Anyone selling goods overseas will need to familiarise themselves with Incoterms and select the most appropriate arrangements for their business.
Here, Matt Vick, academy trade and customs specialist at the Institute of Export & International Trade (IOE&IT), outlines the key things to know:
What do we mean by incoterms?
Incoterms stands for international commercial terms and is a set of 11, internationally recognised rules that outline the responsibilities of both buyer and seller in a transaction. The selected incoterm will then form part of the sales contract.
They include elements such as who is responsible for export declarations, transport up to the port of export, ongoing transport, import declarations, any insurance and documentation, and which party bears risk at a given point of the cargo journey.
Only two of the 11 incoterms mandate insurance – Cost, Insurance and Freight (CIF) and Carriage and Insurance Paid To (CIP) – so it’s important to be aware of this. A lot of people assume goods are insured by default when they ship them, but that’s often not the case.
How do I know which one is right for me?
There is a sliding scale in terms of how much responsibility is placed on the seller. At one end of the spectrum is Ex Works terms, where the buyer takes on most of the tasks.
While this may be attractive for inexperienced exporters, it’s worth pointing out that for VAT purposes sellers must be able to demonstrate that the goods left the country within 12 weeks of the sales invoice date, and Ex Works terms can make this more difficult.
At the other end of the scale is Delivered Duty Paid (DDP) terms, where the seller will take on all responsibility, including the import declaration. It’s likely that this won’t be suitable for first-time exporters, and ideally you would find a middle ground between these two positions. If you’re just starting out, you might want to agree an incoterm that puts more responsibility on the buyer.
Seven of the 11 incoterms relate to all methods of transportation, and can vary on which party bears responsibility for freight costs. Some incoterms are specific to particular types of freight; Free on Board, for instance, cannot be used with road freight, as responsibility will only shift when a container is on a vessel.
A commonly used incoterm is Free Carrier (FCA), where the exporter is responsible for getting goods to the port or otherwise specified point of export and the buyer then takes over.
Can these be negotiated with buyers?
If you agree terms, you must abide by those. But it’s possible to negotiate modifications if they’re agreed in writing. The different terms will also impact what you charge customers. If you as a seller agree that you will take out insurance, for instance, you would then add the cost of this to the invoice.
Just because a customer suggests a particular incoterm doesn’t mean you have to use it. It’s important to have a look at what it entails and make sure you’re comfortable with it and that it suits your needs.
Are there risks here for first-time exporters?
The main risk is that exporters may not realise what they’re signing up to. There may be a three-digit code such as CIP, FCA or DDP on an order form and they may not think anything of it, without realising they are signing up to trade on a particular incoterm. Getting the wrong term can cause confusion and delays; you cannot use DDP, for instance, unless you have a company set up or a fiscal representative in the destination country.
One way around this for inexperienced exporters is to use a freight forwarder or agent for the first few hundred shipments, as they will be fully aware of the process and be able to advise on the most appropriate terms. This will help you to gain confidence and experience and get you better prepared should you want to bring this function in-house in the future.
Are the terms applicable worldwide?
Incoterms are run by the International Chamber of Commerce, and it’s understood that anyone who is a member of the World Trade Organization works on these terms.
Where can people find out more?
The International Chamber of Commerce produces a physical book, which is the main primary source, and it’s a good idea to buy this to make sure you have the correct information. A slightly cheaper online version is also available.
If you’re using agents or freight forwarders, you can also ask them for help. A lot of people think freight forwarders will just ship items from A to B, but they can offer much more than that, including fourth-party logistics (4PL) where they can get more involved in the different steps within a customer’s supply chain, such as negotiating sales contracts.
IOE&IT also offers a one-day course on the latest incoterms from 2020, and how these have changed since the 2010 version.