Incoterms®

 

 

Question: Incoterms® is/are:

  1. Short for International Commercial Terms
  2. Voluntary
  3. Eleven (11) established rules commonly used in foreign trade
  4. Developed by the International Chamber of Commerce
  5. Trade terms indicating which tasks will be performed by exporter/importer
  6. Trade terms indicating which activities will be paid by exporter/importer
  7. All the above

Understanding Incoterms® is important given the growth of international trade and globalization. When doing business abroad, the more specific your contract terms, the less room for misinterpretation by the involved parties. Incoterms® trade terms indicate which tasks will be performed and which activities will be paid by the exporter, which tasks will be performed and which activities will be paid by the importer, and when product responsibility moves from one party to the other.

The APICS Dictionary, 15th edition, defines a private carrier as:

‘a set of (voluntary) rules established by the International Chamber of Commerce providing internationally recognized rules for the interpretation of the most commonly used trade terms in foreign trade…’

The 11 terms primarily define when risk for the cargo passes from seller to buyer and which party is responsible for freight and insurance costs. The first letter in the terms is significant:

  • C: Require the seller to pay for shipping.
  • D: The seller or shipper’s responsibility ceases at a specified point, and they deal with who will pay pier, docking, and clearance charges.
  • E: When the goods are ready to leave the seller’s premises, their responsibility ceases.
  • F: The primary cost of shipping is not met by the seller.

From there the current Incoterms® are divided into two categories: one for any mode of transport, and the second for sales that solely involve non-containerized shipping by sea or inland waterways. Click here to read more from Inbound Logistics.

If you have taken an accounting class in the USA you probably learned about FOB. The term FOB is also used in modern USA domestic shipping to describe the point at which a seller is no longer responsible for shipping cost, specifically ‘FOB origin’ and ‘FOB destination’.

The two terms have a specific meaning in commercial law and cannot be altered. But the FOB terms do not need to be used, and often are not. In this case the specific terms of the agreement can vary widely, in particular which party, buyer or seller, pays for the loading costs and shipment costs, and/or where responsibility for the goods is transferred. The last distinction is important for determining liability or risk of loss for goods lost or damaged in transit from the seller to the buyer.

For example, a person in Miami purchasing equipment from a manufacturer in Chicago could receive a price quote of “$5000 FOB Chicago”, which would indicate the buyer would be responsible for the shipping from Chicago to Miami. If the same seller issued a price quote of “$5000 FOB Miami”, then the seller would cover shipping to the buyer’s location.

Following are additional resources to help you better understand Incoterms® in preparation for the CLTD Certification.

Back to our question, Incoterms® is/are:…

Answer: 7. All the above

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