The international shipping industry is highly complex. Transporting freight over long distances and across international borders means shippers frequently encounter rules, regulations, licensing, and paperwork issues. Every country implements policies and procedures, which shippers must stay up-to-date with to clear customs and avoid fines and delays.
The International Chamber of Commerce (ICC) established a set of global terms to help facilitate trade agreements and ensure smooth international trade contracts. These terms help verify the obligations and responsibilities of buyers and sellers during international trade. The ICC introduced them to minimize misunderstandings and errors in domestic and international negotiations.
Learn more about Incoterms, including what they are, what they mean, and a complete list of incoterms for 2022.
What are Incoterms?
The word Incoterms is an acronym derived from the phrase, international commercial terms. The ICC registered Incoterms as a trademark in multiple regions.
Incoterms refer to a set of standardized terminology that applies to international corporations. These rules clearly outline the roles and responsibilities of buyers and sellers in any international transaction sale of goods. Details include key data points like costs, risk of loss, and the necessary tasks taken on by either side.
Importance of Incoterms
Incoterms also help clarify the finer details involved in imports, exports, and transportation. From import duties to customs clearance in the destination country, Incoterms ensure both parties have complete transparency regarding their obligations. They are essential in avoiding confusion and misunderstandings between the seller and buyer.
Incoterms are often used similarly to shorthand, facilitating concise and to-the-point arrangements. Most terms apply to all modes of transport. However, some are in place for cross-ocean international trade.
Any business involved in international trade should be familiar with Incoterms to navigate the overseas marketplace successfully. In-depth knowledge of these terms allows companies to gather accurate transportation cost breakdowns, correct product pricing, and determine customs formalities.
Failure to address Incoterms can cause potential issues, such as insurance complications or on-board liability, in the event of an accident.
Incoterms List 2022
Since its introduction in 1936, the ICC has updated the terms every ten years, ensuring they reflect any significant changes in the industry. The latest Incoterms list was released in 2019 but didn’t officially come into effect until January 2020. Although the 2010 Incoterms remain valid, buyers and sellers may only use them if both parties agree.
How Many Incoterms Are There in 2022?
There are two types of Incoterms in 2022, with 11 rules. The first 7 apply to all modes of transport, while the next 4 apply to sea and inland waterway transport only:
EWX – Ex-Works
Ex-works outlines the seller and buyer’s responsibilities for transporting and selling goods. This Incoterm states that the seller must deliver the goods to an agreed-upon location but the buyer is liable for all shipping costs. Under EWX, the buyer must also bear responsibility for possible risks such as loading and transferring the shipment and passing customs regulations.
The buyer assumes responsibility for picking up these goods and transporting the cargo from origin to the port of destination. The buyer also takes on the shipping costs and risk of loss until the inventory reaches the destination port.
EXW states that the buyer must orchestrate all aspects of transport, including choosing the mode of transportation, product loading, and the customs clearance process.
This Incoterm is a seller-friendly agreement as the maximum risk and additional costs lie with the buyer. Sellers are solely responsible for export packaging, labeling, and ensuring the inventory is ready for collection at the agreed-upon location.
FCA: Free Carrier
Free Carrier is more favorable for the buyer regarding transport obligations and the risk of loss. It states that the seller is responsible for the entire shipment until it reaches an agreed location or destination port, such as an ocean dock, air cargo terminal, warehouse, or another specified facility.
Under FCA, the seller provides a quote that covers the full-service cost, including export clearance fees, licensing, and additional supply chain costs. However, once the shipment arrives at the designated location, the buyer assumes responsibility for the cargo, including arranging and covering the cost of unloading the merchandise.
CPT – Carriage Paid To
CPT is similar to FCA, but the seller is responsible for the entire delivery process, from the point of origin to the end customer’s front door. They take on all costs, risks, and potential losses until the goods are in the customer’s possession.
This Incoterm applies to all transport modes. If intermodal transport is needed, risk transfer remains with the seller for each leg of the journey. The seller must handle all costs and customs clearance procedures. However, they can include these services and fees in their quote.
