Understanding The Incoterms In International Shipping

Legalities and laws related to businesses can be quite complicated. Especially those tied to the moving and shipping industry. That is why we have standardized terms used in international trade that we call Incoterms. These terms provide a framework for the parties to agree on who is responsible for the various stages of the transaction, including transport, insurance, and customs clearance. So, today, Easy Move Kuwait will help you with understanding the incoterms in international shipping. Let’s take a look!

What are incoterms?

Incoterms are a set of international trade terms that define the responsibilities and obligations of buyers and sellers in international trade transactions. They were first introduced by the International Chamber of Commerce (ICC) in 1936 and have since been updated several times to reflect changes in the global trade landscape. Most, if not all, international shipping companies in Kuwait must know about all Incoterms and apply them according to the situation. And if you are a shipping company owner, you must do the same. Although, even if you are a customer, you must still know about all Incoterms available and what are the legal responsibilities behind them.

pallets in the warehouse
International trade terms are invented to make the entire shipping operation more efficient.

Let’s cover the basics for understanding the incoterms in international shipping

Incoterms provide a standardized language and set of rules that help to clarify the terms of sale, transportation, and delivery of goods between parties involved in international trade. The terms specify the respective obligations of the buyer and the seller regarding the delivery of goods, the transfer of risk, and the payment of costs associated with the transaction. The current version of Incoterms, known as Incoterms 2020, includes 11 trade terms. And as such, they have appropriate abbreviations you must know about before you start shipping to Bahrain or anywhere else in the world.

There are eleven incoterms you must know about

We will begin with the most important ones. The most used Incoterms include FOB (Free on Board), CIF (Cost, Insurance, and Freight), and EXW (Ex Works). EXW describes a contract in which the seller makes goods available to the buyer at a specific location. Usually, the seller’s factory or warehouse is responsible for making the goods available for pickup. On the other hand, we have CIF where the seller is responsible for the cost of the goods, including the cost of transporting and insurance. Lastly, in a FOB agreement, the seller is responsible for loading the goods onto the transport vehicle at the location and is also responsible for obtaining any necessary export licenses, permits, and customs clearance. Getting to know these 3 is a good start for understanding the incoterms in international shipping.

understanding the incoterms in international shipping and the legal side of it
After getting used to all 11 Incoterms, settle with the one you are most comfortable with.

Let’s go over the rest of the Incoterms

Obviously, you will focus on the Incoterm that suits you the most. And the one that is the best for your business. But knowing all about them will help you with the understanding the incoterms in international shipping to the fullest. So, check the following:

  • FCA (Free Carrier) – The seller delivers while the buyer assumes responsibility for all costs and risks associated with the delivery.
  • FAS (Free Alongside Ship) – This is a shipping term that specifies that the seller is responsible for delivering the goods to a specified port of shipment and placing them alongside the vessel for loading onto the ship. The buyer assumes responsibility for all costs once they are placed alongside the ship.
  • CFR (Cost and Freight) – CFR only applies to sea transport and does not cover any costs associated with inland transportation and insurance.
  • CPT (Carriage Paid To) – Under CPT, the seller is responsible for arranging and paying for the cost of transporting the goods to the destination specified by the buyer. This includes all costs associated with loading and the cost of freight.
  • CIP (Carriage and Insurance Paid To) – This one is like CPT with an addition where the seller is responsible for obtaining insurance coverage for the goods during transit to the destination.
  • DAP (Delivered at Place) – The seller is responsible for arranging and paying for the cost of transporting the goods to the destination specified by the buyer.
  • DPU (Delivered at Place Unloaded) – The main feature of DPU is that the seller bears the responsibility of delivering the goods while the buyer is responsible for the clearance and any subsequent costs or liabilities associated with them.
  • DDP (Delivered Duty Paid) – This one is the same as DPU. The only difference is that DPU includes unloading as well.

Now that you are understanding the incoterms in international shipping, choose one carefully

Choosing the right Incoterm for a transaction is an important decision. It that can impact the cost, risk, and overall success of the transaction. And by now, you should be ready to evaluate your situation and choose the right Incoterm for your organization. So, firstly, determine the mode of transportation, and consider the risk, responsibility, and cost implications. Then, review the applicable laws and regulations. If necessary, seek advice from legal and logistics experts to help them choose the most appropriate Incoterm for their transaction. They have all the knowledge, experience, and means to inform you and execute any shipments if need be. If you were ever shipping from Kuwait to UK or you intend to do so, you must know all about it.

sea freight with cargo
Whether you ship by air, sea, or land, you still must choose the right Incoterm for your business.

Incoterm and customs clearance

We are sure you already know all about the customs clearance. It is the process of obtaining permission from the relevant authorities to import or export goods. This process involves submitting the necessary documentation and paying any applicable taxes or duties. The customs clearance process can be complex and time-consuming. It is important to ensure that all necessary documentation is accurate and complete to avoid delays or additional costs. So, when shipping from Kuwait to Qatar for example, one of the parties involved will have to cover the clearance cost which is covered by several Incoterms.

Furthermore, when choosing an Incoterm, it is important to consider the customs clearance requirements of the country of import or export. Some Incoterms place the responsibility for customs clearance on the buyer, while others place it on the seller. As we have mentioned before, under the DDP Incoterm, the seller is responsible for arranging customs clearance and paying any applicable duties or taxes. However, under the EXW Incoterm, the buyer is responsible for all aspects of customs clearance. This leaves room for negotiations and arranging better terms for all parties involved.

Understanding the incoterms in international shipping might be complicated at first. Yes, having 11 of them is not making anything easier. But after a while, you will get used to abbreviations and the meaning behind them. Hopefully, we have made it a bit clearer for you to comfortably choose the right Incoterm for you. Good luck.