No sea freight without Incoterm
30 May 2023
Incoterms are delivery terms that regulate the rights and obligations of the buyer and seller in international goods transport. To avoid surprises afterwards, it is important to choose the right Incoterm for your import shipments. Which are the most common ones in sea freight and what is the most suitable Incoterm for your shipment?
A deal is a deal
International Commercial Terms, or Incoterms, were first introduced in 1936 by the International Chamber of Commerce (ICC). They are reviewed every ten years. There are currently eleven Incoterms used in international sea freight.
Incoterms define what the buyer and seller are responsible for. Using the right terms offers advantages and clarity, ensures lower transport costs. Disagreement can also be avoided in case of transport damage or errors that arise during transport. For example, the insurance only pays out if the Incoterms are applied correctly. So keep this in mind and take this knowledge into account in the quotation process.
Top 4 Incoterms
The Incoterm you use determines how much control you have over the transport, planning and costs. Which Incoterm is best suited for your sea freight transport? Below we explain the four most common Incoterms:
Full control with Ex Works (EXW)
With the Incoterm Ex Works (EXW), you as an importer have maximum control over your transport process. This is because you yourself choose a Dutch forwarder, who then arranges end-to-end transport for you: from the supplier in the country of origin to your delivery address. This way, all responsibilities lie clearly with one party. You also know in advance exactly what the costs are and what the planning looks like, so there are no surprises afterwards.
The best rate and a high degree of control with Free On Board (FOB)
Under the Incoterm Free On Board (FOB), you have almost complete control over the transport process. You choose your own Dutch forwarder, who arranges the sea freight transport and end transport for you. Your supplier is only responsible for the transport from the factory up to on board the ship.
This division of responsibilities has one big advantage: the supplier usually gives you a good rate for transport in the country of origin. Why? Simply because you are also purchasing the goods from them. The bottom line is that FOB is often the cheapest option. At the same time, you – as the importer – largely retain control over the transport and planning. Most importers prefer the Incoterm FOB for this very reason.
The supplier decides with Delivery Duty Paid (DDP)
Do you prefer to let your supplier handle the entire transport process? This is what happens with Incoterm Delivery Duty Paid (DDP). As such, this might seem the simplest option, where you don’t have to worry about anything. However, in practice there are some issues to take into account.
For example, we regularly see problems with shipments travelling under the Incoterm DDP. These include the customs formalities upon import and the payment of VAT and import duties, often resulting in unexpected extra costs. Are you importing goods from outside the EU? Then we would advise against using the Incoterm DDP.
Everything out of your hands with Cost, Insurance & Freight (CIF)
Is your supplier proposing an Incoterm? Then they will probably opt for Cost, Insurance & Freight (CIF). This means the supplier is responsible for transport in the country of origin plus the sea freight transport. The agent then chooses a Dutch forwarder who will deal with handling the goods when they arrive at the port of Rotterdam. You are only responsible for the end transport.
How beneficial exactly is the Incoterm CIF for you as an importer? First of all, you will be told in advance what your transport to the Dutch port will cost. You will usually get a (very) good rate for this. Conversely, handling costs are often charged at exorbitant prices – which you are only informed of and charged afterwards. In other words, the Incoterm CIF is not transparent and can often be needlessly expensive.
Want more info?
The aim of this explanation is to advise importers as well as possible about Incoterms for sea freight. However, no rights can be derived from this and you always remain responsible for the choice of an Incoterm. We recommend researching this area thoroughly.
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