Companies doing business globally should always have a clear understanding of the terms under which freight is transported across borders because they can have a substantial impact on freight, duty, insurance, and other costs. Today, however, with those costs skyrocketing as the U.S. and others subject traded goods to a raft of new tariffs, this understanding is more important than ever to minimize both expenses and shipment delays.
Understanding Incoterms
Incoterms can facilitate this process by specifying the obligations of sellers and buyers in cross-border trade transactions involving tangible goods and thus avoiding potential differences in interpretations of commercial terms. These obligations include import clearance (e.g., duties, brokerage fees, liability, and licensing), export clearance (duties, taxes, liability, export filing, and licensing), risk of loss of the goods, insurance, and freight (e.g., vessel loading and unloading, freight forwarding, and related charges).
It is important to note that Incoterms do not convey title; address warranties, breaches, and remedies; replace the law of contracts; or apply to other contracts related to the sale of goods (e.g., letters of credit). They are also not the same as the shipment and delivery terms in the U.S.’ Uniform Commercial Code.
There are currently 11 Incoterms divided into four categories.
Departure – ex works (EXW)
Main carriage unpaid – free carrier (FCA), free alongside ship (FAS), free on board (FOB)
Main carriage paid – cost and freight (CFR), cost, insurance, and freight (CIF), carriage paid to (CPT), and carrier and insurance paid to (CIP)
Arrival – delivered place unloaded (DPU), delivered at place (DAP), delivered duty paid (DDP)
These terms, in the order specified above, reflect a spectrum of responsibilities between the seller and the buyer. The buyer incurs virtually all responsibilities under EXW, while the seller does so under DDP. The other terms each indicate some degree of sharing of responsibilities and costs.
Using Incoterms
Determining which term to use (bearing in mind that doing so is voluntary) depends on a number of factors, including the nature of the goods, the mode of transportation, and whether there are specific concerns regarding export controls, taxes, document preparation, or other issues.
Once a decision to use a term is made, such use must be done properly. Terms must be placed within a legally binding document and be referenced correctly (e.g., the appropriate three-letter abbreviation with a named place in parentheses). They should also be included on commercial shipping invoices.
Risks of Incoterms
Companies should also be aware that the use of specific Incoterms is not without its risks. For example, with the recent rapid and unpredictable increase in tariffs imposed by the U.S. and other countries, there has been a corresponding rise in the use of the term DDP. Under this term the seller is effectively the importer and responsible for all shipping, delivery, export, and import paperwork and expenses, including tariffs, which can be an attractive option for buyers looking to keep prices down.
However, if the seller in a DDP transaction does not have a capable office in the destination country to handle these tasks, buyers may find themselves facing tariff bills, unexpected shipment delays, possible detentions, and other problems that can end up costing them more than if they had acted as the importer in the first place.
ST&R’s customs experts can help your company determine whether to use Incoterms and which ones are most appropriate for your transactions. For more information, please contact Andrea Jeglum via email or at (781) 559-0140.
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