International Commercial Terms, known as “Incoterms”, are internationally accepted terms defining the responsibilities of exporters and importers in the arrangement of shipments and the transfer of liability involved in their international sales. Incoterms do not cover ownership or the transfer of title of goods. It is crucial to know which Incoterm is being used at the start of a negotiation/quotation of a sale, as it will affect the costs and responsibilities involved in shipping, insurance and tariffs. Incoterms are reviewed and published by the International Chamber of Commerce, and a list of all 13 Incoterms is included in the following pages of this document.
INCOTERMS AND THE EXPORTER
In any sales transaction, it is important for the seller and buyer to understand the terms of sale and know precisely what is included in the sale price. Exporters should determine the Incoterm that works best for their company and be prepared to quote on those terms. See VEDP Issues FastFact - Responding to Inquiries. For example, relatively inexperienced exporters may use the Incoterm “Ex Works” (abbreviated as ExW), because among the 13 Incoterms, this term carries the least burden. Under ExW, an exporter’s responsibility ends at their facility’s loading dock, which includes making the goods available for pick up and providing any product information needed for filing the Electronic Export Information, or EEI (formerly the SED, or Shipper’s Export Declaration). The importer’s agent (such as their designated freight forwarder) will arrange and pay for the pre-carriage, shipping, insurance and any additional costs from the exporter’s door. A sale based on the Incoterm “CIF”, on the other hand, requires the exporter to arrange and pay for the pre-carriage, shipping, and insurance to a named port. In this case, the sale price (invoice) includes not only the (C)ost of goods, but also (I)nsurance and (F)reight costs that the importing buyer pays the exporting seller. When designating the Incoterm on a commercial invoice or a quotation to the buyer, the term should be followed by the city or port of load/discharge, such as “ExW Factory, Richmond, VA” or “CIF Rotterdam” to avoid any confusion or misinterpretation of the Incoterm. Communication throughout the entire process is crucial. For example, under Ex Works, the shipper should notify the importer when the goods are ready and after they have been picked up by the importer’s selected carrier. The exporter’s freight forwarder often provides the vessel and sail date, or air cargo service used, and any ocean bill of lading or airway bill number to keep the parties informed of the arrangements and status of the shipment (even though technically under Ex Works the exporter’s responsibility ends at their loading dock). The most burdensome Incoterm for the exporter is Delivered Duty Paid (DDP) because all arrangements and costs are borne by the exporter, usually with the assistance of agents (freight forwarders and customs house brokers). With DDP, the exporter bears all risks and costs of transportation, including duties and tariffs, until the goods are received by the importer, usually at the importer’s factory or warehouse. Example: Four palletized drums of chemicals at US$ 40,000, DDP Santiago, Chile. This means the exporter is telling the importer that for $40,000 the importer will get the merchandise delivered to the importer’s facility in Santiago, Chile. The exporter arranges and
pays for all transit costs, including delivery to the importer’s designated facility in Santiago, including any insurance coverage and duties/tariff charges. While these costs are added to the product’s price and are sometimes itemized on the commercial invoice, the exporter takes full responsibility for the added logistics costs and headaches, such as delays at customs, demurrage or detention, or changes in inland or ocean transportation costs. Shipping...
Cited: Hinkelman, Edward. Dictionary of International Trade. 6th Edition. 2005 International Chamber of Commerce website. “Incoterms 2000”. Accessed May 2009. Shen Zhen Per Do International Logistics website.
Last Revised: June 2009
*Information provided by VEDP Fast Facts is intended as advice and guidance only. The information is in no way exhaustive and the VEDP is not a licensed broker, banker, shipper or customs agency. VEDP shall not be liable for any damages or costs of any type arising out of, or in any way connected with the use of, these Fast Facts.
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