Are you an international trader? If so, you are probably already familiar with the term “Incoterms” or International Commercial Terms.
These are the rules created by the International Chamber of Commerce (ICC) that are used in international trade contracts.
ICC Incoterms regulate the delivery of goods and merchandise purchased between different countries.
In this article, we will look at what exactly Incoterms are, how they are used and why they are important for international trade.
👉 Here you can find more information about: How To Make A Sales Pitch
What are Incoterms?
The term Incoterms is an abbreviation for “International Commercial Terms” and is used to determine the responsibility and financial requirements of each party involved in the commercial process.
For example, one party may be responsible for the delivery of a certain product, while another party is responsible for paying customs clearance charges.
The term Incoterms was first introduced by the ICC in 1936 and has been updated periodically over the years.
Currently, there are four main categories of Incoterms in use worldwide: Group E (EXW, Ex Works), Group F (FCA, Free Carrier), Group C (CFR, Cost and Freight) and Group D (DDP, Delivery Duty Paid).
Each group has its own set of conditions that dictate which party is responsible for different aspects of the transaction.
Why are they important?
Incoterms provide a universal understanding between exporters and importers in an international trade context.
In this way, they help to avoid any disputes or discrepancies that may arise due to different laws, customs procedures and tax systems used by different countries.
Using Incoterms can also save a lot of time when negotiating a trade agreement.
Since all parties involved will know the agreed terms and conditions of the transaction, this can help reduce time spent on paperwork and simplify the communication process.
In addition, Incoterms allow for a more efficient allocation and management of costs between the parties by defining which party is responsible for payment of certain elements, such as customs clearance.
How are Incoterms used?
Incoterms provide the parties involved in the commercial process with a framework for the distribution of risk and financial costs.
They can be used in two ways: with a “cost-based” system or with a “risk-based” system.
For a cost-based system, the seller is responsible for bearing all the costs of delivering the goods to the place specified by the buyer.
This means that he must pay the price of all relevant costs; from packaging, shipping and insurance costs to customs clearance fees.
In contrast, with a risk-based system, the seller’s responsibility ends upon delivery of the goods to the buyer at the agreed delivery point.
Thus, the buyer is then responsible for any risks that may arise between the point of delivery and the final destination.
What are the advantages?
The main advantage of Incoterms is that they offer security to both parties to the commercial agreement.
Incoterms establish the responsibilities to which each party is subject, based on the established regulations.
This fact offers clarity and security to the contracting parties, thus avoiding future conflicts between buyer and seller.
In addition, Incoterms also facilitate international transactions, as they streamline formalities and procedures.
They also save costs, such as handling and administrative expenses, since with these rules it is the suppliers and buyers themselves who must take care of the necessary customs procedures and formalities.
The main advantage of Incoterms is that they clarify the obligations and rights of both buyer and seller, facilitating the establishment of any agreement.
It also provides an international framework that both parties must adhere to in order to avoid any legal complications or confusion.
👉 You may be interested in: 4 Advantages Of Having Business Objectives
What are the disadvantages?
One of the main disadvantages of Incoterms is that many companies try to take advantage of them.
Often, they quote shipments using one method and buy another to save money and have more control over the goods.
This can lead to legal complications, as the contracting parties may not agree to the terms of the agreement.
In addition, Incoterms often do not cover the full cost of shipping and transporting the goods.
This means that the contracting parties may have to agree on additional costs to cover any extra expenses related to shipping and transportation.
Another drawback of Incoterms is that they do not always apply to all types of transactions.
For example, some Incoterms rules do not apply to international transactions involving the sale and purchase of goods in a single country.
This means that contracting parties may have to negotiate alternative terms to avoid legal complications.
Finally, contracting parties should be aware that Incoterms do not provide any financial protection in the event of litigation.
It is therefore important to ensure that any contract entered into is legally binding and that all parties are aware of their respective rights and obligations.
Incoterms provide clarity and certainty to both the buyer and seller of goods.
They can streamline paperwork and procedures, and can save costs related to handling and administrative expenses. However, they can also lead to complications if one party tries to take advantage of them.
In addition, some Incoterms may not always be applicable and do not provide any financial protection.
It is therefore important to understand the potential advantages and disadvantages, as well as any legal implications, before entering into any contract.
👉 Learn more about: How To Start A Health Food Business
In a nutshell
Overall, it is clear that Incoterms provide an important regulatory framework for international traders.
By setting out the responsibilities of each party clearly and concisely, these terms ensure that transactions are conducted safely and securely.
While it may not be necessary to use Incoterms in all international trade agreements, they can certainly help save time, money and headaches in complex agreements between parties located in different countries.
International Commercial Terms, better known as Incoterms, are a set of international trade rules established by the International Chamber of Commerce that define the ownership of goods when they are shipped between buyer and seller.
This means that they establish who is responsible for export and import formalities, transportation and payment of taxes and costs.
These rules are important to avoid misunderstandings or obligations between nations or to clarify situations between two different countries.