International trade has remained a major contributor to the world economy. Through buying and selling of products across boarders, countries are able to develop trade links and engage in mutual businesses practices.
While this has promoted significance growth in most countries, of importance is the fact that international trade is governed by rules which regulate all the transactions designed by the International Chamber of Commerce. These rules are collectively referred to as Incoterms (International Commercial Terms). This report gives a detailed analysis of Incoterms with a clear understanding of what they are and their significance in international business.
By definition, Incoterms refer to a collection of commercial terms designed and published by the International Chamber for Commerce. These terms are broadly applied in international business transactions as they define significant aspects of international trade. They usually take a pattern of three letters that are exclusively related to sales practices that are common between transacting bodies.
Of particular emphasis is the fact that Incoterms clearly stipulate the tasks, risks and costs associated with the overall transportation and delivery of goods from one place to another (Business Link 1). For these terms to be effective, they are recognized by various countries, practitioners and legal authorities around the world which are charged with the responsibility of interpreting those terms that are commonly used in international business transactions.
This is important in order to eliminate or minimize uncertainties which arise from varying interpretations given by different countries. Incoterms were first published in 1936 and have been updated continuously in order to meet the changing business environment. The rules were last revised in 2010 with this latest version having been made public in January 2011. “Incoterms” is a registered trademark owned by the International Chamber of Commerce (Business Link 1).
Additionally, Incoterms define the responsibilities of buyers and sellers in terms of transport, clearance, duties and insurance. It is therefore important for those intending to engage in International business to understand the Incoterms of the buyer’s country to avoid disappointments and misinterpretation of the rules. The following segments give detailed analysis of some of the common Incoterms encountered by those involved in international transactions.
EX-Works means that the seller reduces business risks by availing specified goods at their own location. According to this rule, the buyer incurs all the costs resulting from loading, insurance, custom clearance and transport (Business Link 1). The responsibility of the seller under this Incoterm is therefore to avail purchased goods at the point of collection as agreed upon by the two parties.
On the other hand, the buyer remains responsible for risks and costs once the foods are made available at the seller’s premises (Business Link 1). In cases where the seller agrees to pay loading costs, “EXW-load” is used. However, such modifications have to be well communicated to clarify the person who bears risks and costs involved. Lastly, the rule allows the buyer to choose the most appropriate means of transport based on his/her financial ability (Business Link 1).
Free Carrier series comprises of three Incoterms which begin with “F”. These are: Free On Board (FOB), Free Carrier (FCA) and Free Alongside Ship (FAS). According to the these rules, the seller organizes and pays for delivery of purchased goods to a carrier before the buyer takes the responsibility of covering the remaining charges (Business Link 1). This delivery is made by use of any means of transport deemed appropriate and economical by the seller.
The main responsibility of the buyer is to select the main carrier to be loaded and clear all the costs incurred after the goods are loaded to the carrier by the seller. In case of any modification of the rules, they have to be explained with clarity to avoid misunderstanding. Under FAS, the seller is expected to finalize export documentation, take carriage responsibility and make clearance for exportation.
The buyer becomes responsible after the goods have been delivered alongside a ship agreed upon. On the other hand, the seller delivers all the goods at a specific carrier preferred by the buyer under FOB Incoterm. The buyer assumes remaining expenses once the goods cross a ship’s rail. Importantly, FAS and FOB are only applicable for inland waterway and sea transport (Business Link 1).
CFR (Cost and Freight) and CIF (Cost, Insurance and Freight) Intercoms indicate that the seller is responsible for the cost of the main carriage after purchase of goods. However, extra costs and damages which arise afterwards are covered by the buyer. Additionally, CIF requires sellers to cater for the insurance charges to cover the buyer’s risks before the goods are delivered over the agreed ship’s rail (Business Link 1).
According to Carriage and Insurance Paid To (CPT) and Carriage Paid To (CIP) Incoterms, the seller is supposed to organize and pay for the main carriage although extra costs and damages incurred later are met by the buyer. CPT allows the seller to select the best carrier, clear the goods and pay for their transport to an agreed destination.
In addition, CIP requires the seller to incur insurance costs for the risks associated with transport or any form of damage while goods are on carriage. CPT further means that the buyer has to be prepared for the costs after the goods reach the carrier (Business Link 1). Notably, CPT and CIP are applicable when using any mode of transport.
The “D” series of Incoterms identifies the seller as the main bearer of the risks and costs involved in the transportation of purchased goods. Under these Incoterms, the seller caters for all costs and risks incurred during the delivery process of goods to the contract destination. These Incoterms are: DAF- Delivered At Frontier, DES- Delivered Ex-Ship and DEQ- Delivered Ex-Quay.
According to DAF regulations, sellers transport goods to an agreed point of collection and place them at the frontier. In this regard, they clear purchased goods for exportation but not importation and are liable of any costs or risks associated with the movement of goods until they are delivered at the frontier when buyers take charge of all the charges left (Business Link 1). DAF is used with rail and road transport.
On the other hand, DES requires sellers to meet all delivery costs to the contact destination and load the goods on a ship although unloading costs are met by the buyer together with all other costs on board. DES is predominantly used for inland waterway and sea transport. Like DAF and DES, DEQ allows sellers to meet all the costs until the goods are delivered at an agreed point. Additionally, buyers pay for import duties and taxes.
As explained in the reference article, an Incoterm forms a significant part of any international business transactions. The article explains the obligations of both sellers and buyers and emphasizes on the need to make clarifications in cases where Incoterms are edited to avoid misunderstanding and conflicts.
Work Cited
Business Link. International Commercial Contracts, 2007. Web.