When it comes to international trade, avoiding mistakes when exporting is key to a successful venture. A few common incoterms mistakes to avoid are as follows:
- Selecting Inappropriate Incoterms:
In spite of their very different obligations, many of the Incoterms® have similar initials, which makes them easy to confuse. For instance, CIF and CFR. CIF includes the cost of the goods, freight charges, and insurance coverage arranged by the seller. CFR includes the cost of the goods and freight charges, but the buyer must arrange and bear the cost of insurance separately. Understand your responsibilities as well as your partner's. CIF involves the seller arranging insurance on behalf of the buyer. It is common for these Incoterms® to be misunderstood and the cargo to be transported without insurance.
- Places or destinations must be named specifically:
INCOTERMS® rely on a named place, terminal, port, etc. where risk and responsibility are transferred. To make sure that both parties are clear on liability in the event of an incident, it's essential to name these places and/or addresses specifically.
- Terminal Handling Charges:
In Incoterms® involving cargo beyond the port of shipment, the seller is responsible for paying terminal handling fees. It is important to outline who is handling charges in the contract so that complications, delays, and unforeseen costs can be avoided.
- Identifying Customs Tasks and Responsibilities:
Although Incoterms specify the parties responsible for export and import formalities, it is crucial to recognize that successful handling of these processes requires both the buyer and seller to be legally authorized as exporter and importer. For EXW shipments, the buyer must proficiently handle export procedures in the seller's country. Similarly, with DAP shipments, the seller must be capable of fulfilling import formalities and paying VAT in the buyer's country.
- Ensuring Proper Alignment of Incoterms with Payment Methods:
When you use a letter of credit or a documentary collection for payment in international trade, it's really important to make sure that the Incoterms rule you choose matches the security requirements or the rules set by the banks. If they don't match up correctly, it can cause problems and delays with the payment process. So, it's crucial to align everything properly to ensure smooth and successful transactions.
An overview of the 11 Incoterms® 2020 rules that can be used in 2023
List of incoterms 2020 & definitions:
- EXW (Ex Works): The seller makes the goods available at their premises, and the buyer is responsible for all transportation and export procedures.
- FCA (Free Carrier): In FCA (Free Carrier) terms, the seller delivers the goods to a carrier or a named location, and the buyer takes responsibility thereafter.
- CPT (Carriage Paid To): The seller pays for the transportation of the goods to the destination country or named place, but not for import duties or taxes.
- CIP (Carriage and Insurance Paid To): Similar to CPT, but the seller also provides insurance coverage for the goods during transportation.
- DAP (Delivered at Place): The seller is responsible for delivering the goods to the buyer's chosen location within the destination country but not for unloading.
- DPU (Delivered at Place Unloaded): The seller delivers the goods, unloaded, at the buyer's chosen location within the destination country.
- DDP (Delivered Duty Paid): The seller takes full responsibility for delivering the goods to the buyer's chosen location, including import duties and taxes.
- FAS (Free Alongside Ship): The seller delivers the goods alongside the vessel at the port of shipment, and the buyer handles the loading.
- FOB (Free on Board): The seller is responsible for delivering the goods on board the vessel at the port of shipment, and the buyer takes responsibility from there.
- CFR (Cost and Freight): The seller pays for the cost of goods and freight to the destination port, but the buyer is responsible for unloading and import duties.
- CIF (Cost, Insurance, and Freight): Similar to CFR, but the seller also provides insurance coverage for the goods during transportation.
Difference between CIF and FOB
In the process of selling and distributing, shipping agreements are crucial. As a result, it determines who is liable for goods during transit between the seller and the buyer. When it comes to importing and exporting, there are many different options for shipping agreements.
CIF(Cost, Insurance, and Freight)
When goods are sold CIF (Cost, Insurance, and Freight), the seller must cover all costs, insurance, and freight to deliver them to the specified destination. In CIF transactions, the seller arranges and pays for the transportation of the goods to the port of destination, as well as insurance covering them during transit. Once the goods are loaded onto the vessel, the risk transfers to the buyer, who becomes responsible for any damages or losses that may occur during the rest of the journey.
