Incoterms: Everything you need to know

Buying and selling anywhere in the world may involve certain risks. When dealing with products internationally, you need to know how to limit and protect yourself from risk. In this sense, the Incoterms were created. Incoterms are a type of insurance that aims to protect buyers and sellers when moving transport links or goods. The term “Incoterms” was coined in 1936. This tool was created by the International Chamber of Commerce and is an abbreviation of the English words “International”, “Commercial” and “Terms”. (Conditions of commercial transactions). Incoterms represent a signed contract between different parties (buyer and seller) in the context of trade.

What are Incoterms?

When the buyer decides to buy the item, the whole logistics system is set up. It must be delivered to the customer on time at no additional cost. Incoterms are a very useful tool in the transport sector, making it easy to resolve disputes and disputes related to the management of goods and transport. Above all, you must define the risks, responsibilities and procedures that apply to each party. Incoterms are reassessed every 10 years by the International Chamber of Commerce and adapt to the constant evolution of international trade and the transport situation. As of 2011, there are 11 Incoterms that businesses can recognize by a three-letter code they can choose from. These Incoterms can be divided into two different groups. Incoterms for sea or river transport and Incoterms for multimodal transport. In addition, there is a revised version of the Incoterms 2020 established by the International Chamber of Commerce, aiming to reorganize them. In the first group, the Incoterms characters are FOB, FAS, CFR, CIF, and in the second group, CPT, DAP, DDP, DPU, FCA, EXW. Incoterms are not mandatory, but strongly recommended after 2020. Indeed, they are used by nearly 90% of international companies and represent real references. In both cases, the delivery address of the article must be indicated in the contract. Indeed, Incoterms alone are not enough, it is important to indicate where the delivery will take place. In addition, its use depends on each company and each situation.

What are the characteristics of Incoterms?

Incoterms are known to have three main functions: primary, secondary and tertiary. These are used to establish each party’s rights and obligations under existing contracts relating to international trade and transport. These Incoterms define the legal obligations related to sales contracts, delivery and unloading of goods, payments, etc. In the event of a dispute, we can support what was agreed in the original contract. Incoterms have several features, including the following:

Cost risk assessment of retail sellers and buyers
Division of responsibilities between buyers and sellers. Who is insured? For transport ? Which party is responsible for providing the legal document?
Cost allocation. Who will pay for transport and insurance?
Allocation of risks. What are the risks associated with shipping goods? Who will support them?

Some of these Incoterms, notably those starting with E, define the buyer as the main actor in the process. He takes care of everything and exists only to make the goods available to the seller. Incoterms, on the other hand, starting with D define the seller as responsible. It takes care of the payments and the buyers don’t care about the costs.

How to calculate an incoterm?

The cost of Incoterms depends on the classification. There are reliable methods and criteria for calculating Incoterms. The main criteria to consider are trading profit, quantity of goods, cost of goods, price of packaging and labor costs. The calculation of Incoterms is defined on the basis of these criteria and aims to determine the fair price of the goods and the selling price for export. Incoterms are now an indispensable tool in international trade, especially when transport contracts connect buyers and sellers. Understanding their interests and knowing how to use them correctly helps to avoid quarrels and conflicts between them.

Know the parties to the same contract, or how to solve it. Therefore, Incoterms help to carry out the international movement of goods correctly.