What Are Incoterms?

To facilitate commerce around the world, the International Chamber of Commerce (ICC) publishes a set of Incoterms, officially known as international commercial terms. Globally recognized, Incoterms prevent confusion in foreign trade contracts by clarifying the obligations of buyers and sellers. Parties involved in domestic and international trade commonly use them as a kind of shorthand to help understand one another and the exact terms of their business arrangements. Some Incoterms apply to any means of transportation; others apply strictly to transportation across water.

Key Takeaways

  • International commercial terms—Incoterms for short—clarify the rules and terms buyers and sellers use in international and domestic trade contracts. 
  • The International Chamber of Commerce (ICC) developed Incoterms in 1936 and updates them periodically to conform to changing trade practices.
  • Typical examples of Incoterms rules for any mode of transportation include Delivered at Terminal (DAT), Delivered Duty Paid (DDP), and Ex Works (EXW).

Understanding Incoterms

The International Chamber of Commerce (ICC) developed Incoterms in 1936 and updates them periodically to conform to changing trade practices. The ICC's mission is to promote open markets and ensure global economic prosperity through trade. Because it is a networked business organization that reaches over 6 million businesses in 100 countries, the ICC is seen as having unparalleled expertise in establishing rules to guide international trade. While the adherence to its Incoterms is voluntary, the ICC-established rules are commonly used by buyers and sellers as a regular part of trade transactions.

Incoterms provide a universal set of rules and guidelines that help facilitate trade. In essence, they provide a common language traders can use to set the terms for their trades. Buyers and sellers can use Incoterms in a variety of activities necessary to conduct business. Typical activities that call for the use of Incoterms include filling out a purchase order, labeling a shipment for transport, completing a certificate of origin, or documenting a free carrier agreement (FCA).

Because the ICC regularly updates Incoterms, contracts should specify which version they are using—e.g., Incoterms 2020. Also, be aware that trade terms used in different countries may appear identical on the surface, but they can have different meanings when used domestically.

Incoterms Rules for Any Mode of Transport

Some common examples of Incoterms rules for any mode of transportation include Delivered at Terminal (DAT), Delivered Duty Paid (DDP), and Ex Works (EXW).

DAT indicates the seller delivers the goods to a terminal and assumes all the risk and transportation costs until the goods have arrived and been unloaded. After that, the buyer assumes the risk and transportation costs of the goods from the terminal to the final destination.

DDP indicates the seller assumes all the risk and transportation costs. The seller must also clear the goods for export at the shipping port and import at the destination. Moreover, the seller must pay export and import duties for goods shipped under DDP.

Under Incoterm Ex Works (EXW), the seller is only required to make the goods available for pickup at the seller's business location or another specified location. Under EXW, the buyer assumes all the risk and transportation costs.

Real World Examples of Incoterms

In 2010, the two main categories of Incoterms were updated and classified by modes of transport. The first classification applies to any mode of transport, while the second classification only applies to sea and inland waterway transport.

Group 1 Incoterms: Apply to Any Mode of Transport

  • EXW Ex Works
  • FCA Free Carrier
  • CPT Carriage Paid To
  • CIP Carriage and Insurance Paid To
  • DAT Delivered at Terminal
  • DAP Delivered at Place
  • DDP Delivered Duty Paid

Group 2 Incoterms: Apply to Sea and Inland Waterway Transport

The ICC has specific Incoterms rules for inland waterway and sea transport such as cost, insurance, and freight (CIF) and free on board (FOB). Free on board shipment terms indicate the seller delivers the goods on board a designated vessel named by the buyer. The buyer or seller may assume all the risk and transportation costs depending on whether the goods are sold under FOB shipping point or FOB destination point.

Cost, insurance, and freight (CIF) terms indicate the seller must deliver the goods to a designated port and load them on a specified vessel, assuming responsibility for paying all transportation, insurance, and loading costs. After that, the buyer assumes the cost and risk associated with transporting the cargo from the designated port to its warehouse or business.