Risks and Risk Management in International Business

What are INCOTERMS®, and why do they matter in the world of global trade?

Clear and concise language is one of the most important tools of global trade, so small changes in wording or uncertainty can have a major impact on aspects of any business transaction.

Word definitions often differ from industry to industry, especially when it comes to international business. For business terminology to be effective, words and phrases must mean the same thing, which is why the International Chamber of Commerce created “INCOTERMS®” in 1936 – to bridge the gap between industries, and serve as a means of reducing uncertainties that arise from various interpretations of the rules in different countries. INCOTERMS® help traders avoid misunderstandings by clarifying the tasks, costs, and risks involved in the delivery of goods from sellers to buyers.

With language posing a risk in any foreign trade agreement, INCOTERMS® are used globally to manage this risk. Each INCOTERM® refers to a type of agreement for the purchase and shipping of goods internationally. Some of the most important things to consider are:

  • Costs: who is responsible for expenses involved at a given point in the shipment’s journey?
  • Control: who owns the goods at a given point in the journey?
  • Risks: who is responsible for the goods at a given point in a shipment’s journey?

The 8th version – INCOTERMS® 2010 – was published January 1, 2011, which includes:

RULES FOR ANY MODE OF TRANSPORT:

EXW (EX-Works)

Minimum responsibility is placed on the seller with greater responsibility on the buyer. Goods are made available for pickup at the seller’s warehouse/factory/etc.  Buyer bears all responsibility and costs from pickup to delivery. Seller has no obligation after time of pickup.
FCA (Free Carrier)

The seller delivers goods export cleared to the carrier that has been determined by the buyer or another party. The authorized party picks up goods at the sellers premises or another named place. The buyer assumes all risk and costs that are associated with delivering the goods to the final destination including transporting after delivery to carrier and any fees such as customs and insurance to import the product into a foreign company.
CPT (Carriage Paid To)
The seller has the same obligations found with CIF, with the addition that the seller has to pay for the transportation costs associated with delivery goods and cargo insurance to the named place of destination.
CIP (Carriage and Insurance Paid To)
It is the sellers responsibility to clear the goods for expert and deliver them to the carrier or other named person determined by the seller at the place of shipment. They are also responsible for the transportation costs associated with delivering the goods and the cost of minimum insurance coverage to the named place of destination.
DAT (Delivered At Terminal)
The seller pays for carriage to the terminal of destination as well as clearing the goods for export and assumes all risks up to the point that the goods are unloaded at the terminal. It is the buyers responsibility for all costs related to import clearance and assumes all risks from this point forward.
DAP (Delivered At Place)
The seller bears all risks and pays for carriage to the named place of destination not unloaded. The buyer is responsible for all risks and costs related to unloading the goods and import clearance.
DDP (Delivered Duty Paid)
The seller is responsible for dealing with all the tasks involved in moving goods from the manufacturing plant to the named place of destination, ready for unloading and cleared for import. It is the seller’s responsibility to insure the goods and absorb all costs and risks including the payment of duty and fees.

RULES FOR SEA AND INLAND WATERWAY TRANSPORT:

FAS (Free Alongside Ship)

FAS requires the seller to clear goods for export and delivers them when are placed at the named port of shipment alongside the vessel. The buyer is responsible for all risks/costs for the goods from this point onwards.
FOB (Free On Board)
The seller uses their freight forwarder to clear and move the goods to the port or designated point of origin. Seller delivers goods once they are onboard the vessel at the named port of shipment. The buyer is responsible for all risks/cost for the goods to move from this moment forward.
CFR (Cost and Freight)
It is the seller’s responsibility to clear the goods for export and to get goods from their door to the port of shipment. “Delivery” is accomplished at this time. It is the buyer’s responsibility to cover insurance from the port of origin or port of shipment to buyer’s door.
CIF (Cost, Insurance and Freight)

Similar to CFR, but instead of the buyer insuring the goods for the maritime phase of the voyage, the seller will insure the goods and is responsible for the cost of freight. “Delivery” is accomplished at the port of destination. It is the buyers responsibility for the cost of unloading goods at port of destination and clearing goods for import. The risk passes from seller to buyer once the goods have arrived onboard the named vessel at the port of shipment.

References: For more information please visit http://www.export.gov/faq/eg_main_043740.asp

1 Comment

  1. András Schmidt says:

    Very important to use additional terms also:
    FOR (free on railcar)
    CAF Liner in/out, Sous Palan, and etc.

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