International Commerce Terms, or Incoterms, are a set of international trade rules for common trade terms. These terms govern seller and buyer responsibilities in moving product between countries, and they are redefined every 10 years by the International Chamber of Commerce (ICC). More importantly, many online sources reference 13 Incoterms in use, but the ICC’s revision of Incoterms in 2010 reduced the number of Incoterms to 11. So, you could be engaged in trade and using incorrect Incoterms without even realizing it. Thus, you need to know how understanding the correct Incoterms prevents disruptions within and enhances global supply chain management.
Incoterms Are Classified Into Two Groups
The first key to understanding Incoterms is understanding how they are categorically defined. The first seven Incoterms refer to any mode or modes of transportation. Meanwhile, the final four Incoterms govern common practices while transporting goods by sea or inland waterways.
Not understanding how the Incoterm operates can lead to severe miscommunications and unnecessary costs or delays in shipping. More importantly, some Incoterms, such as “Free Carrier” can have different connotations. In other words, they sound differently than they are.
For example, “Free Carrier” sounds like it implies “free shipping.” Yet, it refers to the seller delivering the goods to the carrier or appropriate party on the seller’s premises. Meanwhile, the buyer may have the obligation to pay for the carrier services if specified in the contract.
Failure to use the current 11 Incoterms correctly may reveal illegitimate, unethical business/trade practices. More importantly, not using or understanding them could leave the buyer or seller with more financial and customs’ responsibility than the other party. Furthermore, goods could be seized at the time of import for failure to pay duties if parties do not understand who bears that obligation. Primarily, Incoterms help the global supply chain keep moving by preventing bottlenecks from confusion over who is responsible for the risk and transport of purchased goods during international trade.
Any company that relies on shipping goods in the global marketplace needs to have a strong understanding of Incoterms, or employ the services of a full-service supply chain solutions provider who can handle all aspects of global trade compliance. To learn more about the trade compliance guidance Flash Global offers as part of our end-to-end service supply chain solutions, contact us today.