In Foreign Trade, professionals and companies face various processes involving different entities in export and import operations. One of the most important issues is defining the responsibilities and obligations related to the international transportation of goods between the buyer (importer) and the seller (exporter). As the context is global, each country may have distinct regulations concerning the transportation of goods.
To standardize and simplify global trade, Incoterms were created, which establish rules for international transportation. Knowing Incoterms, their importance, and types is essential for professionals and companies wishing to enter international trade, even though these terms are not mandatory.
The origin and objective of Incoterms
Incoterms, also known as International Commercial Terms, were created in 1936 by the International Chamber of Commerce (ICC) with the aim of making international trade procedures safer and more accurate.
These rules were designed to improve communication between countries and avoid conflicts in international business. Incoterms regulate and clearly define three fundamental terms:
- Obligations: Determine the responsibilities of each party involved, such as who organizes transportation, insurance, obtains shipping and export documents, or who obtains import licenses.
- Risks: Establish where and when the seller “delivers” the goods, that is, where the transfer of risks from the seller to the buyer occurs in international transportation.
- Costs: Define which party is responsible for which costs, such as transportation costs, packaging, loading, unloading, inspection, and security.
The role of Incoterms in the responsibilities and obligations of international transportation
Incoterms play a fundamental role in defining the responsibilities and obligations of international transportation. They clearly establish who is responsible for each stage of the process, from organizing transportation to insurance, documentation, and necessary licenses.
By knowing and applying Incoterms correctly, companies can avoid conflicts and misunderstandings, as well as ensure better communication between the parties involved in international trade. With Incoterms, it is possible to determine who assumes the risks and costs at each stage of transportation, providing more security and accuracy in commercial transactions.
What Incoterms do not cover in international trade
Although Incoterms are essential for establishing standards and responsibilities in international trade, it is important to note that they do not cover all conditions of a sale. Some aspects not covered by Incoterms include:
- Addressing all conditions of a sale, such as the identification of goods, the contract price, and the payment method negotiated between the seller and the buyer.
- Identifying when title or ownership of goods is transferred from the seller to the buyer.
- Specifying which documents should be provided by the seller to facilitate the customs clearance process in the buyer’s country.
- Addressing responsibility for non-delivery of goods in accordance with the sales contract, delayed delivery, and mechanisms for dispute resolution.
It is important to be aware of these limitations and consider other relevant aspects when conducting international business transactions.
Know the types of Incoterms and their characteristics
Currently, there are 11 types of Incoterms, grouped into 4 categories, established by the latest version of Incoterms in effect since January 1st, 2020. This new version brought significant changes, replacing the old DAT (Delivered At Terminal) with DPU (Delivered At Place Unloaded).
It is worth noting that Incoterms can be used not only in international trade negotiations but also in domestic market buying and selling. However, they do not affect insurance contracts, banking relationships, and customs brokers, mainly regulating the relationship between the exporter and the importer.
Group E: Incoterm EXW (Ex Works)
The Incoterm EXW, known as Ex Works, represents the minimum obligation for the seller (exporter) and the maximum obligation for the buyer (importer). In this Incoterm, the seller makes the goods available at a named place, and all expenses and customs clearance processes, insurance, transportation, and storage are the responsibility of the buyer.
Group F: Incoterms related to main freight and insurance
In this group, the responsibilities for main freight and insurance are transferred to the buyer.
- Incoterm FCA (Free Carrier): The seller delivers the goods at a specific location or to the carrier indicated by the buyer.
- Incoterm FAS (Free Alongside Ship): The seller delivers the goods at a port designated by the buyer, ready for loading.
- Incoterm FOB (Free On Board): The seller is responsible for clearing the goods for export and delivering them on board the ship at the port of shipment designated by the buyer.
Group C: Incoterms where transportation is paid by the seller
In this group, the main transportation is paid by the seller, but the risks and responsibilities are assumed by the buyer.
- Incoterm CPT (Carriage Paid To): The seller contracts and pays the necessary freight to transport the goods to the agreed-upon destination. Risks and costs are transferred to the buyer from the time of delivery.
- Incoterm CIP (Carriage And Insurance Paid To): In addition to assuming the obligations of clearance and the risks of the cargo, the seller contracts and pays for the freight and insurance necessary to transport the goods to the agreed-upon destination.
- Incoterm CFR (Cost And Freight): The seller is responsible for clearing the goods for export and contracts the necessary freight to take them to the destination port. The delivery of the cargo occurs on board the ship.
- Incoterm CIF (Cost Insurance And Freight): The seller assumes the obligations of clearance and contracts the freight and insurance to take the goods to the agreed-upon destination port. However, the risks of loss or physical damage are the responsibility of the buyer.
Group D: Incoterms related to the arrival of goods
In this group, the seller has the maximum obligation, ending their responsibility when the goods are made available to the buyer at the named destination place.
- Incoterm DAP (Delivered At Place): The seller places the goods at the disposal of the buyer at a specific location in the destination country. The cargo must be ready to be unloaded but not cleared for import.
- Incoterm DPU (Delivered At Place Unloaded): The seller places the goods at the disposal of the buyer at a specific location in the destination country. All costs and risks are the seller’s until the delivery at the named place. The seller is not responsible for clearance for import.
- Incoterm DDP (Delivered Duty Paid): The seller places the goods at the disposal of the buyer at the designated destination place in the importing country. The seller assumes all risks, costs, and charges incident to importation, including taxes and duties.
Incoterms and the involved transport modes
Incoterms are applicable to different transport modes, classified into two categories:
Incoterms for any mode of transport (multimodal):
- EXW (Ex Works)
- FCA (Free Carrier)
- CPT (Carriage Paid To)
- CIP (Carriage And Insurance Paid To)
- DAP (Delivered At Place)
- DPU (Delivered At Place Unloaded)
- DDP (Delivered Duty Paid)
Incoterms for maritime transport:
- FAS (Free Alongside Ship)
- FOB (Free On Board)
- CFR (Cost And Freight)
- CIF (Cost Insurance And Freight)
How to choose the best Incoterm for your international trade operation
When choosing the most appropriate Incoterm for your international trade operation, it is important to consider the supplier’s willingness to negotiate and all costs involved in transportation. If necessary, it is recommended to seek the advice of a specialized professional to ensure the correct choice and avoid future problems.
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