What Is Incoterms in International Trade? Discover It Here!

Key Takeaways

Incoterms are international trade rules that clarify cost, risk, and liability allocation between sellers and buyers.
There are 11 types of Incoterms 2020 to choose from, depending on transaction needs and mode of transportation.
Selecting the right Incoterms helps reduce misunderstandings, control logistics costs, and clarify the shipping process.

In international trade, understanding the allocation of costs, risks, and responsibilities during shipping is a priority. Clear terms help each party understand their obligations from the moment the goods are shipped until they arrive at their destination. One of the key references in international trade transactions is Incoterms. Read on to learn more about these rules!

What Is Incoterms?

Incoterms are a set of international trade rules published by the International Chamber of Commerce (ICC) that outline responsibilities between sellers and buyers in goods transactions. These rules cover shipping costs, risks, transportation arrangements, and obligations in export and import processes.

Incoterms aim to ensure a common understanding between sellers and buyers regarding costs, risks, and responsibilities during shipments.

With terms agreed upon from the outset, sellers and buyers can determine when risk transfers, who bears which costs, and who is responsible for each stage of shipment.

Types of Incoterms

In Incoterms 2020, there are 11 trade rules divided into two groups: rules applicable to various modes of transportation and rules specific to maritime and inland waterway transportation. Each type of Incoterm involves a different allocation of costs, risks, and responsibilities between the seller and the buyer. Here is the explanation:

Ex Works (EXW): The seller makes the goods available at a specified location, while most of the costs, risks, and shipping processes are the buyer’s responsibility.
Free Carrier (FCA): The seller delivers the goods to the carrier or a party designated by the buyer at an agreed-upon location. Upon delivery, the risk transfers to the buyer.
Carriage Paid To (CPT): The seller pays the transportation costs from the point of origin to the agreed-upon destination, but the risk transfers to the buyer when the goods are handed over to the carrier.
Carriage and Insurance Paid To (CIP): The seller covers the transportation and insurance costs up to the agreed-upon destination. However, the risk transfers to the buyer after the goods are handed over to the carrier.
Delivered at Place (DAP): The seller is responsible for transporting the goods to the agreed-upon destination, but the buyer handles the unloading and import procedures.
Delivered at Place Unloaded (DPU): The seller bears the costs and risks until the goods arrive and are unloaded at the destination. After that, responsibility transfers to the buyer.
Delivered Duty Paid (DDP): The seller bears nearly all responsibility for shipping to the destination, including the import process and payment of import duties.
Free Alongside Ship (FAS): The seller delivers the goods alongside the ship at the port of shipment. Once the goods are placed alongside the ship, the risk transfers to the buyer.
Free on Board (FOB): The seller is responsible until all goods are fully loaded onto the vessel at the port of shipment. Once all goods are on board, the risk or responsibility transfers to the buyer.
Cost and Freight (CFR): The seller pays for transportation costs until the goods arrive at the destination port, but the risk transfers to the buyer once all goods are loaded onto the vessel at the shipment port.
Cost, Insurance, and Freight (CIF): The seller bears the costs of transportation and insurance until the goods arrive at the port of destination. However, the risk passes to the buyer once the goods have been loaded onto the vessel at the shipping port.

The Advantages and Disadvantages of Incoterms

Using Incoterms offers several benefits for managing international trade transactions, but it also has limitations that must be considered. To understand both, review the following points:

Advantages of Incoterms

Clarifies how costs, risks, and liabilities are allocated between the seller and the buyer.
Reduces potential disputes because each party’s obligations are clearly defined.
Helps companies estimate logistics and shipping costs more accurately.
Facilitates coordination among the seller, buyer, carrier, and logistics providers.
Utilizes internationally recognized trade standards.

Disadvantages of Incoterms

Does not cover all aspects of the contract, such as the price of goods, payment methods, and dispute resolution.
Differences in the provisions of each term can lead to errors in determining liability.
Inappropriate selection of Incoterms can increase the risk of costs or operational obstacles.
Not all Incoterms are suitable for every mode of transportation and type of shipment.
A clear sales contract is still required to govern aspects of the transaction not covered by Incoterms.

More to explore: What Is a Letter of Indemnity? Its Meaning & Function

Optimize International Shipping with CDI Group

The selected Incoterms must be supported by appropriate logistics to ensure that the allocation of responsibilities, costs, and risks in the transaction can be effectively implemented.

To meet these needs, PT Chandra Daya Investasi Tbk (CDI Group) provides maritime and land logistics solutions through its subsidiaries to support the company’s operational needs.

For sea-based shipping, PT Chandra Shipping International (CSI), a subsidiary of the CDI Group, operates a fleet of over 10 vessels used to transport LPG and chemicals. This fleet has a capacity of approximately 4,200–9,600 DWT and could potentially expand as service demands grow.

Meanwhile, PT SCG Barito Logistics (SBL) can support land logistics through inter-island services, maritime transport, import-export operations, customs clearance, and warehouse management. Additionally, SBL operates more than 200 trucks to support distribution activities.

Your storage needs can also be met by PT Chandra Cold Chain (CCC), which offers modern cold storage facilities with a capacity of over 700 pallet positions, as well as PT Chandra Warehouse Cilegon (CWC), which operates a warehouse in the Cilegon area with a total land area of over 51K m².

With the support of these various integrated facilities, CDI Group and its subsidiaries can be #YourGrowthPartner in supporting your company’s logistics and operational needs. For more information about the available services, please contact us. Trust CDI Group with your company’s logistics needs!

Frequently Asked Questions (FAQ)

Do you still have questions about Incoterms and their application in international trade transactions? Check out the following FAQ to understand some of the terms and conditions commonly used in the import-export process.

1. Which Incoterms Are Currently in Effect?

Incoterms® 2020 is the latest edition, effective as of January 1, 2020, and contains 11 international trade rules from the ICC.

2. What Is the Difference Between CIF and CIP?

CIF is used only for maritime and inland waterway transport, while CIP can be used for various modes of transport. CIF requires minimum insurance coverage under the Institute Cargo Clauses (C), whereas CIP requires higher coverage, specifically the Institute Cargo Clauses (A) or equivalent.

3. Who Bears the Cost Under CIF?

Under CIF, the seller bears the costs of transportation and insurance to the agreed-upon port of destination, although the risk for the goods passes to the buyer once the goods have been loaded onto the vessel at the shipping port.