Incoterms: FCA, CIF or FOB? Understand what it is and what they are

Incoterms answer certain commercial management questions. International trade is a transaction in which company A (for example, an importer) buys goods from supplier B ( exporter), and resells them (or almost) to company C (importer's customer).

The difficulty in this type of commercial transaction stems from the distance, exchange risks, delivery times, etc., and above all from the lack of international laws that clearly define the rights and duties of each party. Incoterms were therefore invented to provide a common framework, share responsibilities and facilitate communication and, above all, understanding between all the organizations involved.

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What are Incoterms?

Incoterms (international commercial terms) are a system of rules that regulate international commercial transactions.

These rules define the distribution of costs, risks and import and export formalities between the seller and buyer in the process of delivering and transporting goods. In other words, at what point the transfer of risks and costs takes place.

What do Incoterms mean?

The term comes from English and is an abbreviation for international commercial terms . "in" comes from international, "co" from commercial and "terms" from terms .

What is the purpose of incoterms?

The main objective of incoterms is to standardize and guide global transactions, foreign trade. A common regulation, nomenclature and framework for all countries, regardless of language, political system, etc.

Who administers the Incoterms?

The International Chamberof Commerce ( ICC) is the body responsible for drawing up and controlling the Incoterms.

When did the Incoterms come into being?

The first drafts of the terms appeared in 1923 and in 1936 the terms were officially published under the name of incoterms.

©️ ICC

How many and what are the incoterms?

Incoterms are revised every 10 years. This has been the case for the last 5 versions: incoterms 1980, incoterms 1990, incoterms2000, incoterms 2010 and now incoterms 2020. The latter was published in September 2019.

Within incoterms 2020, we have a total of eleven rules, four of which are exclusive to maritime and inland waterway transport:

• FAS - Free Alongside Ship;
• FOB - Free On Board;
• CFR - Cost & Freight;
• CIF - Cost, Freight & Insurance.

Seven for any mode of transport:

• EXW - Ex-Works;
• FCA - Free Carrier;
• CPT - Carriage Paid To;
• CIP - Carriage and Insurance Paid to;
• DPU - Delivered at Place Unloaded;
• DAP - Delivered At Place;
• DDP - Delivered Duty Paid.

Incoterms 2010

What are incoterms 2010? They are the eighth version of international trade terms. Used until 2019, incoterms 2010 have given way to the ninth version of the terms, incoterms 2020.

The terms of the previous version are very similar to those of the current one (2020), with the exception of the addition of the DPU rule and the improvement of the FCA.

Below are two tables listing the 2010 incoterms and their respective terms in Portuguese.

List of Incoterms 2010: any means of transport

List of Incoterms 2010: maritime and inland waterway transport

A distinction must be made between sales on departure and sales on arrival.

The Incoterms for sales on departure are: EXW, FCA, FAS, FOB, CFR, CIF, CPT and CIP. They oblige the buyer/importer to bear the transportation costs and inherent risks (to a greater or lesser extent).

On the other hand, an Incoterm sale on arrival means that the goods travel at the seller's/exporter's risk to the agreed point. The Incoterms in question are as follows: DAP, DAT, DDP.

Incoterms 2020

There are no major changes compared to the 2010 terms, DAT has given way to DPU. We have prepared a table of the 2020 incoterms. Highlighting in blue what has changed from the previous version.

List of Incoterms 2020: any means of transport

List of Incoterms 2020: maritime and inland waterway transport

Explaining incoterms - any modal

Incoterms EXW, Ex-Works: In the factory

The exporter is the one who makes the goods available in their warehouse, this is their only obligation. It is the importer who assumes all responsibilities up to the final destination, costs, insurance, formalities and associated risks.

Incoterms FCA: Free carrier

The seller delivers the goods to the carrier chosen and paid for by the buyer. This is when the risks are transferred. The buyer is responsible for transportation to the final destination, as well as the associated costs, insurance, formalities and risks.

