What are 'Incoterms'?

The International Chamber of Commerce publishes Incoterms, aka international commercial terms, and traders commonly use them to help understand one another in domestic and international trade.

BREAKING DOWN 'Incoterms'

The ICC developed Incoterms in 1936 and updates them periodically to conform to changing trade practices. Because of these updates, contracts should specify which version of Incoterms they use -- e.g., Incoterms 2010. Trade terms used in different countries may appear identical on the surface, but they can have different meanings when used domestically. Incoterms are internationally recognized and prevent confusion in foreign trade contracts by clarifying the obligations of buyers and sellers.

Incoterms Rules for Any Mode

Some common examples of Incoterms rules for any mode of transportation include delivered at terminal, delivered duty paid and ex works. The ICC abbreviates these Incoterms as DAT, DDP and EXW, respectively. 

DAT indicates the seller delivers the goods to a terminal, and assumes all the risk and transportation costs until the goods have arrived at the terminal and have been unloaded. Thereafter, 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 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.

Incoterms Rules for Sea and Inland Waterway

The ICC has specific Incoterms rules for inland waterway and sea transport such as free on board and cost, insurance and freight. FOB indicates that the buyer or seller delivers the goods on a designated vessel. 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.

CIF indicates the seller must deliver the goods to a port and load them on a specified vessel. Under the CIF rule, the seller is responsible for paying all transportation and insurance costs to the designated port and the cost to load the cargo onto the vessel. Thereafter, the buyer assumes the cost and risk associated with transporting the cargo from the designated port to its warehouse or business.

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