The CIF term is commonly used in maritime trade when the goods are transported by sea.
| Pro’s | Con’s |
|---|---|
| Reduced Buyer Risk: CIF transfers the risk from the seller to the buyer only when the goods have been loaded onto the vessel at the port of origin, and the seller is responsible for insuring the goods during transit. | Higher Overall Cost: While CIF may seem convenient for the buyer, the seller often incorporates the transportation and insurance costs into the total price, potentially making the goods more expensive. |
| Convenient Shipping Arrangements: The seller takes care of arranging and paying for transportation to the destination port, making it more convenient for the buyer, who doesn't have to handle the logistics of shipping. | Insurance Claim Complications: In case of damage or loss during transportation, the buyer might face challenges in filing insurance claims, as the insurance is typically arranged by the seller. |
| Lower Initial Costs for Buyer: CIF includes the cost of shipping and insurance in the total price, which can be beneficial for buyers who don't want to deal with separate shipping and insurance arrangements. | Limited Control Over Shipping: The buyer has limited control over the shipping process as it is managed by the seller. Delays or issues in transportation might be beyond the buyer's control. |
FOB (Free On Board):
FOB is a trade term where the seller's responsibility ends when the goods are loaded onto the designated vessel at the port of shipment. The seller arranges and pays for the transportation of the goods to the port of shipment, but once the goods are on board the vessel, the risk and responsibility transfer to the buyer. The buyer is then responsible for all costs and risks associated with the shipment from that point on.
FOB is often used when goods are transported by sea, but it can also apply to other modes of transport, such as air or land.
| Pro’s | Con’s |
|---|---|
| Cost Control: FOB allows the buyer to have more control over shipping arrangements, carrier selection, and associated costs. This can potentially lead to cost savings as the buyer can choose more competitive shipping options. | Increased Buyer Risk: Since the buyer assumes responsibility for the goods once they are on board the vessel, there is a higher risk of damage, loss, or delays during the transportation process. |
| Greater Flexibility: FOB can be used for various modes of transport, including sea, air, and land, making it more versatile for different types of trade transactions. | Complex Logistics: Buyers need to arrange and coordinate the shipping and insurance of goods independently, which can be challenging, especially for inexperienced importers. |
| Customization: The buyer has the freedom to customize the shipping process according to their specific needs, ensuring that the goods are handled in a manner that meets their requirements. | Import Compliance: Buyers may face complexities related to customs clearance, import duties, and compliance with import regulations, as they are responsible for these aspects. |
Conclusion
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FAQs
1. What is the objective of Incoterms?
The Standardized commercial rules simplify and unify trade through delivery, risk, insurance, cost, and transport regulations.As a tool for managing global business, Incoterms defines where the obligations of each party start and end.
2. Are the Incoterms necessary?
Yes, Incoterms are very useful in international trade. Every country has its own rules and practises, so having common rules that everyone understands helps make trade easier.In simple terms, Incoterms creates a common language for international trade, making it easier for businesses to work together across borders.
3. How do Incoterms work?
In international trade, the buyer and seller agree on the means of transport that suit both parties. They also choose an Incoterm to govern the shipping of goods, and I recommend using the most recent version, Incoterm 2020.Each Incoterm follows the same concepts but has different meanings. They specify who pays for transport, insurance, customs, loading, and unloading, and when responsibility and risk shift between parties.Once the Incoterm is agreed upon, both parties must adhere to the agreed conditions. It ensures protection for both sides during the transaction. In case of any disputes, the standard rules make interpretation simpler and more predictable when third-party intervention is needed.
4. Are Incoterms legally binding?
Incoterms are not laws, but they are commonly used as part of sales contracts. They are binding if both parties agree to use them in their contract.
5. How do I choose the right Incoterm for my transaction?
Choosing the right Incoterm depends on factors such as the location of the buyer and seller, the mode of transport, and the level of risk and responsibility each party is willing to take.
6. Do Incoterms cover payment terms?
No, Incoterms does not address payment terms. Payment terms are usually negotiated separately in the contract.
7. Can Incoterms be changed or modified?
Yes, Incoterms can be changed or modified if both parties agree to do so and include the changes in their contract.
8. Are Incoterms suitable for all types of goods?
Yes, Incoterms can be used for all types of goods, whether they are physical products, raw materials, or commodities.