Understanding INCOTERMS for Entrepreneurs Planning to engage in Export Business
Incoterms (International Commerce Terminologies or International Commercial Terms) are universally accepted set of rules that define the responsibilities of sellers and buyers in the delivery of goods. Incoterms is a registered trademark of International Chamber of Commerce. Incoterms are very important is harmonizing the trade relationship between the buyers and sellers by reducing misunderstandings among traders and minimizing trade disputes and litigation. It is very important for any person intending to join export business to familiarize themselves with Incoterms so that they are able to understand and choose terms that will enable to clearly cost their goods.
What do incoterms cover?
According to International Chambers of Commerce, incoterms cover the following areas:
- Tasks involved in shipping
- Which parties hold contract
- Responsibility of risk
- Delivery of goods (buyers and sellers)
- Insurance duties
- Customs and taxes
Summary of commonly used Incoterms and their meaning
FOB: FOB is the short form term for Free On Board (or Freight on Board). FOB means that the cost being charged by the seller includes expanses involved in the delivery of the product up to the nearest port of the seller. The purchaser is liable to pay the shipping costs from that port along with other fees involved to the port of the buyer’s destination.
CIF: CIF refers to Cost, Insurance and Freight. In this case, the seller meets the cost of insurance and freight expenses up to the port of destination. The seller is responsible for any loss or damage while the products are in transition to the buyer’s port as specified in the sales contract. Until the loading of the goods onto a transport ship is complete, the seller bears the costs of any loss or damage to the product. Further, if the product requires additional customs or export paperwork or requires inspections or rerouting, the seller must cover these expenses. Once the freight loads, the buyer becomes responsible for all other costs.
DAT: Delivery at Terminal (DAT) means that the seller is responsible for delivering the products/goods at the disposal of the buyer. With DAT, the seller is also responsible for unloading the goods at the terminal. Terminal in this case could mean a quay, warehouse, container yard or any road, rail or airport. DAT also requires the seller to clear goods for export, where applicable, pay import duty or carry out import customs formalities in the destination country.
DAP: Under the Delivered at Place (DAP) terms, the seller delivers the goods at the buyer’s point of preference as specified in the sales contract. Unlike DAT, unloading in this case is at the buyers’ risk. The buyer is responsible for import clearance and any applicable local taxes or import duties.
Free carrier: Free Carrier is a common agreement where a seller (or shipper / supplier) of goods is responsible for packaging and loading goods onto a truck at their transport hub or port, different to Ex Works, where the seller is just responsible for getting the making the goods available at their own factory or place of manufacture. The seller is also responsible for export clearance of the goods at the port or terminal. The buyer (or consignee) is then responsible for everything else which include shipping the goods, Unloading the goods at the buyer’s port or terminal and transporting the goods to the end destination or warehouse.
Ex Works: Under the Ex Works terms, the seller is not obliged to load the goods on the buyer’s designated method of transport. The seller is only responsible for making the product available at a selected location either at the factory, depot or warehouse of the seller. The buyer then incurs all the costs involved right from the seller’s location. Shipping using the designation of Ex Works (EXW) means transportation cost and associated risks are not a burden for the seller.
CFR: CFR or Cost and Freight terms means that the seller is required to arrange for the carriage of goods by sea to a port of destination and provide the buyer with the documents necessary to obtain the items from the carrier. Under the CFR terms, the seller is not responsible for buying insurance for the loss or damage of products during transportation.
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