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What are Incoterms in the Freight Forwarding Business?

What are Incoterms in the Freight Forwarding Business?

For every business dealing in import/export of goods, Incoterms or International Commercial Terms define the operational boundaries of their trade. However, for new entrants to the industry, Incoterms can cause confusion. In this article, we take up what they (the Incoterms) are and why are they important?

What are Incoterms?

A stock term in the global cargo world, Incoterms is the set of rules that govern different types transportation services for freight management. The term was introduced by the International Chamber of Commerce (ICC) in 1936. Since then the rules have been updated eight times, having the latest version published in 2001.

The Incoterms is recognized by national governments, legal authorities and businesses all over the world for the understanding of frequently used terms in global trade. These rules remove the uncertainties that might occur due to different interpretation of the regulations in different countries. For every freight management company, they are strictly incorporated into the sales contracts.

Why are Incoterms Important?

These facilitate a fair understanding between the service provider and the service taker by defining the basic entities such as: who holds the responsibility of the products at every stage, who makes the payment for the cost elements, and who has the liability to bear the associated risks (the event of damage or loss, at a given point).

Acknowledged by the United Nations Commission on International Trade Law (UNICTRAL) as the international standard for transportation, the Incoterms is made available in 34 languages by the ICC.

Currently there are eleven Incoterms, with seven rules covering any other mode of transport and four particularly used for sea and inland waterway transport of goods.

Although a majority of trade is done using the 2010 Incoterms, some parties that are involved in a shipping transaction may agree to use a previous version, Incoterms 2000.

The first Incoterm, EXW (Ex Works), places a minimum responsibility on the seller, and covers only the packing costs and commercial documents. The customer is accountable for loading the products for transportation for exporting and bears the expenditure arising after assorting them.

While there are multiple other Incoterms that define the scope of an agreement between the buyer and the seller, DDP (Delivered Duty Paid) is the one that covers all of them. DDP represents the highest obligation that the seller can bear. It includes bearing the expenditure related to taxes, duties and other expenses while ensuring that the products reach their final place of after importing or exporting.

So, we can simply say that Incoterms are really important in import/export business and in subsequent posts we would be discussing details about all the Incoterms involved.

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