What are 'Incoterms'
Incoterms are trade terms published by the International Chamber of Commerce (ICC) that are commonly used in both international and domestic trade contracts. Incoterms, which is short for "international commercial terms," are used to make international trade easier by helping traders who are in different countries to understand one another.
BREAKING DOWN 'Incoterms'Incoterms were first developed in 1936 and are updated from time to time to conform to current trade practices. Because of these updates, contracts should specify which version of Incoterms they are using (e.g., Incoterms 2010).
Trade terms used in different countries may appear identical on the surface, but they actually have different meanings as they are used domestically. Incoterms are internationally recognized and prevent confusion in terms of foreign trade contracts by helping sellers and buyers understand their obligations in any transaction.
Incoterms Rules for Any Mode
Some common examples of Incoterms rules for any mode, or multiple modes, of transportation include delivered at terminal (DAT), delivered duty paid (DDP) and ex works (EXW).
Delivered at terminal indicates that the seller delivers the goods to a terminal, and the seller assumes all the risk and transportation costs until the goods have arrived to the terminal. Thereafter, the buyer assumes the risks and transportation costs of the goods from the terminal to the buyer's final destination.
Delivered duty paid indicates that the seller assumes all the risk and transportation costs, and the seller is obligated to clear the goods for import and export. Moreover, the seller must pay duties for both export and import if the goods are shipped under DDP.
If goods are sold under ex works, the seller only needs to make the goods available for pickup at seller's business location or another specified location. Under ex works, the buyer assumes all risks and transportation costs.
Incoterms Rules for Sea and Inland Waterway
The ICC has set aside Incoterms rules for inland waterway and sea transport, such as free on board (FOB) and cost, insurance and freight (CIF).
Free on board indicates that the buyer or seller delivers the goods on a designated vessel. The buyer or seller may assume all the risks and transportation costs, depending on whether the goods are sold under FOB shipping point or FOB destination point.
Cost, insurance and freight indicates that the seller must deliver the goods onto a specified vessel or port. Under the CIF rule, the seller is responsible for paying for insurance and transportation costs for loading the goods onto the ship. Thereafter, the buyer assumes risks associated with transportation once the goods are loaded onto the vessel.