NAVIGATING GLOBAL TRADE: THE POWER OF INCOTERMS

- Siddharth. R

Incoterms, short for "International Commercial Terms," are a set of standardized three-letter trade
terms published by the International Chamber of Commerce (ICC) that define the responsibilities of
sellers and buyers in international trade transactions. They are widely used in contracts for the sale of
goods worldwide to clarify the tasks, costs, and risks associated with the transportation and delivery
of goods from sellers to buyers.
Incoterms also help clarify the finer details involved in imports, exports, and transportation. From
import duties to customs clearance in the destination country, Incoterms ensures both parties have
complete transparency regarding their obligations. They are essential in avoiding confusion and
misunderstandings between the seller and buyer.
There are two types of Incoterms, with 11 rules. The first 7 apply to all modes of transport, while the
next 4 apply to sea and inland waterway transport.

RULES FOR ANY MODE OF TRANSPORT:

• 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)
RULES FOR SEA AND INLAND WATERWAY TRANSPORT:
• FAS (Free Alongside Ship)
• FOB (Free On Board)
• C&F (or) CFR (Cost and Freight)
• CIF (Cost Insurance and Freight)

The core functions of Incoterms® used in international trade:

• Outline the obligations of the buyer and the seller in a trade transaction.
• Clarify when risk passes from seller to buyer under each of these rules.
• Outline how costs are allocated between the buyer and the seller.
EXW (Ex Works):
EXW (Ex Works) is an Incoterm where the seller's responsibility is to make the goods available at their
premises or another named place (such as a factory or warehouse). The buyer is responsible for all
costs and risks of transporting the goods from the seller's location to the final destination.
In an EXW transaction:
- The seller fulfills their obligation by making the goods available at their premises or another agreed-
upon location.
- The seller's responsibility ends once the goods are made available to the buyer at the agreed-upon
location.
- The buyer assumes all responsibility and costs associated with transporting the goods from the seller's
location to the final destination, including arranging transportation, export clearance, and import
clearance.

FCA (Free Carrier):

FCA (Free Carrier) is an Incoterm where the seller is responsible for delivering the goods to a carrier
or another person nominated by the buyer at a named place, typically the seller's premises or a
transportation hub. The risk transfers to the buyer once the goods are delivered to the carrier.
In an FCA transaction:
- The seller fulfills their obligation by delivering the goods, cleared for export, to the carrier or another
person nominated by the buyer at the named place.
- The named place can be the seller's premises, a warehouse, a terminal, or any other agreed-upon
location where the goods are made available for delivery to the carrier.
- The seller's responsibility ends once the goods are handed over to the carrier at the named place, and
the risk transfers to the buyer at that point.
- The buyer is responsible for arranging and paying for transportation from the named place to the final
destination, as well as for import clearance and any applicable taxes or duties.

CPT (Carriage Paid To):

CPT (Carriage Paid To) is an Incoterm where the seller delivers the goods to a carrier at an agreed-
upon place, typically a transportation hub, and is responsible for the cost of transporting the goods to
the named destination. The risk transfers to the buyer once the goods are handed over to the carrier.
In a CPT transaction:
- The seller fulfills their obligation by delivering the goods, cleared for export, to a carrier at the agreed-
upon place (typically a transportation hub or terminal).
- The seller is responsible for the cost of transporting the goods to the named destination specified in
the contract.
- The risk transfers to the buyer once the goods are handed over to the carrier at the agreed-upon place.
- The buyer is responsible for arranging and paying for import clearance, as well as any applicable
taxes or duties once the goods arrive at the destination.

CIP (Carriage and Insurance Paid To):

CIP (Carriage and Insurance Paid To) is an Incoterm where the seller delivers the goods to a carrier at
an agreed-upon place, typically a transportation hub, and is responsible for the cost of transporting the
goods to the named destination. Additionally, the seller procures insurance against the buyer's risk of
loss or damage to the goods during transit. The risk transfers to the buyer once the goods are handed
over to the carrier.
In a CIP transaction:
- The seller fulfills their obligation by delivering the goods, cleared for export, to a carrier at the agreed-
upon place (typically a transportation hub or terminal).
- The seller is responsible for the cost of transporting the goods to the named destination specified in
the contract.
- Additionally, the seller is responsible for procuring insurance against the buyer's risk of loss or
damage to the goods during transit.
- The risk transfers to the buyer once the goods are handed over to the carrier at the agreed-upon place.
- The buyer is responsible for arranging and paying for import clearance, as well as any applicable
taxes or duties once the goods arrive at the destination.

