INCOTERMS® essentials for international shipping

In international transactions, INCOTERMS® are important standardized terms that clarify the sharing of risks, responsibilities, and costs between sellers and buyers.  A proper understanding of these terms can prevent problems and ensure smooth transactions.

In this article we will explain what INCOTERMS® are, the specifics of each term, latest updates, and practical usage in an easy-to-understand manner.

We will also introduce how INCOTERMS® are being used in accordance with various means of transportation and changing forms of trade. Whether you are just starting out in international shipping or are already engaged in trading, it is always advisable to review the latest industry information in order to conduct more efficient transactions.

The role of INCOTERMS®

Today, cross-border transactions are often taken for granted. Yet, smooth international trade and export operations are directly related to business growth. Business practices, laws and regulations differ between countries and regions, often resulting in problems over risk transfer and cost sharing in transactions. INCOTERMS® play a major role in managing such risks supporting stable international trade, by providing common rules and bringing the seller and buyer into agreement. In addition, since the rules and costs of international trade vary greatly depending on the country and mode of transportation, INCOTERMS® can help both parties to understand each other and facilitate smooth transactions.

Types of INCOTERMS®

There are multiple types of terms within INCOTERMS®. The appropriate choice must be made according to the purpose and means of transportation. Each of them clearly defines the scope of security and the time of risk transfer, and it is necessary to decide which one to adopt at the time of contract.

Major Types of INCOTERMS® (2020 Edition): Rules Applicable to All Means of Delivery

EXW (Ex Works)

• Terms whereby the seller delivers the goods to the buyer at its own facilities (factory, warehouse, etc.).
• The buyer is responsible for all subsequent transportation and expenses.
   

FCA (Free Carrier)

• Terms whereby the seller delivers the goods to the carrier at a specified location.
• Risk is transferred at the point of delivery by the buyer to the carrier.
   

CPT (Carriage Paid To)

• Terms whereby the seller pays the freight to the specified destination and delivers the goods.
• However, risk passes when the goods are delivered to the first carrier.
   

CIP (Carriage and Insurance Paid To)

• Similar to CPT, but the seller also arranges for carriage insurance.
• As with CPT, risk is transferred at the time the goods are delivered to the first carrier.
   

DAP (Delivered at Place)

• Terms whereby the seller transfers risk by delivering the goods at the named destination specified by the seller.
• Usually, the seller bears the cost of transportation to the destination.
   

DPU (Delivered at Place Unloaded)

• Terms whereby the seller delivers the goods at the destination and also unloads them.
• This differs from DAP in that unloading is included.
   

DDP (Delivered Duty Paid)

• Terms whereby the seller transports the goods to the destination and bears all costs, including duties and taxes.
• These are the terms in which the seller bears the greatest responsibility.

Major Types of INCOTERMS® (2020 Edition): Rules Exclusively for Shipment by Sea and Inland Waterways

FAS (Free Alongside Ship)

• Terms whereby the seller bears the cost and responsibility for the goods up to the port of loading and carries the cargo to the side of the vessel (alongside the ship).
• The buyer bears the costs and risks from this point forward.

FOB (Free On Board)

• Terms whereby the seller bears the costs and risks until the goods are loaded onto the vessel at the port of loading.
• Risk is transferred to the buyer when the goods are loaded onto the ship.

CFR (Cost and Freight)

• Terms whereby the seller pays the freight from the port of loading to the destination port, but the risk is transferred to the buyer at the port of loading.
• Insurance premiums are not included.

CIF (Cost Insurance and Freight)

• Terms whereby the seller pays the freight to the port of destination plus insurance premiums for the goods.
• Risk is transferred to the buyer at the port of loading, but the buyer has certain protection because of the insurance.

