Incoterms® Explained

Freight a minute, what the truck are Incoterms®?

Are you a small to medium-sized business? Do you ship cargo from all over the world, like furniture from Bali, or plush, authentic rugs from India? If so, you’re probably at least loosely familiar with the word “Incoterms®”. Incoterms® (a registered trademark of the International Chamber of Commerce, hence the little “R”) are rooted in conventions dating back to 1936 and have been updated as the world of shipping and borders has changed. Before we get too deep into the waters, A & A does not negotiate Incoterms® – no customs brokerage does. This is meant to be a handy resource for you while you determine your own Incoterms® requirements.

As always, if you find them daunting, we’re here to help as we have been charting the course for shipping clients for decades. First, let’s teach you about what they are and why they matter now more than ever. There’s a lot of literature out there, so we’ve broken it down for you.

History of Incoterms®

According to the ICC website, “ICC’s world-renowned Incoterms® rules facilitate trillions of dollars in global trade each year.” Their original purpose was navigating (????!) the many different and often incongruous practices and legal interpretations between traders around the world. The terms are copyrighted and registered by the ICC, and set out to create a unified set of “rules” that we now call Incoterms®. By creating globally recognized, regularly incorporated terms that are used in sales contracts everywhere, they reduce or altogether remove uncertainties from different nations’ interpretations of the rules. As you can imagine, much has changed with boundaries and technology since 1936, but their core function remains the same. Most recently, a major overhaul was done in 2020, by the International Chamber of Commerce, reflecting the changes to some specific stipulations. The most recent version of terms is explored down below.

Why are Incoterms® important for my business?

Incoterms® are three-letter acronyms that stipulate and clarify the responsibilities between buyers and sellers when included into a sales contract. This is very important! These rules are of particular importance for companies of all sizes. Thousands of dollars are at stake with every shipment, and these terms lay out clearly who is responsible for any potential delays as a result of improperly handled Incoterms®. Using them reduces the potential for confusion and disputes over logistics for buyers and sellers. As exporters in Canada and the USA diversify their export chains, understanding these terms is essential for any exporters looking to expand their export markets — especially with the current added pressures on the global supply chain. Are you as familiar with Incoterms® as you need to be? If not, this guide will help. You DO need to incorporate the proper usage and implementation of Incoterms®, you do NOT have to navigate those waters alone.

From A & A’s Director, Operations & Client Services, Meredyth Welsman,

“Incoterms are an essential part of trade, especially on the global scale. Not only do they provide clarity as to which parties are responsible for certain costs and risks in the agreement, but also allow you to refine your price analysis.”

What do Incoterms® do?

This set of 11, three-letter rules do a lot. Many challenges can arise with international deliveries; like who pays for shipping insurance or duties owed on the cargo, whether the cargo will be unloaded at its destination, and who does the collecting aboard the ship? They serve as a unified accountability check, laying out precisely who is responsible for what. For example, in each Incoterm® rule, a statement is provided as to the seller’s responsibility to provide the goods and commercial invoice in conformity with the contract of sale. Likewise, a corresponding statement is provided which stipulates that the buyer pays the price of goods as provided in the contract of sale. For example; imagine you’re a furniture retailer and you have a shipment coming in from Bali. Only – your container gets lost at sea! Who is responsible for that? Who pays for your freighter if it gets stuck at the port while waiting to be unloaded, or during unloading? Port space is expensive and limited.

Keep reading for part 2 of our Incoterms® Compatibility Series and see which three-letter acronyms you’ll be using the most. Plus, find out what isn’t covered by Incoterms®, and why it’s crucial to have an A & A customs broker helping you ensure your sales contract is compatible with global trade terms.