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Incoterms: Basics and Importance in International Logistics

Incoterms: Basics and Importance in International Logistics

Incoterms (International Commerce Terms) are universal international rules that standardize the interpretation of key terms in foreign trade. The application of these terms is especially important in international logistics, as they regulate crucial aspects such as the allocation of risks, transportation costs, and the moment of transfer of goods between the seller and the buyer.

Key Principles of Incoterms

Incoterms regulate three main aspects in international trade:
    1. Distribution of transportation costs. Incoterms define who is responsible for the delivery costs of the goods and at what point the seller is no longer liable for the goods, transferring responsibility to the buyer.

    2. Risk of damage or loss of goods. Incoterms rules regulate the moment when the seller is no longer responsible for potential damage or loss of goods and when these risks pass to the buyer.

    3. Moment of delivery. This is a crucial point determining when the seller transfers the goods to the buyer, either through physical transfer to the buyer or their representative, such as a transport company.

Incoterms do not cover issues related to the transfer of ownership, customs duties obligations, or the failure of parties to fulfill their contractual obligations. These matters are regulated by national laws or international agreements, such as the United Nations Convention on Contracts for the International Sale of Goods (CISG).

Classification and Explanation of Incoterms

Each Incoterms term consists of three letters, which simplifies their identification and use in contracts. The classification is based on the moment of transfer of responsibility from the seller to the buyer.
  • E — at the departure point (departure): The seller makes the goods available at their warehouse. The buyer assumes all costs and risks from this point onward.
  • F — at the departure terminal (main carriage unpaid): The seller delivers the goods to a specified terminal, but the buyer pays for the main transportation.
  • C — at the arrival terminal (main carriage paid): The seller pays for the main transportation, but the buyer assumes the risks once the goods arrive at the destination.
  • D — at the buyer’s location (arrival): The seller bears full responsibility for delivering the goods to the destination point.
Now let’s take a closer look at the popular Incoterms terms.
  1. EXW (Ex Works): The seller delivers the goods at their premises, and the buyer arranges all further transportation, including customs duties and risks.
  2. FCA (Free Carrier): The seller delivers the goods to the specified place and pays export duties, but all further expenses and risks transfer to the buyer.
  3. CPT (Carriage Paid To): The seller pays for the transportation of the goods to the destination terminal, but the risks transfer to the buyer when the goods are handed over to the carrier.
  4. CIF (Cost, Insurance and Freight): The seller arranges and pays for the transportation of the goods to the destination port and also provides cargo insurance.
  5. DDP (Delivered Duty Paid): The seller assumes all costs and risks until the goods are delivered to the buyer, including customs duties and taxes.
These and other terms allow the parties to clearly understand who is responsible for what during the transportation process.

Terms for maritime transport.

Maritime transport has its own characteristics, which are reflected in the Incoterms terminology. Among the most popular terms:
  • FOB (Free On Board): The seller pays all expenses and assumes the risks until the goods are on board the vessel.
  • CFR (Cost and Freight): The seller pays for the transportation of goods to the destination port, but the risks transfer to the buyer at the moment of shipment.
  • CIF (Cost, Insurance, and Freight): The seller pays not only for the transportation but also for the insurance of the goods during transit.

Why is it important to use Incoterms in international logistics?

The correct use of Incoterms helps minimize risks and misunderstandings between the parties of the contract. This is especially important in complex logistics conditions, where multi-level transportation is possible, including maritime, rail, air, and road transport chains.

Conclusion

Incoterms play a key role in organizing international freight transportation. They help clearly allocate responsibilities, risks, and costs between the seller and the buyer, making the trading process more transparent and efficient. By using the current Incoterms rules in your contracts, you can protect your business and avoid potential disputes in the future.
Author: SG Logist

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