Incoterms CPT: Carriage paid up to

Here the seller or exporter chooses the carrier and pays the freight to transport the goods to their destination. It takes care of customs clearance of the goods for export. However, the risks are transferred from the seller to the buyer when the goods are delivered to the main carrier, as the insurance is the responsibility of the buyer.

Incoterms CIP: Postage paid, including insurance, up to

Same as CPT, except that the seller takes out transport insurance against the risk of loss or damage to the goods, all risks (class A).

Incoterms DAP: Delivered to agreed place of destination

DAP replaces the old DAF, DES and DDU. The exporter assumesthe transportation of the goods, costs and risks up to the agreed delivery point. Unloading is the responsibility of the importer, who also bears the import formalities, duties and taxes.

Incoterms DPU: Delivered to place, agreed destination and unloaded

The exporter/seller is responsible for transportation and unloading at the place of destination. They assume all risks and costs until arrival at the final destination. The importer/buyer is responsible for all costs after unloading (import taxes, duties and costs).

Incoterms DDP: Delivered duty paid

Almost all costs and risks are borne by the seller. He carries out export and import customs clearance and bears the taxes, as well as transportation to the final destination. The buyer simply unloads the goods.

Explaining maritime or river incoterms

FAS Incoterms: Franco along the ship

The seller delivers the goods alongside the ship (bearing the related costs), at the agreed port of shipment, and is responsible for clearing the goods for export. It is at this stage that the risks and costs are transferred to the buyer all the way to the final destination.

Incoterms FOB: Free on board

The seller must deliver the goods inside the cargo ship (at his own expense) at the agreed port of shipment and will be responsible for clearing the goods for export. It is at this stage that the risks and costs are transferred to the buyer all the way to the final destination.

Incoterms CFR: Cost and Freight

The exporter manages the transportation and its costs to the port of destination. He takes care of the export formalities and regulates the related duties and taxes. The importer takes over when the goods arrive at the port of destination and the import formalities (payment of the related duties and taxes). However, as the importer is responsible for maritime transport insurance, he assumes the risks from the moment of delivery to the ship at the port of shipment.

Incoterms CIF: Cost, Insurance and Freight

The same principle as CFR, except that the seller is responsible for marine insurance against the risk of loss or damage to the goods.

Which incoterm is more favorable to the exporter?

Those that give the seller/exporter less responsibility, for example, EXW, FCA, FOB and FAS, all of which, of the eleven terms mentioned, are the ones for which the exporter has the least obligations.

On the other hand, the most favorable for the importer? is the one where the exporter assumes most of the responsibility (and costs), for example, CIF, DDP and DPU.

What is the difference between FOB and FCA?

In FCAthe seller 's costs run until delivery at the port or place of export, while in FOB the seller is responsible for costs until the goods are on the ship. In both cases, the seller is responsible for export formalities.

Points to watch out for with Incoterms

We have seen that the use of an incoterm in the context of an international transaction is very useful, as it makes it possible to clarify the responsibilities of each party and thus minimize risks for both parties.

However, in practice, it is always possible to find yourself in difficult situations, especially in the event of an accident.

An example: in the case of the purchase of CFR goods in the port of Shanghai, the incoterm means that the seller manages the sea transport, but the buyer is already responsible for the goods during transportation (because he is responsible for the insurance). If the ship sinks and the goods don't reach their destination, it can be difficult to make the buyer pay.

⚠️ That's why it's important to monitor the progress of the delivery of the goods and be aware of the right time to ask for payment for the goods.

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Conclusion

We've managed to understand the need for terms and rules for foreign trade. How to organize millions of transactions from different countries, cities and languages. A basis was needed. However, even with rules and guidelines at our disposal, the basic rules of trade and negotiation must still prevail: transparency, professionalism and honesty. After all, no seller or buyer wants to do business just once.