When businesses step into the world of international trade, they often encounter a bewildering set of rules and acronyms.
One of the most commonly used — and misunderstood — set of guidelines is “Incoterms”. Short for International Commercial Terms; they can seem intimidating, but when broken down they’re straightforward and invaluable. This column will unpack the basics of Incoterms, their purpose, and why they’re essential for simplifying global trade.
Incoterms are a standardised set of rules established by the International Chamber of Commerce (ICC) in 1936, updated every 10 years to reflect evolving trade practices. Their primary function is to define the responsibilities of buyers and sellers in international transactions — essentially, they clarify who does what.
Incoterms specify who handles transport, pays for insurance, clears customs, and bears the risk of goods in transit. By establishing clear boundaries, they prevent disputes and ensure smoother trade processes.
Imagine a South African importer purchasing electronics from a supplier in China. Who is responsible for shipping the goods to Durban? Who pays if the shipment is damaged en route? Without clear terms, these questions can cause costly misunderstandings.
Incoterms step in to provide a shared language between buyers and sellers. They simplify agreements by setting expectations, reducing confusion, and fostering trust in the trade process.
The key objectives of Incoterms are to:
- Define Responsibilities: They establish who handles various tasks, such as transport, insurance, and customs clearance.
- Transfer Risk: Incoterms pinpoint when the risk of loss or damage shifts from the seller to the buyer.
- Allocate Costs: They outline who pays for specific expenses like freight, packaging, or insurance.
In essence, Incoterms streamline negotiations by ensuring all parties are on the same page from the outset, from both a risk and responsibility perspective.
While Incoterms might appear daunting, they’re essentially shorthand for specific agreements. The current version, Incoterms 2020, includes 11 terms divided into two categories: those for any mode of transport and those specifically for sea or inland waterway transport.
Terms for any mode of transport:
- EXW (Ex works): The seller’s responsibility ends at their premises. The buyer handles everything else, including transport and risk. Think of it as: “You come and fetch it.”
- FCA (Free carrier): The seller delivers the goods to a carrier chosen by the buyer, such as a trucking company or freight forwarder.
- CPT (Carriage paid to): The seller arranges transport to a destination, but the buyer assumes risk once the goods are handed to the carrier.
- DAP (Delivered at place): The seller handles transport and risk up to the buyer’s specified destination, while the buyer manages customs clearance.
- Terms for sea and inland waterway transport:
- FOB (Free on board): The seller loads the goods onto the ship. Risk transfers to the buyer once the goods are on board.
- CIF (Cost, insurance, and freight): The seller pays for transport and insurance up to the destination port, but risk shifts to the buyer once the goods are loaded onto the ship.
How Incoterms work in practice:
Example 1: EXW
A buyer in South Africa purchases machinery from a supplier in Germany under EXW terms. The supplier’s job is simple — make the goods available at their factory. From that point, the buyer arranges and pays for transport, insurance, and customs clearance. If something goes wrong in transit, it’s the buyer’s responsibility.
Example 2: CIF
If the same deal were under CIF terms, the German supplier would take on more responsibility. They’d arrange and pay for the shipment to the destination port and include insurance coverage. However, once the goods are loaded onto the ship in Hamburg, the risk passes to the buyer.
Despite their simplicity, Incoterms are often misused or misunderstood. Here are some key points to remember:
- Incoterms aren’t contracts: They’re part of a trade agreement, not a replacement for one. Always ensure your trade deals include a full written contract.
- They don’t cover everything: Incoterms only deal with responsibilities, risk, and cost allocation. They don’t govern payment terms, ownership transfer, or dispute resolution.
- Local regulations still apply: Incoterms don’t override national laws. For example, South African customs requirements must still be met regardless of the agreed terms.
For businesses involved in international trade, understanding Incoterms is more than just a skill — it’s a strategic advantage. They minimise the risk of costly misunderstandings, build stronger relationships with trade partners and simplify complex negotiations.
In a world where global trade fuels economies, Incoterms serve as the invisible framework ensuring transactions run smoothly. While they might seem intimidating at first glance, they’re simply tools designed to create clarity. The next time you encounter terms like FOB or CIF, remember that they’re there to help — not confuse.
As trade professionals, entrepreneurs, or curious learners, investing time to understand Incoterms can save you money, time, and headaches. With a little effort, you’ll find that these terms are not just rules — they’re the language of successful trade.
• Bezuidenhout is the founder of international trade/banking FSP BeztForex.co.za and the global trade AI platform Zynched.com
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