Since 90% of global trade runs on the oceans, it is not a surprise that some of the most used Incoterms are maritime Incoterms.
Moreover, the recent boom in e-commerce has made the D-Group Incoterms, previously used only in special situations, widespread by e-tailers.
Here we list the 5 most used Incoterms, starting from the fifth and going up to the top one.
5) FAS Free Alongside Ship (named port of shipment)
Suppose that you have to ship a huge power generator, or machinery that does not fit into a container. In global shipping jargon, it would be any out of gauge (OOG) cargo.
For this kind of goods, the best Incoterm is definitively FAS. While OOG cargos of course do not account for the majority of shipments, rather just a small part, the fact that FAS has a monopoly over such merchandise makes it in the top 5.
Under FAS, the seller is responsible to place the goods alongside the ship sent by the buyer to collect them. Delivery occurs just at that point. All transport costs after that point up to destination are on the buyer.
4) FCA Free Carrier (named place of delivery)
Many sellers think that the most convenient Incoterm for them is EXW Ex Works.
Yet, there are two issue with EXW:
- EXW was never meant for international deliveries.
- It is so inconvenient for the buyer that it might represent an obstacle to reach an agreement.
A much better Incoterm with essentially the same features, meant for international transactions, is FCA.
FCA is the best Incoterm for a seller that:
- Does not want to get involved in transport costs.
- Does not want to carry additional risk.
In fact, under FCA, the seller is sure that both his transport obligations and risk will end at origin. This is the same outcome that FAS and FOB provide, but only FCA is meant for containerized cargo.
Plus, while FAS and FOB require the seller to take the goods to the named port of shipment, there is not such requirement under FCA: the place of delivery could well be a port, but also an airport, a train station, a warehouse close to the seller’s headquarters, or even the seller’s premises.
Essentially, FCA is as convenient as EXW but much more flexible, no wonder it is so widely used!
3) FOB Free On Board (named port of shipment)
If FAS has the monopoly over OOG cargos, FOB has it on commodities.
Unfortunalty, FOB is a widely misunderstood Incoterm and its widespread use extends to areas where it should not be used at all.
Even if FOB is meant only for waterway transport and it is not intended for containerized cargo, we have seen FOB used even for domestic shipments by truck, which makes no sense at all.
Anyway, FOB is similar to FAS, the only difference being that the seller is responsible to load the goods on the ship sent by the buyer.
This requirement, which would be significant in case of an OOG cargo, is not that difficult if the good to be loaded is a batch of grain, or iron ore.
These are the type of goods that FOB is meant for, which are nevertheless a big part of international trade.
2) DDP Delivered Duty Paid (named place of destination)
Have you ever bought anything online?
Generally, the price of the goods you buy includes everything: transport, import clearance, taxes, etc.
You receive the goods at your door and only at that moment they are delivered to you.
If the truck carrying your goods has an incident and the goods are damaged or destroyed, you are entitled to new ones: the risk is on the seller.
This is how DDP works. Once upon a time, it should have been adopted with great care and only if the seller had the capabilities to carry out the whole transaction.
However, the boom in e-commerce has made DDP the standard for e-tailers that want to provide maximum comfort to their clients and avoid nasty surprises such as a bill for import taxes upon delivery.
For this reason, DDP is one the most widely used Incoterms, and its growth will continue to rise along with e-commerce.
1) CIF Cost, Insurance & Freight (named port of shipment)
Even if it is not meant for containerized cargo, CIF is the most used Incoterm in the world.
The reason is that it is a maritime Incoterm which is beneficial to both the seller and the buyer.
The seller can provide transportation up to destination and include this additional service in the price of the goods. However, the seller does not carry the risk that the goods are lost or damaged along the way, because risk shifts to the buyer at origin.
The buyer has the benefit of having the goods delivered at his own port. While the buyer carries the risk during transportation, CIF requires that the seller provides for a minimum level of insurance.
Therefore, the risk is balanced.
CIF is widely used in the transportation of automotive vehicles, commodities, and machineries, although it should not be used for containers.
For that, CIP Carriage & Insurance Paid To should be used as alternative. Since it requires a higher level of minimum insurance coverage and is not limited to waterway transport or to the port of destination, we prefer CIP to CIF overall.
Globartis Research Center