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Navigating the landscape of international trade can be daunting, especially when it comes to understanding Incoterms. Incoterms, short for International Commercial Terms, are a set of predefined commercial terms published by the International Chamber of Commerce (ICC) that are used globally to make international trade smoother and more efficient.
This guide offers a brief overview of each Incoterm, along with examples to illustrate their application in real-world trade situations.
EXW (Ex Works)
Definition: Under EXW, the seller makes the goods available at their premises, and the buyer is responsible for all costs and risks involved in taking the goods from the seller’s location to the destination.
Example: A manufacturer in Germany sells machinery to a buyer in Canada. The buyer is responsible for arranging and paying for the transportation from Germany to Canada, including export and import formalities.
FCA (Free Carrier)
Definition: The seller delivers the goods to a carrier or another person nominated by the buyer at the seller’s premises or another named place. The risk passes to the buyer once the goods are handed over to the first carrier.
Example: A textile producer in India delivers goods to a carrier chosen by the buyer at Mumbai Port. Once the goods are with the carrier, the buyer assumes responsibility.
CPT (Carriage Paid To)
Definition: The seller pays for the transportation of the goods to a named destination, but the risk transfers to the buyer once the goods are handed over to the first carrier.
Example: A US-based electronics company sells smartphones to a retailer in Australia, agreeing to CPT Sydney. The seller pays for shipping to Sydney, but the risk transfers when the goods are handed to the first carrier in the US.
CIP (Carriage and Insurance Paid to)
Definition: Similar to CPT, but the seller also has to procure insurance against the buyer’s risk of loss or damage to the goods during the carriage.
Example: A machinery manufacturer in Italy sells to a buyer in Brazil under CIP Rio de Janeiro. The seller pays for transportation and insurance until Rio de Janeiro, but risk transfers at the point of origin.
DAP (Delivered At Place)
Definition: The seller delivers the goods, ready for unloading at the named destination. The seller bears all risks involved in bringing the goods to the destination.
Example: A furniture maker in Sweden delivers a consignment to a warehouse in New York. The seller is responsible for all costs and risks until the goods are at the New York warehouse, ready for unloading.
DPU (Delivered at Place Unloaded)
Definition: The seller delivers and unloads the goods at a named place of destination. DPU requires the seller to clear the goods for export, where applicable.
Example: A winery in France delivers and unloads wine barrels at a distributor’s facility in Canada, assuming all risks and costs until the goods are unloaded at the destination.
DDP (Delivered Duty Paid)
Definition: The seller delivers the goods to the buyer, cleared for import, and ready for unloading at the named place of destination. The seller bears all costs and risks involved in bringing the goods to the destination, including duties.
Example: A chemical manufacturer in the UK sells products to a buyer in the US, with DDP New York. The seller is responsible for all costs and risks, including duty payments, until the goods are at the buyer’s warehouse.
FAS (Free Alongside Ship)
Definition: The seller places the goods alongside the buyer’s vessel at the named port of shipment. The risk of loss or damage to the goods passes to the buyer when the goods are alongside the ship.
Example: A coal exporter in South Africa delivers coal alongside a vessel at Durban Port, transferring risk to the buyer once the coal is alongside the ship.
FOB (Free On Board)
Definition: The seller loads the goods on board a vessel nominated by the buyer at the named port of shipment. The risk passes to the buyer once the goods are on board the vessel.
Example: A grain exporter in Brazil sells soybeans FOB Santos to a buyer in China. The risk transfers to the buyer once the soybeans are on board the ship in Santos.
CFR (Cost and Freight)
Definition: The seller must pay the costs and freight necessary to bring the goods to a named port of destination but the risk transfers to the buyer once the goods are loaded on board the ship.
Example: A lumber company in Canada sells timber CFR Tokyo to a Japanese buyer. The seller pays for transportation to Tokyo, but risk transfers once the timber is loaded in Canada.
CIF (Cost, Insurance, and Freight)
Definition: Like CFR, but the seller also has to procure and pay for the insurance against the buyer’s risk of loss or damage to the goods during transport.
Example: An oil producer in Saudi Arabia sells crude oil CIF Rotterdam to a Dutch refinery. The seller is responsible for transportation and insurance to Rotterdam, but risk transfers at the shipping point in Saudi Arabia.
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