What is an Incoterm?

Felicia Dye

An incoterm is an international trade term whose definition is provided by the International Chamber of Commerce (ICC). The ICC is a global business organization that has the highest level consultative status with the United Nations (UN). By defining incoterms, the organization helps to facilitate commercial transactions between parties in various countries.

An incoterm outlines who is responsible for the charges necessary to ship exported freight from one country to another.
An incoterm outlines who is responsible for the charges necessary to ship exported freight from one country to another.

Many things can greatly vary from one country to another. An example is contract terms. International commercial transactions could become chaotic and problematic if there was not a way to ensure mutual understanding between the parties. An incoterm is an attempt to do that. The first list of these terms was published in 1936.

Each incoterm provides an internationally recognized definition for terms, such as Delivery Duty Paid (DDP), Free Alongside Ship (FAS), and Free On Board (FOB). Those definitions provide details surrounding the transfer of goods from a seller to a buyer. An incoterm can focus on several topics that can arise in a contract regarding the transfer of goods.

There are numerous costs involved in shipping goods from one place to another. An incoterm can outline who is responsible for each of those costs. For example, if a seller is shipping car batteries to an international buyer, there will be fees including unloading the car batteries from the delivery truck, landing charges at the destination, and insurance.

If the buyer and seller have a Delivered Ex Quay (DEQ) agreement, the seller will be responsible for those costs. If these individuals have agreed to Free Carrier (FCA) terms, the buyer will be responsible for the costs. There are numerous other terms the two parties could agree on that divide the responsibility of the costs differently. For example, an instance where the seller pays all of the costs associated with shipping products is known as Delivery Duty Paid (DDP). Ex Works (EXW) is the term used when the buyer pays all of the costs.

An incoterm can also determine who has control over the decisions made during the various phases of shipment. According to some terms, the buyer may be able to choose the freight forwarder. Another term can give this right to the seller. It is important to note, however, that the responsibility to pay for a service does not always include the right of choice.

Incoterms are usually listed in categories. There are E, F, C, and D categories. Knowing the category can provide a bit of information about an incoterm. The category can be determined by the first letter of the acronym.

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