First published by the International Chamber of Commerce (ICC) in 1936, Incoterms® rules provide internationally accepted definitions and rules of interpretation for most common commercial terms used in contracts for the sale of goods.
Developed and maintained by experts and practitioners Incoterms® have become the standard in international business rules setting, recognized by The United Nations Commission on International Trade Law (UNCITRAL) as the global standard for the interpretation of the most common terms in foreign trade.
Parties involved in domestic and international trade commonly use Incoterms 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, while others apply strictly to transportation across water.
KEY TAKEAWAYS
International commercial terms—Incoterms for short—clarify the rules and terms that 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.
- Examples of Incoterms for modes of transportation include Delivered at Terminal (DAT), Delivered Duty Paid (DDP), and Ex Works (EXW).
- Incoterms were updated for 2020, and although only one term changed, there are notable differences in security costs.
- The terms are standardized, but certain buyers and sellers prefer individual terms over others. As such, which terms will be used is a matter of negotiation.
Incoterms Rules for Any Mode of Transport
Some common examples of Incoterms rules for any mode of transportation include Delivered Duty Paid (DDP), Delivered at Place (DAP), and Ex Works (EXW). The seven Incoterms for any mode of transport are:
- 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
Incoterms Rules for 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). The Incoterms for sea and inland waterway transport are:
- FAS: Free Alongside Ship
- FOB: Free on Board
- CFR: Cost and Freight
- CIF: Cost, Insurance, and Freight
Advantages and Disadvantages of Incoterms
The single greatest advantage of using Incoterms is the standardization and specificity of complicated international trade aspects. Having a system that eliminates ambiguity between nations has made trading much simpler, especially when negotiating terms. This saves time and money that would have previously been spent on lawyers, who would draft terms basically breaking down Incoterms into different languages.
A notable disadvantage of Incoterms is that buyers and sellers often have different preferences when using them. Sellers, for example, may choose CIF because they understand their shipments better than buyers do. Buyers, in contrast, may prefer FOB for the same reasons. However, the terms themselves are not the issue, and it becomes more a matter of negotiation over which terms to use vs. the clarity of the terms themselves.
Conclusions
Incoterms are helpful terms used to facilitate international trade. They are separated by modes of transport between any mode, and those specifically involving water transport. The terms categorize responsibility between the buyer and seller, but there are some aspects of trade that the terms do not cover, such as the goods being sold or future liability responsibilities. For this reason, Incoterms should be used to help clarify agreements, but they should not be the entirety of the agreement.