Explanation of International Shipping Terms (Incoterms)

This is where the importance of “International Shipping Terms,” or Incoterms for short, comes into play.

These terms, issued by the International Chamber of Commerce (ICC), serve as a clear roadmap, precisely defining the responsibilities of the seller and the buyer at every stage of shipping—from the moment the goods leave the factory to their receipt by the buyer.

Understanding these terms not only facilitates business operations but also protects you from any disputes or misunderstandings that may arise between contracting parties.
In this article, we will take a simplified yet detailed knowledge journey to delve into the international shipping terms—Incoterms—their importance, and how to effectively use them to accurately define responsibilities and costs. We will review the key Incoterms 2020, highlighting the differences between them, to empower companies and traders to make informed and effective decisions in the world of commerce.

What are International Shipping Terms (Incoterms)?

A frequently asked question: What are these terms? International shipping terms are a set of globally recognized standard rules that define the conditions of sale and delivery of goods in international trade.

These terms were developed by the International Chamber of Commerce (ICC) in 1936 and have been continuously updated to keep pace with rapid changes in the global market. The Incoterms 2020 edition is the latest version.

It is important to note that Incoterms are not legally binding laws themselves but are optional commercial rules agreed upon by contracting parties.
These rules are incorporated by custom and practice into sales contracts to provide a common and clear language between the seller and buyer, defining:

• Who is responsible for organizing the transportation? (Seller or buyer?)
• Who bears the risks? (Exactly when do the risks transfer from seller to buyer?)
• Who pays the costs? (Transportation, insurance, customs clearance, fees—who bears which part?)
• Where is the delivery made? (Defining the exact delivery point at which responsibility transfers).

These terms greatly simplify business operations and reduce the likelihood of disputes or misunderstandings between parties, enhancing trust and efficiency in international trade relationships.
We build our clients’ trust in us and help them achieve success and proper investment with Alameed Oils.

Why are Incoterms Extremely Important in International Trade?

Can we export or import without knowing these terms at all? The importance of Incoterms is reflected in several vital aspects:

1. **Clear definition of responsibilities:** Incoterms detail the responsibilities of the seller and buyer at every stage of shipping, from the factory to the final delivery destination. This clarity removes ambiguities and reduces potential disputes.
2. **Fair allocation of costs:** Incoterms specify who is responsible for paying transportation, insurance, customs clearance, and other fees. This helps parties accurately estimate the total cost of the transaction.
3. **Precise determination of risk transfer:** One of the main functions of Incoterms is to define the moment and place where the risk of loss or damage to goods transfers from the seller to the buyer. This point is critical to determine who bears the loss in case of any unforeseen incident.
4. **Facilitating effective communication:** Incoterms provide a standardized global language understood by all parties in international trade, regardless of their native language or country.
5. **Ensuring legal and customs compliance:** Incoterms help define the party responsible for completing customs procedures and necessary export and import licenses.

Without Incoterms, international trade transactions are more complicated and prone to errors and disputes, negatively impacting the efficiency and smoothness of the global supply chain. Therefore, we advise keeping your business within established rules and customs.

Incoterms 2020 Classification: Types and How to Use Each

Unfamiliar codes and letters—what are they, how are they classified, and what do they mean? The **Incoterms 2020 edition** includes eleven rules, divided into two main groups based on the mode of transport used:

1. Rules Applicable to Any Mode (or Modes) of Transport

These rules are very flexible and can be applied regardless of the transport mode (road, sea, air, or rail). Here’s a simple overview:

• **EXW (Ex Works):** Delivery at the factory.
• **FCA (Free Carrier):** Delivery to the carrier.
• **CPT (Carriage Paid To):** Carriage paid to.
• **CIP (Carriage and Insurance Paid To):** Carriage and insurance paid to.
• **DAP (Delivered at Place):** Delivery at place.
• **DPU (Delivered at Place Unloaded):** Delivery at place unloaded (replaces DAT in Incoterms 2020).
• **DDP (Delivered Duty Paid):** Delivery duty paid.

2. Rules Specific to Sea and Inland Waterway Transport

These rules apply exclusively when transport is by sea, which is particularly relevant to us and our clients.

• **FAS (Free Alongside Ship):** Delivery alongside the ship.
• **FOB (Free On Board):** Delivery on board the ship.
• **CFR (Cost and Freight):** Cost and freight.
• **CIF (Cost, Insurance, and Freight):** Cost, insurance, and freight.

Detailed Explanation of Key International Shipping Terms (Incoterms)

Here we focus on explaining the most common and widely used terms in international trade, as well as some other important terms from Incoterms 2020. Let’s start our journey with the terms.

EXW (Ex Works)

**Concept:** EXW places the least responsibility on the seller and the most on the buyer. The seller makes the goods available at their premises (factory, warehouse, or any other place designated by the seller).
Responsibilities in EXW:
Seller: Only responsible for making the goods ready for pickup at their location.
Buyer: Bears all costs and risks associated with transporting the goods from the seller’s premises to the final destination, including loading, inland transport, export and import customs clearance, international shipping, and insurance.
Point of risk and cost transfer: Risks and costs transfer to the buyer once the goods are ready for pickup at the seller’s premises.
Example: If an importer from Saudi Arabia buys oil from a Turkish factory under EXW terms, the Turkish factory’s responsibility ends once the oil is ready for pickup at its warehouse. The Saudi importer is responsible for arranging shipping from the warehouse in Turkey to their warehouse in Saudi Arabia, including all costs and risks.
When to use: Preferred when the buyer can fully manage the shipping process from the country of origin or when the seller does not want to assume any logistical responsibilities.

