What Are Incoterms and How are They Used in Shipping? (Bonus: Downloadable Incoterms Chart)
International Commercial Trade Terms, or Incoterms for short, are selling terms buyers and sellers use so they can communicate which party is responsible for the tasks, costs, and risks associated with transferring the goods to the buyer when trading internationally. These are legally binding agreements published by the International Chamber of Commerce (ICC), and followed by virtually all countries.
Every 10 years, the ICC updates the Incoterms to ensure that they stay consistent with the current process of international trade. Incoterms were last updated on January 1st, 2020, and include 11 unique types.
When buyers are purchasing products internationally, sellers will often include a three-letter abbreviation of one of the 11 Incoterms to define what the terms of the trade shall be. These terms represent various tasks, costs, risks, and logistics of getting goods whether by sea freight, air freight, and land freight.
Every Incoterm defines the following responsibilities and obligations:
Incoterms communicate a binding agreement between the buyer and seller that outlines the responsibilities between the manufacturer and purchaser of goods in regards to the delivery to the products.
While it is not a requirement for sellers to quote an Incoterm when selling internationally, the advantage of doing so helps avoid confusion over roles and responsibilities between the two parties. As language barriers and cultural differences are commonplace in international trade, these terms simplify an often complicated process and help communicate a large portion of the process of transferring the goods from the seller to the buyer.
Incoterms help communicate a large portion of the logistics and cargo transferring process, which is why most international traders opt to rely on them. While these terms communicate a lot, there is a significant amount of information they don’t explain. Buyers should be fully aware of not only what these terms mean, but also what is not included in each of these terms, as miscommunication could easily lead to misunderstandings and costly mistakes.
International Commercial Trade Terms help communicate the terms of delivery of a product purchased internationally. These terms do not define the payment terms of a product or other outside rights. They do not explain how the buyer should pay for the goods, and they do not determine who is responsible for the cargo in the event of defective, incorrect, or failed productions.
Incoterms do not exist to protect the buyer from fraud or guarantee the products in any way. The only terms Incoterms define is which party is responsible during the transportation process. Incoterms do not act as a contractual agreement for the sale of a product; instead, they help communicate a portion of the purchase agreement to both parties.
An aspect that can be confusing to some buyers is determining whether or not Incoterms protect buyers from the risk of damage, loss, or theft of cargo. Each Incoterm can help define each of these concerns; however, it is essential to point out, there are only two Incoterms that require the seller to purchase insurance on the freight. Unless freight insurance has been agreed upon before a shipment, the buyer would need to buy insurance on the cargo separately.
The International Chamber of Commerce publishes updated Incoterms every ten years. While companies like Guided Imports rely on ensuring they are entirely up to date with the ICC’s terms, you can learn more about the rules on the ICC website, or directly downloading our guide that follows all updates published.
At Guided Imports, we dedicate our focus to ensuring our international logistics are seamless and straightforward as possible for our customers. We believe that a well-informed shipper is a happy shipper. This is why we have created multiple resources to help you understand each Incoterm, and how to use them when conducting international trade.
We have created “The complete Shipper’s Guide to Incoterms and their Meaning.” to help you better understand these critical terms and improve your understanding of international trade.
In this free guide, we share an easy to follow Incoterms chart, which explains each term at a glance. We also explain what each term means, how it works in a buying and selling agreement, and what you should look out for.
Click the link below to download our Incoterms guide, which includes an easy to understand chart and explanation of each International Commercial Trade Term.
Not all Incoterms are valid for all types of shipments. While all Incoterms are valid for waterway shipments, some can only be used for waterway transport, and not land or air. Knowing these differences can be crucial, because if you use a waterway only Incoterm and ship using an alternative method, you may find yourself needing to cover additional, unexpected charges.
Below is a list of Incoterms you can use for all types of shipment methods;
Below are Incoterms you can only use for sea and inland waterway transport:
What is the difference between ‘Freight Collect’ and ‘Freight Prepaid’?
Freight Prepaid and Freight Collect are terms that can commonly be used between buyers and sellers when discussing international freight. When a seller mentions ‘Freight Collect’, they refer to one of the four Incoterms that require the buyer to collect and pay all freight charges. The Incoterms associated with Freight Collect are:
Freight Prepaid indicates the seller will pay for the freight charges. The remaining seven Incoterms consist of Freight Prepaid:
What types of insurance is a seller required to obtain when shipping under CIF and CIP Incoterms?
Two International Commercial Trade Terms require the seller to purchase insurance on the cargo prior to shipment. These two terms are CIF and CIP. Each of these terms has unique requirements for the type of insurance a seller must obtain.
How do a buyer and seller agree on which Incoterm to use?
Unless specifically requested by a buyer, sellers often have preferred Incoterms they use that work best for them and their customers. Buyers can often have unique preferences, which are conveyed to sellers, and through this communication, a buyer and seller can come to an agreement on the most ideal Incoterm for their deal.
In order for Incoterms to be contractually valid, the terms should be listed on the purchase agreement, sales invoice, or sales contract. As these are contractual terms, buyers and sellers should be clear with their agreement and not rely on verbal communication to define the responsibility of each party when shipping products internationally.
There is no special documentation or form needed when selecting an Incoterm; instead, the term should be listed in conjunction with the product price and defined as the agreed-upon incoterm.
Incoterms can change during an order process. For example, if a shipment was intended for sea, but due to delays or unforeseen circumstances, the shipment needs to be shipped via air, an Incoterm could change. As we discussed above, not all terms are valid for air travel. If there is a change in the terms, buyers and sellers would need to communicate this change, just as they would communicate any other change taking place in a purchase agreement.
Want a more in-depth look at the most common incoterms used in shipping? Check out our detailed guides here that include the definition, responsibilities, advantage, and disadvantages, plus cost information for each: