International Commercial Terms (Incoterms) Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Commonly referred to as Incoterms, international commercial terms are internationally standardized terms of trade that specify the responsibilities of the seller and the buyer in a sales transaction. Incoterms help answer the questions: Which party is responsible for arranging and paying for transport of the goods? Which party is responsible for insurance? Which party is responsible for clearing the goods for export or import and paying duties and taxes? When will transfer of responsibility for the goods take place? Rather than leaving these questions unaddressed or needing to work through each detail for every sales contract, the seller and buyer can select from standard Incoterms that define who bears the cost and responsibility for each of the various activities in delivering the goods.

Because they are standardized and have a long history of usage across the globe, Incoterms can simplify the negotiation of sales terms and help the buyer and seller to avoid misunderstandings. Also, because they clarify what is included in the quoted sales price and what additional activities and costs are borne by the buyer, Incoterms help a buyer determine the total landed cost that will be incurred in acquiring and bringing the goods to their final point of delivery.

Incoterms were first created in 1936 by the International Chamber of Commerce (ICC) and subsequently have been revised six times. The most recent version is Incoterms 2000, with the next revision slated for release in 2010. Each of the 13 Incoterms is known by a three-letter abbreviation, with the first letter indicating into which of four groups it falls. While a brief description is given below, it is imperative to reference each Incoterm’s full description as provided by the ICC in order to understand and use them correctly.

Origin Terms (E): In this category of Incoterms, the seller’s responsibilities are fulfilled when goods are ready to depart from the seller’s facility:

EXW [Ex Works] (named place)

Main Carriage Not Paid by Seller (F): For shipments where the primary or international shipment cost is not paid by the seller:

FCA [Free Carrier] (named place)
FAS [Free Alongside Ship] (named ocean port of shipment)
FOB [Free On Board] (named ocean port of shipment)

Main Carriage Paid by Seller (C): For shipments where the primary shipping cost is paid by the seller:

CFR [Cost and Freight] (named ocean port of destination)
CIF [Cost, Insurance, and Freight] (named ocean port of destination)
CPT [Carriage Paid To] (named place of destination)
CIP [Carriage and Insurance Paid To] (named place of destination)

Arrival at Destination (D): For shipments where the seller’s responsibility ends when the goods arrive at a named place, usually in the destination country:

DAF [Delivered At Frontier] (named place at border)
DES [Delivered Ex Ship] (named ocean port of destination)
DEQ [Delivered Ex Quay] (named ocean port of destination)
DDU [Delivered Duty Unpaid] (named place of destination)
DDP [Delivered Duty Paid] (named place of destination)

In actual use, sales documents would reference the Incoterm agreed upon by the seller and buyer by stating the three-letter abbreviation followed by the name of a specific place or port. To illustrate for a Chinese seller and U.S. buyer, “EXW Nanjing, China” would mean that the seller makes the goods available in suitable packaging at its facility in Nanjing and the buyer is responsible for all subsequent activities and costs. “FOB Shanghai, China” means that the seller has accomplished delivery when it has loaded the goods on board the ship in the Shanghai port. “DDU Ogden, Utah, USA” refers to a situation where the seller is responsible for export and import clearances, duties, taxes, insurance, and transportation of the goods to the buyer’s named delivery point in Ogden.

Though the Incoterms have standardized definitions that are recognized internationally, U.S. domestic shipments often have used terms of sale with confusingly similar appearances but different meanings. For example, the Incoterm “FOB” is intended for shipments involving ocean transportation in which delivery is accomplished when the goods are placed on board the ship at the origin port. However, many domestic U.S. sales contracts have utilized terms such as “FOB factory” or “FOB origin” to indicate that goods are transferred at the seller’s facility (rather than loaded on board a ship), and “FOB destination” or “FOB delivered” wherein the seller is responsible for transport and insurance to the buyer’s designated point of delivery.

Bibliography:

Dan Gardner, “A New Chapter in Incoterms,” Journal of Commerce (September 15, 2008);
Incoterms 2000, ICC Publication No. 560 (ICC Publishing, 1999);
International Chamber of Commerce, incoterms.org (cited March 2009);
Rachael Israel, “The Role of INCOTERMS in International Trade,” Indian Journal of International Law (v.45/3, 2005);
Jan Ramberg, ICC Guide to Incoterms 2000, ICC Publication No. 620 (ICC Publishing, 1999).

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