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Understanding Incoterms 2020 and why are they crucial for Global trade?

If you have been doing business in domestic markets, perhaps the local conventions, nomenclatures, and rules suffice for it. But in the case of international trade, chaos and confusion come into the picture due to different countries following different trade rules. There are language barriers and the connotations of the terms might vary too; hence […]

Burak 6 ay önce
If you have been doing business in domestic markets, perhaps the local conventions, nomenclatures, and rules suffice for it. But in the case of international trade, chaos and confusion come into the picture due to different countries following different trade rules. There are language barriers and the connotations of the terms might vary too; hence incoterms.
What are Incoterms?
Incoterms are international commercial terms published by ICC. They are globally accepted, standardized and authoritative rules determining the responsibility of the parties involved in the international trade. In simplest terms, it is an agreement between the parties, which decides who will be responsible if anything goes wrong in the whole process.
Incoterms influence almost all aspects of the business but they are just part of the whole export contract and do not deal with the method of payment or breach of contract.
Incoterms are updated periodically and are used as abbreviations, each signifying the roles and responsibilities in a precise manner. You can see the complete list of Incoterms 2020 here.
But before we delve into its importance, let’s understand Incoterm with an example.
There is a seller Company A which deals with industrial machinery and is located in Frankfurt (Germany). The machinery is being sold to a buyer firm in Delhi (India). The pre-carriage here involves shipping the machine from Frankfurt warehouse to Hamburg port, the main carriage through the ship from Hamburg port to Mumbai port, and on-carriage shipping in a truck from Mumbai port to New Delhi (Buyer’s location).
The naming of incoterm would be:
CIP – Hamburg port – Mumbai port
• CIP = Carriage and Insurance Paid to
• Place of Delivery = Hamburg Port
• Place of Incoterms destination = Mumbai Port
This signifies and answers so many questions:
o The seller bears the risk if the machine is damaged during the transport until the place of delivery (Hamburg port), and then it is transferred to the buyer.
o The freight costs; pre-carriage, main carriage until the place of destination (Mumbai port) has to be paid by the seller and after that the buyer.
o The seller will have to get the insurance cover against the buyer’s risk till the place of destination (Mumbai port), after that the buyer.
Here we can see that Incoterms clarify monetary and procedural aspects and guide the individuals participating in International trade.
Why Incoterms?
It is imperative for buyers and sellers to understand the contract details and what responsibilities it entails, which tasks are to be performed, and till what stage the risks and costs are associated with each party.
• Incoterms helps in reducing the risk by eliminating the language inconsistencies globally by bringing all the parties involved on the same page and terms in a trade agreement
• Standardization and total clarity of rules reduces unfair business practices
• Clearly defined terms, rules, and responsibilities reduces the risk of legal complications
Its proper usage and utilization can lead to long term relationship between the buyers and sellers without any confusion on the trade terms and practices. It also helps in the reduction of freight costs for the buyers and sellers and fastens the total supply chain process.
COSTRISKINSURANCEFRANKFURTPRE-CARRIAGEHAMBURG PORTMUMBAI PORTON-CARRIAGENEW DELHIMAIN CARRIAGESELLERBUYERSALES CONTRACT(CIP –HAMBURG PORT –MUMBAI PORT)
Incoterms are still under-utilized and more awareness should be brought up for better communication among the parties involved in trade globally and ultimately avoid cross-cultural misunderstandings or any ambiguity in the contract.
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