INCOTERMSImport and export business is a booming industry and helps the individuals, companies and countries to grow, expand and strengthen the relationships. This business comes up with many advantages like economic growth of the country, variety of products, relationship strengthening between two countries, high quality products and increase use of labor etc. but with these prons certain cons are also associated with it. Apart from pricing, quality and quantity issues with the products transportation issue is the major concern. Activities like transportation of goods from origin to destination, custom permission during importation of goods, clearing goods for export and payment for freight, risk and other duties are necessary to keep the business going.
Often a contract is signed between the buyer and seller where the ownership and prices are specified and agreed upon by both parties. But if each country will have their own terms of trade it would be difficult to trade among countries as it may create conflicts. Therefore, International Chamber Of Commerce (ICC) came up with set of defined terms so that the international shipments can be made between countries without any confusion or conflict.
These set of terms were known as INCOTERMS and as they were standardized the flow of goods was easier and better understood.The Incoterms or International Commercial Terms are a categorization of pre-defined commercial terms published by the International Chamber of Commerce (ICC) . They are generally used in international commercial transactions or procurement processes and their use is encouraged by trade councils, courts and international lawyers (Wikipedia, 2019)History: The usage of Incoterms in International Trade is extensive in today’s era, yet this has not always been the same as it is today. Beginning of the incoterm is drawn back to more than two centuries and incoterms were first published in 1936 by International Chamber of Commerce (ICC). There have been many changes in the incoterms area and these editions were introduced in 1953, 1967, and 1976. But a continuous change was seen at the end of every decade, such as incoterms 1980, 1990, 2000 and 2010. Initially the incoterms were only functional to 13 countries but eight revisions later with the extensive use of incoterms, they were used in more than 140 countries and in 31 different dialects. Following is the detailed presentation of the evolution of the incoterms: 1. 1812: FOB was created in this year and was initially used in British Courts.2. 1895: Expansion of the world trade led to the creation of the CIF incoterm.3. 1936: International Trade practices were standardized with the issue of first edition of incoterms which comprise six incoterms namely CIF, FOB, FAS, C&F, Ex Ship and Ex Quay.4. 1953: Incoterms were first revised in this year and three non-maritime incoterms were counted in i.e. DCP, FOR/FOT, EXW5. 1976: FOB Airport was added which was different than FOB which was created in 1812.6. 1980: FRC and FCI were added during this version which were knows as FCA and CIP respectively. There were 14 incoterms by this year.7. 1990: After this revision, 13 incoterms were left, and practice of electronic data interchange was increased.8. 2000: Simplification of the incoterms was result of this edition so that incoterms can be straightforwardly understood worldwide.9. 2010: DAF, DES, DEQ, DDU were eliminated and DAT & DAP were added during this edition. (Icontainers, 2018)(Refer appendix for flow chart description of the terms of trade)Incoterms are revised by ICC to make sure that established transport terms regulate to the increasing needs of international trade and are always in alignment with the pace of growth. These terms are used in worldwide and available in different languages to standardize the transport trade among countries.Role and Purpose of IncotermsIn order to avoid the confusion and uncertainties regarding the terms of trade like goods clearance, custom clearance, risk and ownership INCOTERMS were published by International Chamber of Commerce (ICC). These incoterms helped the trading to be well-organized which resulted in cash flow and economic growth of the countries. As discussed above incoterms 2010 has been the latest issue and it includes 11 incoterms which define the terms of trade. Incoterms are mainly categorized into four categories namely E, F, C and D.E Group: In this group of incoterms the entire responsibility from the departure to origin is taken by buyer. There is only one term in this group.F Group: In this group of incoterms seller load the goods to the carrier selected by the buyer. There are three terms in this collection.C Group: In this group of incoterms there is a division of ownership between the buyer and the seller. Four terms are included in this set.D Group: In this group of incoterms seller bears the entire responsibility for the arrival of goods. There are three terms in this group.Detailed explanation of each term is listed below:EX-Works (EXW): In this incoterm, buyer bears all the responsibility of the goods departure from origin to arrival of goods at its destination. Loading of goods, responsibility of insurance, unloading of goods and custom permission are all handled by the buyer. Transportation mode can be any in this incoterm.Free Carrier (FCA): This incoterm can use any means of passage for the exchange of goods. As soon as goods are delivered on the carrier appointed by the buyer, cost of transportation and risk is responsibility of the buyer.Free Alongside Ship (FAS): The incoterm is only valid for the carriage of goods which uses water as manner of transport. As soon as goods are unloaded from the truck and placed alongside the ship seller’s responsibility is ended and risk, transportation and customs cost are on buyer.Free On Board (FOB): This incoterm is also only used for water mode of transportation. In this incoterm seller has responsibility till the goods are actually loaded in the vessel. After the loading of goods in vessel the insurance and customs costs are associated to buyer.Cost and Freight (CFR): This incoterm is specific to water transport means only. Here the cost of transportation is associated to the seller and as soon as carriage is reached on destination whereas insurance, customs and unloading costs are paid by the buyer.Cost, Insurance, Freight (CIF): It is also specific to water mode only. Seller pays for the insurance and cost of transportation till it reaches the port of destination. Unloading from port, customs clearance and cost of transportation till destination costs are buyer’s responsibility.Carriage Paid To (CPT): In this incoterm, the cost of transportation from origin to destination is taken care by seller whereas the insurance, custom clearance and taxes are paid by the buyer. This incoterm is valid for any mode of transportation. This incoterm is not method definite.Carriage and Insurance Paid To (CIP): This incoterm can be used with any style of conveyance. In this incoterm, cost of freight and insurance is associated to the seller but the customs clearance, taxes and unloading at destination is responsibility of the buyer. This incoterm can be used for any mode of transport.Delivered At Terminal (DAT): Seller is responsible for the costs of freight and insurance till the goods are unloaded on the port of import. Loading on truck from port, customs clearance and unloading at destination is accounted to buyer. This incoterm can be used for any mode of transference.Delivered At Place (DAP): In this incoterm, seller is responsible for cost of transportation, insurance, loading/unloading on port of export/import but the customs, taxes and duties are paid by the buyer. Like other D terms, this incoterm is also not mode precise.Delivered Duty Paid (DDP): In this incoterm, seller is accountable for cost of freight, insurance, cost of importation, taxes and duties. This incoterm can be used for any mode of transport. Tabular Representation Of terms of Trade:INCOTERM MODE COST OF FREIGHT COST OF INSURANCE COST OF IMPORTATIONEXW Any Buyer Buyer BuyerFCA Any Buyer Buyer BuyerFAS Marine Buyer Buyer BuyerFOB Marine Buyer Buyer BuyerCFR Marine Seller Buyer BuyerCIF Marine Seller Main-SellerSupplement- Buyer BuyerCPT Any Seller Buyer BuyerCIP Any Seller Main-SellerSupplement-Buyer BuyerDAT Any Seller Seller BuyerDAP Any Seller Seller BuyerDDP Any Seller Seller SellerIncoterms next edition is supposed to get enforced in 2020. It will be fascinating to observe that whether there will be new additions of incoterms, elimination of any existing incoterm or substitution of the incoterm. The entire objective of incoterms is to make the trading simplified and efficient. Incoterms have made the trading easier and strengthen relationships among countries.