Understanding Incoterms

What are “Incoterms”?

Incoterms, or International Commercial Terms, are a set of globally-recognised rules of international trade for the sale of goods. They serve as a way for buyers and sellers to communicate on terms and obligations of the trade. 

The International Chamber of Commerce (ICC), Incoterms outline the roles and responsibilities of the seller (exporter) and buyer (importer).

Incoterms, basically, are the terms that you and your trading partner agree to when conducting a trade. They help simplify the technicalities, and responsibilities of a certain trade transaction.

Understanding Incoterms

Incoterms are generally shown as 3-letter acronyms. Each Incoterms rule has its own set of terms. They provide context and steps of international trade transactions. They also define the point where the costs and risks of the transaction transfer from you to your trading partner.

Depending on the Incoterms you and your trading partner will set, these terms define who carries the responsibility for organising, paying for and managing the following:

  • Shipment, transport and carriage
  • Insurance
  • Export certificates
  • Duties and taxes, and export documentation
  • Customs clearance
  • Other logistical activities

It is important to know the terms you are agreeing to, what you need to do under these terms, as well as the associated costs. 

The table below shows each Incoterms rule and the activities you and your trading partner are responsible for under these terms. Some of the Incoterms may not apply to certain trading partners, depending on logistics from their end.

*CIF requires at least an insurance with the minimum cover of the Institute Cargo Clause (C) (Number of listed risks, subject to itemised exclusions)
**CIP now requires at least an insurance with the minimum cover of the Institute Cargo Clause (A) (All risk, subject to itemised exclusions)

Why are Incoterms important?

They streamline the agreement between you and your trading partner.

The shipping process itself is complex. There are several factors you need to take into account per trade transaction. Since Incoterms provide clear rules of obligations for both exporters and importers, understanding the responsibilities of each trading partner per transaction is more streamlined.

They minimise the risk of shipping.

Agreeing with your trading partner on Incoterms defines who shoulders costs per parts of the shipping process. Each region defines tariffs, surcharges and fees differently, and Incoterms help in defining these costs more clearly, providing a more transparent way of calculating actual costs.

They are required in calculating export pricing.

Export pricing requires you to know your associated shipping costs. Incoterms help you factor in these costs. By understanding who shoulders tariff, loading charges, delivery costs and the like, you will have a more accurate idea on costs and export pricing.


Incoterms help define responsibilities for trading partners. This way, agreements are clear, as well as risk is better managed. 

While Incoterms provide a safety net for you and your trading partner, understanding the terms and process might prove to be a little overwhelming. McHugh and Eastwood have the expertise and the industry knowledge to support you in conducting your trading process. We are your reliable freight forwarding partner that will help you minimise risk, and provide the expertise needed to assist with your cargo, shipment and freight forwarding needs.

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