When dealing with the international market, almost all countries get involved. Some of the countries won’t use English while other countries use it. Therefore, the need to have an international language in international trade emerged and Inco Terms came into practice as a consequence.
These incoterms can simply be defined as a set of rules introduced by the International Chamber of Commerce. Inco Terms specifically shows the extent of the obligation of the buyer and the seller in terms of the risk of the goods delivered in international trade. There are situations where the Inco Terms become null and void if the buyers and the sellers have additional agreements regarding the delivery between them.
Under this article, we will be discussing five Inco Terms which are frequently used in international trade. They are as follows.
- Ex-work
- FCA
- FOB
- CIF
- DDP
Ex-work
As per this Inco Term, the buyer comes to the premises and take the goods. The premises could be either the place of business, factory, warehouse, or the office in which the operations are carried out by the seller. Therefore, the seller’s responsibility is only limited until the goods are taken by the buyer from the factory. Seller is also not required to load the goods to the forwarder under this Inco term which in turn more favorable to the seller since the seller has limited responsibility for the entire process.
FCA
This Inco Term stands for First Carrier and this is an extension to the Ex-work. As per the previous Inco Term, the seller was only responsible to make available the goods at a selected place (Seller’s factory). But under this Inco term an additional step is involved where the seller is also responsible to arrange a transportation to transport the products to an agreed place given by the buyer. Until that point, the seller has the responsibility for the products while the buyer is held responsible soon after the products being handed over to the agreed place.
FOB
This Inco Term stands for Free on Board. FOB term will hold the seller, or the consignor responsible for the transportation of the goods to the port and for the cost of loading the goods to the ship. On the other hand, the buyer is responsible for the payment of insurance, freight charges, cost of unloading and transporting the goods from the arrival port to the designation where they intend to bring the products.
CIF
This is also another Inco Term used in international trade where CIF stands for Cost, Insurance, and Freight. In this scenario, the seller is again held responsible to transport the goods to an agreed destination bearing the cost of insurance and freight charges necessary to bring the products to the agreed or named port of destination.
In a CIF term, even though the seller should bear the insurance cost he is only required to obtain third-party coverage unless otherwise there is a specific agreement between the buyer and the seller.
Advantages of CIF
- By the time goods arrive at the destination port, the costs including the freight charges and the insurances have already incurred by the seller. Therefore, the buyer has an idea about the exact price he needs to pay in order for him to obtain the goods. Because the cost of freight and the insurance charges are included in the contracted price.
- Even though the seller has to incur the freight charges and insurance during the transit, the risk of the goods is not with the seller during the transit session.
- The buyer is responsible to arrange the import licenses and incur any import duties and other charges at the destination port. Therefore, the buyer does not have that burden with him.
Disadvantages of CIF
- In case if there is a fluctuation in the cost of carriage and the insurance, that needs to be born by the seller. This is a disadvantage to the seller.
- There can be situations where the seller will fail to,
- Tender the documents
- Ship the goods and
- Goods do not arrive on time to the agreed destination.
This will result in a breach of condition and the buyer can take necessary actions against the buyer.
DDP
Under this Inco Term, the seller is responsible to bear almost all the cost from the point of the factory to the point of handing over the goods to the buyer’s doorstep where DDP stands for Delivered Duty Paid. Any losses in between the factory to the buyer’s doorstep need to be born by the seller and the responsibility of the goods lies with him until the buyer signs that he received the goods. Therefore, total shipping cost, customs clearance, warehousing, and storage are also a part of that responsibility of the seller.
Advantages of DDP
- Buyer’s intervenes in the process is very limited.
- Therefore, the movement of the goods is fully with the seller.
Disadvantages of DDP
- A large part of the obligation has to be borne by the seller.
- High risk to the seller.
- Administrative burdens in terms of supply chain management need to be borne by the seller.
Since the Inco Term decides the extent of the costs that each party to the trade must bear, choosing the right Inco Term is very important in international trade. Basically, the buyer is the one who decides on the Inco Term. But based on different factors both parties can come into a negotiation and decide the final term.
Summary
Under this article, we discussed what are the Inco Terms focusing on five such Inco Terms commonly used in the International Trade naming Ex-works, FCA, FOB, CIF and DDP. Also, we discussed the extent of the responsibility that both parties must bear based on the Inco Term used in the trade. Finally discussed the importance of deciding the right Inco Term including some pros and cons of CIF and DDP.