International Commercial Terms – Incoterms are a series of pre-defined commercial conditions issued by the International Chamber of Commerce. They are often used in International Commercial (Bank) transactions or procurement processes. Three letters in a series denote terms of exchange related to common contractual sales practices, and are intended to primarily communicate clearly the tasks, costs, and risks associated with the transport and delivery of goods.
Incoterms – in 2016 were organized in two categories:
for all types of transport:
EXW- Ex Works – ex-works (arranged place)
FCA – Free Carrier – franchisee (agreed place)
CPT – Carriage Paid To – the shipping is paid to (agreed place)
CIP – Carriage Paid, Insurance – transport and insurance to (arranged place)
DAT – Delivered at Terminal (new) – delivered to the terminal (new)
DAP – Delivered at Place (new) – delivered to the site (new)
DDP – Delivered Duty Paid – delivered and cleared (agreed place)
only for maritime open sea transport:
FAS – Free Alongside Ship – franko to the ship’s side (arranged port departure)
FOB – Free On Board – free ship (agreed port of departure)
CFR – Cost and Freight – price with shipping (agreed Port)
CIF – Cost, Insurance and Freight – price with transport and insurance (agreed port)
The rules according to the incoterms are accepted by governments, legal authorities and those practicing worldwide in interpreting the most commonly used terms in international trade. They are designed to reduce or eliminate any uncertainties arising from different interpretations of rules in different countries and as such, are regularly incorporated into sales contracts around the world.
That is why they are really important in terms of regulation. It allows the authorities to judge under a unique system that makes communication easier for every buyer and seller in the world.
We often see a Chinese salesman (for example) selling the product at a FOB price without explaining that the price of goods does not include transport of goods and fees.