Source: adapted from International Chamber of Commerce.
International Commercial Terms, or Incoterms, are pre-defined commercial terms that are used to define the transport component and the share of costs and risks for international commercial transactions. They are part of the documentation that accompanies cargo, which used to be in a printed form and which is now increasingly in a digital form. They were initially set by the International Chamber of Commerce in 1936 and became a standard set through the United Nations Convention on Contracts for the Sale of Goods (CISG). It defines a consistent framework of the expected transport service to be provided, removing uncertainty and defining legally enforceable responsibilities across international jurisdictions. Incoterms set a named place where the responsibility switches from the supplier to the buyer. This location and the conditions are summarized in three-letter words. By 2020, there were 11 different Incoterms, with the most common being:
- EXW (Ex Works). The buyer virtually takes care of all the transport responsibilities. The seller’s only obligation is to have the cargo available at an agreed-upon time and premise (factory, distribution center). It often refers to the factory price since it excludes all transportation costs, such as insurance and duties. EXW can be complex to enforce since it technically does not include the tasks related to the assembly of the cargo into load units at the seller’s facility. The buyer becomes the cargo owner once the goods have been picked up.
- FCA (Free Carrier). The seller’s responsibility is simply to provide the cargo that has been cleared for export (duties paid) at a specific delivery point. This is common for intermodal transport since the transport load, such as a container, has been assembled and is ready to be picked up.
- FAS (Free Alongside Ship). Usually used for maritime bulk cargo (resources and raw materials) for which the seller provides the cargo at the dock, which is ready to be loaded on a ship. For instance, a grain seller would make available bulk grain at a dockside grain elevator, and it would be the buyer’s responsibility to charter a bulk cargo ship and load the cargo. This allows the buyer to use the point of export as a warehouse and organize sales and distribution according to its requirements in terms of quantity and destination market.
- FOB (Free On Board). The seller provides, transports, and loads the cargo on board a vessel, which is usually selected by the buyer. Once on board, the responsibility then shifts to the buyer. Common for bulk cargo as it allows the buyer to decide the routing and the destination market of the cargo, allowing for additional flexibility.
- CFR (Cost and Freight). The seller brings and unloads the cargo at a port of destination, but the buyer assumes the risk as soon as the cargo is loaded at the port of origin. The buyer has the responsibility of picking up the cargo at the port of destination.
- CIF (Cost, Insurance and Freight). Same as above, but the seller also provides insurance for the cargo up to the port of destination. It usually applies to bulk cargo.
- CIP (Carriage and Insurance Paid). Common in intermodal transport chains where the seller takes the complete responsibility of bringing the cargo to the point of destination (e.g. the door of a distribution center) as well as providing insurance. The buyer is responsible for unloading the cargo at the point of destination. This is convenient when the buyer has a known and stable demand that can be organized from know distribution points (e.g. an import warehouse or a series of distribution centers).
Although for many transactions, it is either the seller or the buyer’s responsibility to carry the cargo, this task is often attributed to a shipper or a third-party logistics provider that will act on their behalf.