Introduction
International trade involves complex shipping agreements between buyers and sellers. Incoterms (International Commercial Terms) play a crucial role in defining who is responsible for shipping costs, risks, and liabilities at each stage of the supply chain. Misunderstanding Incoterms can lead to unexpected expenses, legal disputes, and delivery delays.
In this blog, we’ll break down what Incoterms are, their categories, and how they impact shipping costs and liability, helping businesses make informed decisions in global trade.
What Are Incoterms?
Incoterms are standardized trade terms established by the International Chamber of Commerce (ICC) to clarify the responsibilities of buyers and sellers in international and domestic transactions. They define:
- Who handles transportation and costs?
- Who is responsible for customs clearance?
- Who assumes the risk for loss or damage during transit?
The latest Incoterms 2020 update includes 11 trade terms divided into two categories: Incoterms for any mode of transport and Incoterms for sea and inland waterway transport.
Incoterms and Their Impact on Shipping Costs & Liability
1. Incoterms for Any Mode of Transport
These terms apply to air, rail, road, and sea shipments:
| Incoterm | Who Pays for Freight? | Who Handles Customs? | Risk Transfer Point |
|---|---|---|---|
| EXW (Ex Works) | Buyer | Buyer | At seller’s premises |
| FCA (Free Carrier) | Buyer | Seller (export), Buyer (import) | At the named place of delivery |
| CPT (Carriage Paid To) | Seller | Seller (export), Buyer (import) | After carrier receives goods |
| CIP (Carriage & Insurance Paid To) | Seller | Seller (export), Buyer (import) | After carrier receives goods |
| DAP (Delivered at Place) | Seller | Seller (export), Buyer (import) | When goods arrive at buyer’s location |
| DPU (Delivered at Place Unloaded) | Seller | Seller (export), Buyer (import) | When goods are unloaded at buyer’s location |
| DDP (Delivered Duty Paid) | Seller | Seller (both export & import) | When goods arrive at buyer’s location |
Key Takeaways for Any Mode of Transport Incoterms
- EXW favors the seller, making the buyer responsible for all costs and risks.
- DDP favors the buyer, placing maximum responsibility on the seller.
- CIP offers added security, as the seller covers freight insurance.
2. Incoterms for Sea & Inland Waterway Transport
These terms apply only to ocean freight and inland water transport:
| Incoterm | Who Pays for Freight? | Who Handles Customs? | Risk Transfer Point |
|---|---|---|---|
| FAS (Free Alongside Ship) | Buyer | Seller (export), Buyer (import) | When goods are placed next to the ship |
| FOB (Free On Board) | Buyer | Seller (export), Buyer (import) | When goods are loaded onto the ship |
| CFR (Cost & Freight) | Seller | Seller (export), Buyer (import) | When goods are loaded onto the ship |
| CIF (Cost, Insurance & Freight) | Seller | Seller (export), Buyer (import) | When goods are loaded onto the ship |
Key Takeaways for Sea & Inland Waterway Incoterms
- FOB is common in international shipping, giving the buyer control after loading.
- CIF is ideal for risk mitigation, as the seller provides insurance.
- FAS is suitable for bulk cargo, where buyers arrange their own vessel.
How Incoterms Affect Shipping Costs
1. Who Pays for Freight & Logistics?
Incoterms determine who bears the shipping costs:
- EXW and FOB shift transportation costs to the buyer.
- CFR, CIF, DAP, and DDP make the seller responsible for shipping expenses.
2. Impact on Customs Duties & Taxes
- DDP places full customs clearance costs on the seller.
- FCA, FOB, and EXW shift import duties and VAT to the buyer.
- Incorrect use of Incoterms may result in unexpected tax liabilities.
3. Insurance Costs & Liability
- CIP and CIF include insurance, protecting shipments from potential loss.
- EXW and FOB leave insurance responsibility to the buyer.
How to Choose the Right Incoterm for Your Business
1. Consider Your Control Over Logistics
- Want full control? Choose EXW, FOB, or FCA to manage your freight and costs.
- Prefer the seller to handle everything? DDP is the best option.
2. Assess Cost vs. Risk
- Higher control = lower costs but higher risks (e.g., EXW, FOB).
- Lower control = higher costs but reduced risks (e.g., CIF, DDP).
3. Factor in the Nature of Your Goods
- For fragile, high-value items: Choose CIF or CIP to ensure insurance coverage.
- For bulk cargo: FOB and FAS are widely used.
Conclusion
Incoterms are essential in defining shipping costs, risks, and responsibilities between buyers and sellers. Choosing the right Incoterm can optimize logistics, minimize costs, and protect businesses from liability issues.
For expert international shipping solutions, partner with Blue Rings Logistics. We ensure smooth, cost-effective global trade by helping businesses navigate Incoterms, customs regulations, and freight management. Contact us today to streamline your international shipping operations!
