Once Free Trade Agreements (FTA) have been fully understood, it is now time to familiarise yourselves with International Commercial Terms or commonly known as Incoterms.
Incoterms are a set of rules which define the responsibilities of sellers and buyers for the delivery of goods under sales contracts.
It is important to abide by these terms as they are published by the International Chamber of Commerce (ICC) relating to international commercial law and are widely used in commercial transactions.
How does Incoterms ease the process of exporting?
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1. Establishes a clear line of communication
Incoterms rules are implemented to clearly communicate the tasks, costs and risks associated with global or international transportation and the delivery of goods.
2. Reduces risks
Other than establishing a clear line of communication between traders, Incoterms also significantly reduce misunderstandings and therefore minimizes trade disputes and litigation that can disrupt the flow of the export process.
3. Generates proper cashflow
Incoterms define the monetary and procedural aspects of an export business. It denotes which party is responsible in each area of the export practice thus ensuring proper, timely and efficient payment of goods and services.
Types of common Incoterms that are implemented globally
The Incoterms rules have been amended eight times, the latest review being in 2010 (published January 2011).
Since then, these are the commonly used Incoterms within the export segment:
1. Ex Works (EXW)
The exporter delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place (for example – factory, warehouse). The seller does not need to load the goods on any collecting vehicle, nor do they need to clear the goods for export, where such clearance is applicable.
2. Free on Board (FOB)
The exporter delivers the goods on board a vessel that is nominated by the buyer at a particular named port of shipment. The risk of loss or damage to the goods passes when the goods are on board the vessel and the buyer bears all costs from that moment onwards.
3. Cost and Freight (CFR)
Similar to FOB but CFR requires the exporter to contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
4. Cost, Insurance and Freight (CIF)
Similar to CFR but this law requires the exporter to also contract for an insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the exporter wish to have a higher insurance protection, both parties (exporter and buyer) are required to agree with each other.
5. Delivery Duty Paid (DDP)
The exporter is responsible for all costs involved in delivering the goods to a named place of destination and for clearing customs in the country of import. What’s interesting about this Incoterm is that the exporter provides door-to-door delivery, including customs clearances, thus the exporter bears the entire risk of loss until goods are delivered to the buyer’s premises.
*The ICC has begun consultations on a new revision of Incoterms, to be called Incoterms 2020.
Incoterms can be a game changer in the export business as it aids export-related business to know and understand various industry-specific terms that can smoothen the whole export process.
It is vital for potential businesses to get an in-depth knowledge of Incoterms so that continuous flow of income is guaranteed.
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