INCOTERMS®. are broadly divided into two categories: 'rules applicable to all modes of transport' including road, rail, and air freight, and 'rules exclusively for carriage by sea and inland waterways. The former includes EXW, FCA, CPT, CIP, DAP, DPU, DDP, etc., while the latter includes FAS, FOB, CFR, CIF. “FCA,” “CPT,” “DAP,” and “DDP” are the main terms used when using DHL Express services. These clarify the timing of risk and cost sharing between the seller and buyer, and support smooth international transactions. In particular, the transfer of risk during transit is a key point of these agreements.

Differences From the 2010 Version

INCOTERMSⓇ2010 and 2020 are distinguished by adjustments that have been made to take into account the modern logistics environment, such as subdivision of means of transport and computerization of documents. In addition, practices specific to maritime transport, such as the handling of bills of lading, have been clarified, and some risk transfers at the time of delivery have also been reorganized. This makes it easier for both the seller and buyer to align their perceptions and reduces misunderstandings and miscommunications that can occur in the field of international shipping.

New and Obsolete Terms

INCOTERMS® 2020 changes the “place of delivery” options that existed in INCOTERMS® 2010. For example, DAT (Delivered At Terminal) was abolished and DPU (Delivered at Place Unloaded) was newly added. This change was made to reflect the fact that unloading is not always carried out at the terminal in the actual trading environment. On the other hand, the names and scope of other conditions have also been reorganized to make them easier to understand, and traders are required to distinguish between old terms that are used interchangeably and the latest terminology.

Understanding DPU (Delivered at Place Unloaded)

DPU is a term under which the seller assumes responsibility for the cargo up to the point where it is unloaded at destination and delivered to the buyer. Unlike conventional DAT, the specific place of unloading is not limited to the terminal and is a term with a wide range of potential applications. In practice, it is important to clarify at what point the risk and cost burden of the cargo switches, and to ensure consistency with the contents of the transportation contract and insurance coverage.

Sharing of Risks and Costs under INCOTERMS.Ⓡ

In order to properly utilize INCOTERMS® it is necessary to understand the risk and cost sharing under each condition.

Each of the INCOTERMS® clearly states whether the seller or the buyer bears the transportation and customs clearance costs as part of the international sales agreement, and when the risk of damage to the cargo is transferred. It is important to fully consider this information, as an incorrect understanding can lead to problems such as delays, trouble claiming additional costs, and the inability to make insurance claims.

In addition, international shipping involves a wide range of legal procedures and documentation preparation related to the trade. Coordination with related parties and schedule management based on which party is responsible for the point of delivery and customs clearance as stipulated by INCOTERMS®  will facilitate smooth transportation.

Regarding the Sharing of Responsibility and Risk

INCOTERMS® clearly indicate at what point the cargo is deemed to have been delivered to the buyer. Risk is also transferred at that moment, so depending on the terms chosen, the seller's liability may continue until mid-transit, or the buyer may assume the risk at an earlier stage. Therefore, it is essential to properly coordinate insurance policy arrangements and coverages to minimize unexpected risks.

Sharing of Transportation and Insurance Costs

It is important to be aware of the differences in the details of cost sharing depending on the terms, such as how under terms like CPT and CIP, the seller bears the cost of transportation to the destination, but the risk transfer occurs at the time the cargo is delivered to the carrier. On the other hand, in CIP, the seller arranges and bears the cost of insurance, while in CPT, even insurance is not included, etc. It is important to take these differences into account when concluding a contract in a manner that is mutually satisfactory to both parties.

Entry in Commercial Invoices

In international shipments, the commercial invoice is a document that plays an important role in customs clearance procedures. By accurately describing the type of INCOTERMS® on the Commercial Invoice, customs clearance can be conducted smoothly.

Creating a Commercial Invoice with MyDHL+

DHL's online shipping tool, MyDHL+, makes it easy to ship, track, and manage your shipments. MyDHL+ allows you to expedite your shipments and easily create waybills and commercial invoices online. In addition, MyDHL+ includes the ability to select INCOTERMS®, which allows you to clearly define the terms of the transaction. The INCOTERMS® selection function also includes a description of each of the INCOTERMS®  MyDHL+ allows you to ship overseas with peace of mind.