When buying, selling or shipping goods globally, you need to understand Incoterms®. They affect the responsibilities of the different parties involved and your need for any insurance in the event of unforeseen incidents.
International shipments can seem quite complex. You need to deal with customs clearance, know how to handle dangerous goods, or complete the correct documentation. If something gets overlooked, it is important to determine who is liable for the goods during each stage of the shipment.
When buying, selling or shipping goods globally, you need to understand what are known as Incoterms®, the rules for global trade set out by the International Chamber of Commerce (ICC). They affect the responsibilities of the different parties involved and your need for any insurance in the event of unforeseen incidents.
What are Incoterms®?
Incoterms® regulate the buying and selling of goods, and set out the responsibilities of buyers and sellers operating in the international trade system. They define who has control (possession) and who bears risks during the process of transporting goods from seller to buyer.
First introduced in 1936, Incoterms® are updated every 10 years. They are recognised by the United Nations Commission on International Trade Law (UNCITRAL), the governing body for international trading law, as the global standard. The most recent edition is Incoterms 2020.
Why Incoterms® matter
The Incoterms® that apply in each case are agreed contractually between the seller and the buyer of the goods. They clearly delineate when control and liability (risk) switch from one to the other. Some common Incoterms are:
- EXW: Ex-Works
- DAP: Delivered at Place
- DDP: Delivered Duty Paid
- CFR: Cost and Freight
- CIF: Cost, Insurance and Freight
Note that Incoterms do not define ownership. They only define when possession, control and risk transfer from seller to buyer.
How to work with Incoterms
Know the timing
As control, possession and liability do not necessarily transfer from seller to buyer simultaneously, it’s important to be aware of when you take on or hand over risk, in other words, when the responsibility for insuring the goods transfers to you from the other party in the transaction, or vice versa.