FOB (Free on Board)

**Concept:** FOB is used exclusively for sea or inland waterway transport. The seller delivers the goods on board the ship specified by the buyer at the agreed port of shipment.
Responsibilities:
Seller: Responsible for costs and risks of transporting goods to the port and loading them onto the ship. Also responsible for export customs clearance.
Buyer: Bears all costs and risks once the goods pass the ship’s rail at the port of shipment, including sea freight, insurance, import customs clearance, and inland transport at the destination.
Point of risk and cost transfer: Once the goods are loaded on the ship at the port of shipment.
Example: If a UAE company buys oil from Turkey under FOB Mersin port terms, the Turkish seller delivers the oil to Mersin port and loads it onto the ship. Once on board, responsibility transfers to the UAE company, which bears sea freight, insurance, and any risks during the voyage.
When to use: Common in sea shipping, especially when the buyer has its own shipping agent in the seller’s country.

CFR (Cost and Freight)

**Concept:** CFR is also used for sea or inland waterway transport. The seller pays the shipping costs to deliver the goods to the agreed destination port.
Responsibilities:
Seller: Pays freight to the destination port and handles export customs clearance.
Buyer: Bears the risk of loss or damage once the goods are loaded on the ship, as well as insurance, unloading at the destination port, import customs clearance, and inland transport.
Point of risk and cost transfer: Risk transfers at loading onto the ship; seller pays shipping costs to the port of arrival.
Example: If a Qatari company buys oil under CFR Doha port terms, the seller pays shipping costs to Doha. If the oil is damaged during the voyage, the Qatari buyer bears the loss.
When to use: When the seller wants to pay main shipping costs but not bear maritime risks or insurance costs.

CIF (Cost, Insurance, and Freight)

**Concept:** CIF is for sea transport only, similar to CFR but the seller also provides marine insurance against loss or damage during transit.
Responsibilities:
Seller: Pays freight to the destination port, provides marine insurance, and handles export customs clearance.
Buyer: Bears risk once goods are loaded on the ship, and pays for unloading, import customs clearance, and inland transport.
Point of risk and cost transfer: Risk transfers to the buyer at loading, while the seller pays shipping and insurance to the destination.
Example: A Palestinian company buys oil under CIF Ashdod port terms. The seller covers shipping and insurance. If oil is damaged during transit, the buyer bears the risk but can claim compensation from the insurance arranged by the seller.
When to use: When the buyer prefers the seller to arrange shipping and insurance.

FCA (Free Carrier)

**Concept:** FCA is a flexible and widely used term for any transport mode. The seller delivers goods to a carrier specified by the buyer at an agreed location.
Responsibilities:
Seller: Delivers goods to the carrier at the agreed location and clears them for export.
Buyer: Bears all costs and risks once goods are delivered to the first carrier.
Point of risk and cost transfer: Risk and cost transfer once goods are delivered to the first carrier.
When to use: Preferred for multimodal transport (using more than one mode of transport).

DDP (Delivered Duty Paid)

**Concept:** DDP places the most responsibility on the seller and the least on the buyer. The seller delivers goods to the buyer at the agreed destination in the importing country and covers all costs and risks, including customs duties and taxes.
Responsibilities:
Seller: Bears all costs and risks up to the final delivery point, including transport, insurance, customs clearance, and all fees and taxes.
Buyer: Only responsible for unloading at the agreed location.
Point of risk and cost transfer: Transfers once goods are delivered ready for unloading at the agreed location.
When to use: Preferred when the buyer wants to receive goods without any additional responsibilities, leaving all procedures to the seller.

Comparison of Key International Shipping Terms

Here is a table comparing the main Incoterms, focusing on the primary responsibilities of the seller and buyer:
Incoterm Delivery Point Risk Transfer Who Pays Main Transport? Who Pays Insurance? Export Customs Clearance Import Customs Clearance
EXW Seller’s premises Seller’s premises Buyer Buyer Buyer Buyer
FCA First carrier location First carrier location Buyer Buyer Seller Buyer
FOB On board ship (Port of shipment) On board ship Buyer Buyer Seller Buyer
CFR Destination port On board ship Seller Buyer Seller Buyer
CIF Destination port On board ship Seller Seller Seller Buyer
DAP Agreed destination Agreed destination Seller Buyer Seller Buyer
DPU Destination unloaded Destination unloaded Seller Buyer Seller Buyer
DDP Agreed destination Agreed destination Seller Seller Seller Seller

How to Choose the Right Incoterm for Your Deal

Choosing the appropriate Incoterm depends on several vital factors:

• **Buyer and seller experience in international trade:** A new buyer may prefer DDP, while an experienced buyer may choose EXW or FOB to control costs and operations.
• **Nature of the goods:** Certain goods may require special care or insurance, affecting the choice of Incoterm.
• **Mode of transport:** Choose an Incoterm suitable for the transport method (sea, air, road, or multimodal).
• **Relationship between buyer and seller:** Trust and cooperation influence willingness to assume certain responsibilities.
• **Costs and risks:** Each party should assess the costs and risks they are willing to bear before agreeing on an Incoterm.

We always advise our clients at **Alameed Oils** to consult shipping experts to select the most suitable Incoterm and ensure understanding of all conditions.

Conclusion

International shipping terms are essential tools in global trade, providing a clear and organized framework for defining responsibilities, costs, and risks between seller and buyer. Understanding these terms can prevent many problems and disputes, helping build strong and successful business relationships.
Through this comprehensive guide, we hope to provide a clear vision of the most important Incoterms and how to apply them, enabling companies to make informed and effective commercial decisions in the global market.