Choosing the right Incoterm

What does CIF mean?

Choosing the right Incoterm [UPDATED 2024]

Choosing the right Incoterm can be the difference between a successful trade transaction and an unprofitable headache. 

Incoterms, short for ‘International Commercial Terms’, are standardised trade terms established by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international transactions. They determine who is responsible for transportation, insurance, duties, and other logistics. 

Choosing the right Incoterm is essential as it affects cost, risk, and logistics management.


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Factors to consider when choosing Incoterms

Several factors influence the choice of Incoterm, and selecting the right one depends on the specifics of the trade deal. Some key considerations are:

  • The type of goods: The nature of the goods being shipped, including their value, fragility, and perishability. For instance, high-value or fragile items might require terms that ensure better control over shipping and insurance.
  • The mode of transport: Whether the shipment is by sea, air, rail, or multimodal transport. Some terms are specific to maritime transport (e.g., FOB, CIF), while others are suitable for any mode (e.g., EXW, CIP).
  • Cost responsibilities: Allocating costs between the buyer and seller, including transportation, insurance, and customs duties, is a critical factor. Deciding who pays for what can influence the final cost of goods.
  • Risk and liability: The point at which risk transfers from seller to buyer varies with different Incoterms. Understanding this transfer of risk helps both parties better manage their responsibilities.
  • Trade regulations: Compliance with international trade laws and regulations in the respective countries can affect which Incoterm is most suitable.

Overview of common Incoterms

There are a total of 11 terms under the Incoterms 2020 rules. The most commonly used of these are: 

  • EXW (Ex Works): The buyer takes on most responsibilities, including picking up goods from the seller’s premises and handling all transportation, insurance, and export/import duties. This term is often used when the buyer has strong logistics capabilities.
  • FOB (Free on Board): The seller delivers the goods on board a vessel chosen by the buyer. Once the goods are on board, the buyer assumes responsibility. This term is ideal for sea shipments where the buyer wants control over the main leg of the journey.
  • CIF (Cost, Insurance, and Freight): The seller pays for the cost, insurance, and freight to the destination port. Risk transfers to the buyer once the goods are loaded on the vessel. This term benefits buyers who prefer the seller to manage shipping and insurance.
  • DDP (Delivered Duty Paid): The seller handles all aspects, including duties, until the goods reach the buyer’s premises. The buyer takes on minimal responsibilities, making this term ideal for buyers who want minimal involvement in logistics and duties.

Best Incoterm for different shipping scenarios

Certain shipping situations also lend themselves to specific Incoterms: 

  • Small parcels and air freight: FCA (Free Carrier) is flexible and allows the seller to deliver goods to the buyer’s chosen carrier. 
  • High-value goods: CIP (Carriage and Insurance Paid To) requires the seller to provide comprehensive insurance coverage, ensuring that the goods are well-protected throughout the journey.
  • Bulk commodities via sea: CFR (Cost and Freight) is suitable for bulk shipping by sea, where the seller arranges and pays for transport to the destination port, but the buyer assumes risk once the goods are on board the vessel.
  • Door-to-door deliveries: DAP (Delivered at Place) requires the seller to deliver goods to a specified location, covering all costs except import duties. This benefits buyers who want a streamlined delivery process without handling transportation.

Practical tips for choosing the right Incoterm

Before deciding on an Incoterm, you should: 

  • Assess your logistics capability: Understand your ability to handle shipping, insurance, and customs clearance. If you lack strong logistics support, consider Incoterms where the seller handles more responsibilities, such as CIF or DDP.
  • Evaluate your risk tolerance: Determine how much risk you are willing to assume during the shipping process. If you prefer minimal risk, choose Incoterms like CIP or CIF, where the seller covers insurance.
  • Consult with trade partners: Discuss with your buyer or seller to ensure mutual agreement on the selected Incoterm. Clear communication helps avoid misunderstandings and ensures both parties know their responsibilities.
  • Stay updated on regulations: Ensure compliance with the latest trade regulations and Incoterm rules. Regularly review updates from the ICC to stay informed about any changes.

FAQs

What is the difference between EXW and FOB?

EXW (Ex Works) places the maximum responsibility on the buyer, who must handle all transportation, insurance, and duties from the seller’s premises. This term is often used when the buyer has strong logistics capabilities. 

FOB (Free on Board) requires the seller to deliver goods on board the buyer’s chosen vessel. Once the goods are on board, the buyer takes over responsibility, including shipping and insurance. FOB is ideal for sea transport, where the buyer wants control over the main leg of the journey.

Can Incoterms be used for all modes of transport? 

Some Incoterms, like FOB, CIF, and CFR, are specific to sea and inland waterway transport. 

Others, such as EXW, FCA, and CIP, are suitable for any mode of transport, making them versatile for multimodal shipments.

Why would a seller prefer using DDP over other Incoterms? 

DDP (Delivered Duty Paid) might be preferred by sellers who want to offer a comprehensive service, including handling all transportation, insurance, and import duties. 

This can make their offer more attractive to buyers who prefer minimal responsibility.

How do Incoterms affect shipping costs and responsibilities? 

Incoterms define the point of risk transfer, cost responsibilities, and logistical duties between the buyer and seller. 

Choosing the right term can impact both parties’ overall cost of goods, risk exposure, and administrative burden.

By considering the nature of goods, mode of transport, cost responsibilities, and regulatory compliance, traders can select the most suitable Incoterm for their transactions. 

Choosing the right Incoterm is essential for mitigating risks and clarifying responsibilities in international trade.

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bob ronaiMeet our writer Written by our resident freight forwarding and shipping expert.

Bob Ronai

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About the Author

Lord is responsible for the TFG Weekly Trade Briefings at Trade Finance Global (TFG).

He is curious about the world of payments and macro-economics, with a specific focus on supply chains in Asia.

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