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Incoterms 2020 - Definition And Types Of Incoterms

incoterms

International business is not as simple as a local business. Here, all companies and parties have to follow proper rules & regulations and work in a procedure only. While dealing with an international trade transaction, the buyers and sellers both have to bear some responsibilities. Here, we will discuss complete details about these responsibilities and related terms in the upcoming paragraphs.

What is Incoterm?

Incoterms explain the responsibilities of both buyers and sellers in eleven different terms. These terms are not only some basic words. These are specific 11 rules that are issued by the ICC (International Chamber Of Commerce). It provides complete information regarding international trade where they can get details about tasks, risks, and costs by becoming an international buyer or seller. In case you have an interest in getting deep information, then check out the types of incoterms here.

Types Of Incoterms

There are different types of rules for international trade issued by the ICC (International Chamber Of Commerce). Out of these 11 rules, seven are created for all modes of transportation, and 4 for sea and inland waterway transport. Let’s check out all 11 one by one.

    Types of Incoterms 2020
  • 1. EXW (Ex-Works)
  • 2. FCA (Free Carrier)
  • 3. CPT (Carriage Paid To)
  • 4. CIP (Carriage and Insurance Paid To)
  • 5. DAP (Delivered at Place)
  • 6. DPU (Delivered at Place Unloaded)
  • 7. DDP (Delivered Duty Paid)
  • 8. FAS (Free Alongside Ship)
  • 9. FOB (Free on Board)
  • 10. CFR (Cost and Freight)
  • 11. CIF (Cost Insurance and Freight)

Incoterms 2020 rules for any mode of Transport

1. EXW (Ex-Works)

According to the EXW (Ex Works) incoterm, the sellers are completely free from all types of responsibilities from the point when loading of goods is started. The seller does not have to worry about anything, such as - export clearances, etc. Everything should be tackled by the buyers only.

2. FCA (Free Carrier)

Free Carriage (FCA) is an incoterm where the maximum responsibility bears by the buyer. Here, the sellers can deliver goods to the buyer at their own place. Afterward, the complete responsibility of costs and risk should bear by the buyers only. The responsibility of goods is transferred when everything is loaded into the buyer’s transport vehicle.

3. CPT (Carriage Paid To)

CPT stands for carriage paid to. Under this particular term, the seller is responsible for bearing the complete carriage cost of the shipment place as decided in the trade agreement. From that particular point or place, the responsibilities are transferred to the buyer. Along with it, the sellers are not responsible for purchasing an insurance plan for proper goods’ coverage.

4. CIP (Carriage and Insurance Paid To)

CIP means carriage and insurance paid to. In this rule, it is mentioned the seller is responsible for buying a fully-featured insurance policy for the goods that can provide maximum coverage. As per the Institute Cargo Clauses, Clause A, the value of insurance coverage should be at least 110% of goods’ value.

5. DAP (Delivered at Place)

Under the DAP (Delivered At Place), the seller is responsible for the goods to the destination place only. The seller does not have to bear unloading and further responsibilities. From the moment, goods reach the destination port and ready to unload, then the responsibilities are transferred to the importer’s shoulders. Here, the buyers have to focus on all factors, such as - goods unloading, customs clearance, and some other activities.

6. DPU (Delivered at Place Unloaded)

It stands for delivered at place unloaded. DPU (Delivered At Place Unloaded) is a new version of an old incoterm and it was DAT (Delivered At Terminal). In some conditions, the buyers want to get goods at their own place rather than a common terminal. Sometimes, the sellers also want to deliver products at a separate place. It is the biggest reason that’s why the incoterm was renamed or revised.

DPU is the only incoterm that makes the seller responsible for the goods’ unloading as well. Here, the seller is responsible for delivering the products and bears the cost & risk to the delivery place after import clearance and unloading of goods.

7. DDP (Delivered Duty Paid)

The full form of DDP is delivery duty paid. If we talk about the seller’s point of view, then DDP becomes a dangerous term. It increases the seller’s responsibilities regarding the goods and makes them liable for goods condition and other risks at the importer’s port as well. Here, the sellers do not take care of loading and shipment related activities but also they have to focus on the import clearance. It becomes very difficult for the sellers to have complete knowledge about the importer’s clearance procedure and other activities.

Incoterms 2020 rules for Sea and Inland Waterway

8. FAS (Free Alongside Ship)

FAS stands for free alongside the ship. Under such a rule, it is cleared that the buyer and seller both have to follow the conditions as signed or decided in the freight contract. In case the buyer fails to fulfill such terms accordingly and places an order, then the seller can do it on their own and take initiative. Here, the buyers are also responsible for the risk and cost of the freight as per the trade contract.

9. FOB (Free on Board)

FOB is known as free on board. According to this particular rule, the buyers assume some crucial facts regarding the transferability of risks and goods costing or expenses. Mainly, it happens from the moment, when the goods are delivered by the exporter on the shipment port, loaded to ship, and set on the voyage. Along with it, the suppliers should make sure the insurance which is selected for the goods should cover goods risks and damages from exporter’s warehouse to importer’s warehouse.

10. CFR (Cost and Freight)

CFR represents cost and freight. Here, the sellers are responsible for delivering the properly packed goods to the shipping port. With it, the importers need to pay complete transportation and shipment charges to the destination port. Once the goods are reached the buyers’ port, after that the responsibility of goods is transferred to the buyer’s shoulders.

11. CIF (Cost Insurance and Freight)

CIF stands for cost, insurance, and freight. According to the CIF, the seller is responsible for delivering the goods to the port for loading procedures and related activities. Along with it, the responsibility of bearing transportation cost (freight) to the destination port is also on the shoulders of the exporter. One thing that should not be avoided by the sellers is insurance. As per the rules and clause C, the seller has to buy insurance for goods to cover future damages and prevent financial losses.

If you focus on the responsibilities or role of buyers, then buyers are responsible for the expenses associated with the transportation of goods from the destination port to their own place or warehouse. It is the stage where the responsibility of goods is transferred from the shoulders of sellers to the buyers.

Final Words

These are some major incoterms that can be considered as rules and regulations for an international trade transaction. If you are interested in getting fully explained details about the rules & regulations, then you can discuss facts with the business experts.

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