustive or
definitive guide, but serve to highlight common Incoterms used in exporting.
See the resources below for further information.
WHAT IS THE MOST COMMON INCOTERM USED IN
OUR REGION AND WHY?
EXW (Ex Works at a named place), for example, “EXW Silver Creek, NY,” is a
typical Incoterm used in our region. This places minimum delivery
responsibility on the seller. Under EXW, the buyer is responsible for
filing export documentation. However, the U.S. government continues to
hold the seller responsible for export control compliance and for filing of
Shipper’s Export Declaration information. Because of this conflict,
EXW is rarely the appropriate Incoterm. In its place the shipper
should consider FCA (Free Carrier at a named place), for example, “FCA
Silver Creek, NY”. The reason EXW and FCA are used is primarily a
matter of convenience. They are after all, the easiest method to use
and this explains their popularity.
WHAT INCOTERM WILL MAKE MY COMPANY’S
PRODUCT MORE COMPETITIVE OVERSEAS?
It is important to understand the way business is done in the export market
and conduct your business similarly by offering the same value proposal as
local suppliers. Payment terms, delivery and after-sale servicing are
important considerations. In an increasingly competitive world,
quoting and delivering your product EXW or FCA can severely limit your
competitiveness versus another competitor.
At WTCBN, we recommend exploring the option of
quoting your product CIF (Cost, Insurance and Freight) or CIP (Carriage &
Insurance Paid to [named place of destination]), as it shows the foreign
buyer the cost of getting the product to or near the desired country.
If your product is in great demand, quoting FCA is more palpable, but as
competition increases, CIF or CIP, will allow you a greater degree of
flexibility in your buyers’ mind and make your product more competitive
internationally.
WHERE CAN I LEARN MORE ABOUT INCOTERMS?
The staff at WTCBN has more than 120 years experience in the field of
international commerce, including two Customs Brokers. By calling
716-852-7160 or toll-free at 1-877-982-4685, we can assist you through the
sometimes complicated Incoterm process. Send us an email
info@wtcbn.com if you would like more
information on Incoterms.
Several avenues exist for obtaining information
on the Incoterms. The International Chamber of Commerce publishes the
Incoterms and can be contacted directly to receive related materials at ICC
Publishing, 156 Fifth Avenue, Suite 417, New York, NY 10010, Tel: (212)
206-1150, or
www.iccbooks.com.
In addition to the hard copy version of the
Incoterms, many different websites list definitions of the Incoterms.
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