CIP: Carriage Insurance Paid To
CIP states that the seller must pay freight charges and cargo insurance to ensure the inventory arrives safely and securely at a contractually set location. The liability and risk of goods passes when the cargo is delivered to the buyer or a nominated third party like a 3PL.
With CIP Incoterms, full-form insurance coverage is mandatory. The seller must insure the goods for 110% of their contracted value. The buyer and seller can also agree on additional coverage.
DAP: Delivered at Place
The DAP Incoterm places the majority of risk and cost on the seller. They must pay full shipping costs, export formalities, loading expenses, and the final delivery fee. They are also responsible for damages or losses while the goods are in transit.
The buyer covers the cost of unloading, local taxes, and import taxes when the inventory arrives at the agreed-upon location. The buyer also takes responsibility for import clearance formalities. With DAP, the Incoterm must include the name of the final destination.
DPU: Delivered at Place Unloaded
The ICC introduced DPU with the release of the 2020 Incoterms. However, it is simply a name change of a previous rule, called Delivered at Terminal or DAT (Incoterms 2010). DAT is the only Incoterm that makes the seller responsible for unloading the inventory at the port of arrival.
Under DAT, the seller is also held accountable for the carriage paid and the delivery of goods. The liability transfers to the buyer once the items are unloaded. The buyer covers import duties and local taxes and manages import clearance formalities.
DDP: Delivered Duty Paid
DDP Incoterms are one of the more buyer-friendly agreements. The seller absorbs all risks and covers total transportation costs from the point of origin to the destination. These risks include export and import duties, insurance, and extra costs that may occur during the time in transit to an agreed location. If a shipment is delayed or damaged, the seller is held accountable.
FAS: Free Alongside Ship
According to FAS, the seller remains responsible for orchestrating the delivery until it arrives at a specific port of shipment. As part of the agreement, the seller must dock next to a designated vessel where the cargo is set to be transferred. The seller handles export clearance formalities, while the buyer must pay unloading and ocean freight costs and cargo insurance.
FOB: Free on Board
The FOB Incoterm states that the seller is only responsible for the goods until they are loaded onto a designated vessel at an assigned loading port. The buyer manages the export clearance process. When the merchandise is safely on board, liability transfers to the buyer.
The seller is solely responsible for transporting the goods from the origin point to the loading port, taking responsibility for any loss in that period. This means the buyer assumes the most responsibility, assuming liability for any damage after the goods are loaded onto the shipping vessel. The buyer pays for ocean freight and takes care of import formalities.
CFR: Cost and Freight
Under the CFR trade terms, the seller must orchestrate the ocean transfer of goods via sea freight, pay the freight costs, and fulfill all paperwork obligations. However, the seller isn’t required to obtain marine insurance to cover potential damages while the goods are in transit. The buyer has the option to insure the goods against damages incurred on the ocean liner.
CIF: Cost, Insurance, and Freight
Like with CFR, the seller is responsible for all aspects of the shipment from when it leaves the storage facility until it arrives at the destination port.
However, the seller must pay minimum marine insurance against potential losses or damages. The insurance coverage is agreed upon between the buyer and seller and detailed in the contract of sale.
Risk transfer occurs when the inventory is removed from the vessel. At this point, the buyer assumes liability for the goods and must pay additional costs, like product inspection, customs duties, licensing fees, taxes, and further transportation costs.
Ensure Smooth and Efficient Transport with Asiana USA
Knowing the definitions of these Incoterms is a helpful way to facilitate international trade. They make the process smoother and quicker for both buyers and sellers.
Asiana USA is a world-class shipping company, providing a wide range of shipping and logistic services for local, regional, and international businesses. Our logistics professionals keep up-to-date with the latest shipping industry rules and regulations and have experience using Incoterms to get you the best shipping deals possible.
With offices in several countries and an extensive global partner network, we offer comprehensive service to clients worldwide. Download our brochure or contact us at (855) 500-1808 for more information about our services or to request a quote.