What are Incoterms? Role in international goods trading

Article overview

Incoterms (International Commercial Terms) is a set of international standard rules issued by the International Chamber of Commerce (ICC), to regulate the legal responsibilities between buyers and sellers in international goods transactions. This set of rules not only clearly defines costs and risks but also helps minimize disputes and ensure transparency. In this article, we will provide detailed information about Incoterms groups, their roles, and instructions on how to choose the right conditions for customers.

The role of Incoterms in international trade
The role of Incoterms in international trade

What are Incoterms? Responsibilities of the seller and buyer in transporting goods

1. What are Incoterms?

Incoterms are a set of internationally recognized rules used to determine obligations, costs and risks between the seller and the buyer during the transportation of goods. Introduced by the ICC in 1936, Incoterms have become an effective tool in international trade.

The latest version, Incoterms 2020, is designed to reflect changes in shipping methods, insurance and globalization trends. Previous versions such as Incoterms 2010 or 2000 were also standard but are now gradually being replaced.

Incoterms apply mainly to the transportation of tangible goods and regulate terms of shipping costs, insurance, and delivery. However, Incoterms do not regulate aspects such as payment methods or transfer of property ownership.

2. Responsibilities of the seller and buyer in transporting goods

Depending on each specific case, the seller and the buyer when transporting goods have equivalent responsibilities. Below are the basic responsibilities of sellers and buyers:

Seller’s responsibilities:

  • Delivery on time and agreed location.
  • Provide relevant documents (invoice, bill of lading, insurance certificate if any).
  • Pay costs related to the goods before the point of transfer of responsibility, such as delivery, loading and unloading fees, or export procedures (depending on applicable Incoterms conditions).

Buyer’s Responsibilities:

  • Payment of the value of goods according to the contract.
  • Receive goods at the delivery point specified in Incoterms.
  • Bear the costs and risks arising after receiving the goods, such as import taxes, domestic transportation, or insurance (if conditions require the buyer to be responsible).

Legal meaning of responsibility:

Incoterms not only help clearly define the roles between seller and buyer but also limit the risk of disputes arising from misunderstanding of responsibilities. Customers need to consider carefully to choose Incoterms conditions that suit their capacity and financial ability.

Current Incoterms groups

Incoterms are divided into two main groups based on the mode of transport, each group has specific regulations as follows:

1. Groups used for all modes of transport:

  • EXW (Ex Works – Delivery at factory): The buyer is responsible for the seller’s delivery point.
  • FCA (Free Carrier – Delivered to the carrier): The seller delivers the goods at a location agreed upon by both parties.
  • CPT (Carriage Paid To): The seller bears the shipping cost to the specified location.
  • CIP (Carriage and Insurance Paid To): The seller is responsible for insuring the goods.
  • DAP (Delivered At Place): The seller bears all costs to the final delivery place.
  • DPU (Delivered at Place Unloaded): Similar to DAP but the goods must be unloaded.
  • DDP (Delivered Duty Paid): The seller is responsible for all taxes, fees and delivery to the buyer’s destination.

2. Groups used specifically for sea and inland waterway transport:

  • FAS (Free Alongside Ship): The seller delivers the goods alongside the ship at the specified port.
  • FOB (Free On Board): The seller delivers the goods on board the ship at the specified port.
  • CFR (Cost and Freight): The seller bears shipping costs but does not bear insurance.
  • CIF (Cost, Insurance and Freight): The seller is responsible for both shipping and insurance of the goods.
Methods of international freight transport
Methods of international freight transport

The role of Incoterms in international trade activities

  • Effective transaction support: Incoterms help clearly define the responsibilities of the parties, thereby increasing transparency and minimizing disputes arising in transactions.
  • Protect legal rights: These regulations are a clear legal basis, helping parties resolve disputes more easily when problems arise during the transportation of goods.
  • Minimize financial risks: Correct use of Incoterms can minimize unnecessary costs such as those arising from unclear responsibilities or shipping errors.
  • Supply chain optimization: Incoterms allow international businesses to optimize supply chain planning and coordination by pre-determining transportation responsibilities and costs.

How to choose appropriate Incoterms

Choosing Incoterms should be considered based on the following factors:

  • Transport capacity and responsibility: For customers who have the ability to control the entire transport, conditions such as EXW will be suitable. Meanwhile, if the transaction requires support from the seller, DDP or DAP may be a good choice.
  • Type of transport: Terms such as FOB, CFR, and CIF only apply to sea transport. For multimodal or road transport, terms such as FCA or CIP are more suitable.
  • Financial ability: If the buyer has good financial capacity, they can bear all shipping costs (ex: EXW). Conversely, if the seller wants to take on many costs, conditions such as DDP would be appropriate.
  • Insurance requirements: CIP and CIF terms include cargo insurance. If asset protection is important, you should consider using these conditions.
Consulting services related to international purchase and sale of goods
Consulting services related to international purchase and sale of goods

Consulting on Incoterms and related issues

  • Evaluate shipping type, financial capacity, and requirements to assist businesses in choosing optimal Incoterms conditions;
  • Consulting on drafting and reviewing contracts;
  • Check and adjust terms related to Incoterms in commercial contracts;
  • Support for international trade negotiations;
  • Consulting on negotiation strategies on responsibilities, costs, and risks based on Incoterms;
  • Providing solutions and representing disputes arising in international transportation or freight forwarding;
  • Assess the impact of Incoterms conditions on tax obligations and customs procedures in import and export.

Incoterms are an essential tool in international trade, ensuring rights and minimizing risks for parties involved in transactions. Choosing appropriate conditions not only helps optimize costs but also ensures transparency in international transactions. To receive detailed advice, please contact Long Phan via the hotline 0906735386. We are always ready to accompany and support our customers.