DPU (Delivered at Place Unloaded):

In the new revision of Incoterms 2020, the number of terms still stays at 11, but the name of the rule
DAT has been changed to DPU (Delivered at Place Unloaded).
In a DPU transaction:
- The seller fulfills their obligation by delivering the goods, unloaded, to the buyer at an agreed-upon
place of destination.
- The seller bears all risks and costs associated with transporting the goods to the named place of
destination.
- The seller is responsible for unloading the goods at the agreed-upon place, which could be a terminal,
warehouse, or other designated location.
- The buyer is responsible for import clearance, as well as any applicable taxes or duties.
DAP (Delivered at Place):
DAP (Delivered at Place) is an Incoterm where the seller is responsible for delivering the goods to the
buyer at an agreed-upon place of destination. The seller bears all risks and costs associated with
transporting the goods to the named place, excluding import clearance and any applicable taxes or
duties.
In a DAP transaction:
- The seller fulfills their obligation by delivering the goods, cleared for export, to the buyer at the
agreed-upon place of destination.
- The seller is responsible for arranging and paying for transportation to the named place, which could
be the buyer's premises, a terminal, a warehouse, or any other designated location.
- The seller's responsibility ends once the goods are made available to the buyer at the agreed-upon
place of destination.
- The buyer is responsible for import clearance, as well as any applicable taxes or duties upon arrival
of the goods at the destination.

DDP (Delivered Duty Paid):

DDP (Delivered Duty Paid) is an Incoterm where the seller is responsible for delivering the goods to
the buyer at the named place of destination, cleared for import and ready for unloading. The seller
bears all risks and costs associated with transporting the goods to the destination, including import
duties and taxes.
In a DDP transaction:
- The seller fulfills their obligation by delivering the goods to the buyer at the named place of
destination, cleared for import and ready for unloading.
- The seller is responsible for arranging and paying for transportation to the destination, including all
associated costs and risks.
- The seller is also responsible for handling import clearance procedures, paying any applicable duties
and taxes, and ensuring that the goods are ready for unloading upon arrival.
- The buyer's responsibility begins once the goods are delivered at the named place of destination.

FAS (Free Alongside Ship):

FAS (Free Alongside Ship) is an Incoterm where the seller delivers the goods alongside the vessel at
the named port of shipment. The seller's responsibility ends once the goods are placed alongside the
ship and the risk transfers to the buyer at that point.
In an FAS transaction:
- The seller fulfills their obligation by delivering the goods, cleared for export, alongside the vessel at
the named port of shipment.
- The seller's responsibility ends once the goods are placed alongside the ship, typically on the quay or
alongside a docked vessel.
- The buyer is responsible for all costs and risks associated with loading the goods onto the vessel, as
well as arranging and paying for transportation from the named port of shipment to the final
destination.

FOB (Free On Board):

FOB (Free On Board) is an Incoterm where the seller fulfills their obligation by delivering the goods
on board the vessel at the named port of shipment. The seller's responsibility ends once the goods pass
the ship's rail, and the risk transfers to the buyer at that point.
In an FOB transaction:
- The seller is responsible for delivering the goods, cleared for export, on board the vessel at the named
port of shipment.
- The seller's responsibility ends once the goods pass the ship's rail, meaning the seller bears all risks
and costs associated with loading the goods onto the vessel.
- The buyer is responsible for all costs and risks associated with transportation from the named port of
shipment to the final destination, as well as import clearance and any applicable taxes or duties.

CFR (Cost and Freight):

CFR (Cost and Freight) is an Incoterm where the seller fulfills their obligation by delivering the goods
on board the vessel at the named port of shipment and covering the cost of freight to the named port
of destination. The risk transfers to the buyer once the goods pass the ship's rail at the port of shipment.
In a CFR transaction:
- The seller is responsible for delivering the goods, cleared for export, on board the vessel at the named
port of shipment.
- The seller is also responsible for covering the cost of freight to transport the goods to the named port
of destination.
- The seller's responsibility ends once the goods pass the ship's rail at the port of shipment, meaning
the seller bears all risks and costs associated with loading the goods onto the vessel and transporting
them to the named port of destination.
- The buyer is responsible for all costs and risks associated with unloading the goods at the named port
of destination, as well as transportation from the port of destination to the final destination, import
clearance, and any applicable taxes or duties.
CIF (Cost, Insurance and Freight):
CIF (Cost, Insurance, and Freight) is an Incoterm where the seller fulfills their obligation by delivering
the goods on board the vessel at the named port of shipment, covering the cost of freight and marine
insurance to transport the goods to the named port of destination. The risk transfers to the buyer once
the goods pass the ship's rail at the port of shipment.
In a CIF transaction:
- The seller is responsible for delivering the goods, cleared for export, on board the vessel at the named
port of shipment.
- The seller is also responsible for covering the cost of freight to transport the goods to the named port
of destination.
- Additionally, the seller arranges and pays for marine insurance to protect the goods against loss or
damage during transit.
- The seller's responsibility ends once the goods pass the ship's rail at the port of shipment, meaning
the seller bears all risks and costs associated with loading the goods onto the vessel and transporting
them to the named port of destination.
- The buyer is responsible for all costs and risks associated with unloading the goods at the named port
of destination, as well as transportation from the port of destination to the final destination, import
clearance, and any applicable taxes or duties.