Why Incoterms are Important for Importing and Exporting Goods

So you’re looking to import or export goods and you start seeing many acronyms pop up. Popular ones appear from time to time, such as  "EXW,” "FOB" and "DDP", but what are they? What do they actually mean? And why are they important to know? Let’s dive straight into it! 

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So what are Incoterms?

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Incoterm stands for International Commercial Terms, a set of internationally recognised rules published and are updated every 10 years by the International Chamber of Commerce (ICC). 

They serve as typical contract terms, helping to define the area of responsibilities and liabilities for the preparation and delivery of goods between the buyer and seller. 

Simply put, these acronyms are usually brought up in contracts with business partners to help define who is paying for what in a typical shipping and delivery process, and to determine the cargo risk being transferred from the seller to the buyer. 

Parties of any international sale will find Incoterms clearly stated on relevant shipping documents.

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Why is it important to know about Incoterms? 

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Every international delivery of goods goes through a complex supply chain, with multiple legs in the transportation process. Without clear communication and mutual understanding of who is responsible for which part of the delivery process, there is a possibility of:

• The buyer/seller paying more than what was initially agreed upon
• Items being stuck in transit
• Deliveries being delayed
• Sale of goods being affected

To prevent such mishaps, all international transactions of goods are typically conducted based on an agreed Incoterm between the buyer and seller. They allow both parties to come to a mutual understanding of their corresponding obligations and responsibilities in the delivery of goods, ensuring the process is carried out smoothly.

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Examples of Common Incoterms

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According to the latest ICC publication, Incoterms 2020 has a total of 11 terms. For buyers and sellers shipping smaller volumes, i.e. less-than-container loads (LCLs), only the following 6 are most applicable:

1. EXW - Ex Works
   
   • The seller only needs to make sure that at his/her premise, the goods are packed and ready for collection by the buyer.
   • The buyer assumes all risk, responsibilities and costs once the cargo is made available for pickup from that moment onwards.
     
     
2. FOB - Free On Board
   
   • The seller is responsible for loading, export clearance and delivery of goods on board the vessel nominated by the buyer.
   • The buyer assumes all risk, responsibilities and costs once products are on board the vessel and from that moment onwards.
     
     
3. CFR - Cost and Freight
   
   • The seller is responsible for all costs and responsibilities of loading, export clearance and delivery of goods up to the port of destination named by the buyer.
   • The buyer assumes all responsibilities and costs once goods arrive at the port of destination and from that moment onwards.
   • Note: The buyer assumes all risk once products are on board the vessel and from that moment onwards. Cargo insurance is not included.
     
     
4. CIF - Cost, Insurance and Freight
   
   • Similar to CFR, with the only difference being the seller has to pay for cargo insurance on top of existing obligations and costs.
   • Note: Most sellers will likely purchase basic insurance to cover his/her obligations in the sale. It is strongly advisable for the buyer to purchase marine cargo insurance to obtain comprehensive cargo coverage, especially for higher valued items.
     
     
5. DAP - Delivered At Place
   
   • The seller is responsible for all associated risks and costs involved in carriage of goods to the buyer's named place of destination, up to the point goods are ready for unloading.
   • The buyer is responsible for import customs clearance, unloading, import duties and taxes.
     
     
6. DDP - Delivered Duty Paid
   
   • The seller is responsible for all associated risks and costs involved in carriage of goods to the buyer's named place of destination, up to the point goods are ready for unloading, including import customs clearance, import duties and taxes.
   • The buyer is responsible for unloading.

Having a good understanding of these Incoterms can help you safeguard your business interests and avoid overpaying for your shipping needs.

Based on our experience working with many companies in Singapore, EXW and FOB are the most common Incoterms chosen for importing through a freight forwarder like SW Logistics. This allows your chosen freight-forwarding agent to handle the majority of the transportation process while always keeping your business interests in mind.

That said, while incoterms serve as internationally-recognised guidelines for negotiations between parties, there may be occasions when you might not understand the full scope of your obligations in the shipping process. For such cases, our team is always happy and on-hand to assist you with tailored-shipping advice specific to your business needs, which can be done through our no-obligations consultation.

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