What Are Shipping Incoterms? 5 Ways How They Are Vital To The Global Shipping Industry

Incoterms or International Commercial Terms are a series of a predefined set of instructions that are commonly used in the global shipping industry. This set of terms are published by the International Chamber of Commerce (ICC) and are highly accepted by the governments and legal authorities of the trade practising countries. Shipping incoterms are basically three-letter acronyms of commonly used trade instructions which are intended to simplify the communication between two trade parties of different countries. The latest revised version of the incoterms was published in September 2019 for the year 2020. The new set of incoterms include 11 acronyms, they are:

  • EXW- stands for “Ex Works”
  • FCA- stands for “Free Carrier”
  • CPT- stands for “Carriage Paid To”
  • CIP- stands for “Carriage and Insurance Paid”
  • DPU- stands for “Delivered at Place Unloaded”
  • DAP- stands for “Delivered At Place” (named place of Destination)
  • DDP- stands for “Delivered Duty Paid”
  • FAS- stands for “Free Alongside Ship”
  • FOB- stands for “Free On Board”
  • CFR- stands for “Cost and Freight”
  • CIF- stands for “Cost, Insurance, Freight”

The last four shipping incoterms are strictly used for Sea and Inland waterways transportations while the other seven are used across the board.

How Are Incoterms Vital To The Global Shipping Industry?

The use of incoterms simplifies the communication process between the buyers and the sellers involved in a shipping contract. Shipping incomes are strictly informative and are used to define costs, obligations and risks involved in a shipping contract. The major 5 ways in which incoterms play a vital role in the  shipping industry are:

  • Reduces the risk factor: The global shipping industry has the involvement of different countries that possess different rules and regulations of trade. The definition of trade terms like a tariff, custom duties, etc. may also vary. Shipping Incoterms provide a common set of regulations that holds the same definition in every country. This reduces the risk of any possible miscommunication that might have occurred in the absence of incoterms.
  • It helps gain a monetary advantage: A few shipping incoterms like CPT, CIP, etc. are used to define the monetary aspects of the global shipping industry. Uses of these incoterms specifically ensure accurate and timely payment for goods and services. Since incoterms are legally accepted by governments of trade practising countries, the occurrence of delayed payments or bribes is highly reduced.
  • It is widely used for shipping practices: Shipping “Incoterms” is a registered trademark of the ICC which was first published in 1936. It has been in use since then for interpreting the most commonly used terms in the shipping industry. Therefore, it is very important for trade practitioners to understand the meaning of each incoterm as misuse of it may lead to negative customer interactions.
  • Removes Communication gap: The shipping incoterms are majorly intended to provide a common medium of communication between two different trade parties. It specifies the instructions in a detailed manner within three-letter acronyms which help the traders and other parties involved in the global shipping industry to understand the terms clearly. One must be aware of the proper implications of each shipping incoterms in order to avoid any problem.
  • It reflects the changes, if any, in the global shipping industry: Incoterms are reviewed and modified by the ICC every ten years according to the changes that are taking place in the global trade market. It not only clarifies obligations but also helps buyers and sellers to perform international trade practices in a standardised manner.

The shipping incoterms are useful in removing uncertainties that may arise due to the different interpretations of trade rules in different countries. It is also important for companies that are involved in the global shipping industry to understand the usage and significance of incoterms in order to maintain a standardised sales contract.