Full definition
Incoterms, or International Commercial Terms, are a set of globally recognized trade rules established by the International Chamber of Commerce (ICC) that delineate the responsibilities, costs, and risks borne by buyers and sellers engaged in international and domestic transactions. The current version, Incoterms 2020, came into effect on January 1, 2020, and consists of 11 distinct rules that categorize transactions based on the level of obligation the seller is willing to accept. These rules are critical for facilitating trade and mitigating misunderstandings in contracts, particularly in complex logistics and supply chain operations.
The 11 Incoterms include EXW (Ex Works), which places the minimum obligation on the seller, and DDP (Delivered Duty Paid), which signifies the maximum obligation. The intermediary terms, such as FCA (Free Carrier), CPT (Carriage Paid To), and DAP (Delivered At Place), offer varying degrees of responsibility and cost allocation between the parties. Particularly for industrial goods, FOB (Free On Board) is commonly used in Latin America, allowing buyers to control freight costs for large shipments, often from Asia, while CIF (Cost Insurance and Freight) provides convenience by bundling these costs into the seller's price, making it easier for buyers to compare prices.
In practice, businesses must always specify “Incoterms 2020” along with the named place in contracts and purchase orders to ensure clarity and avoid potential disputes. Each term has implications not only for cost allocation but also for risk management, insurance, and compliance with local regulations. Furthermore, understanding these rules is essential for procurement managers and logistics coordinators to ensure smooth operations and successful transactions in the global marketplace.