When shipping internationally, especially from abroad to the U.S., setting the transaction terms from the moment the customer requests a quote is incredibly important. To avoid problems, unwanted costs, and even potential legal issues, there should be no room for confusion or ambiguity in the contract you set up with your customer. Choosing the correct incoterms for your transaction is paramount to determining who will pay for shipping, customs, and other necessary fees.
What are Incoterms?
The International Trade Administration defines Incoterms as follows:
The Incoterms® are a set of 11 individual rules issued by the International Chamber of Commerce (ICC) which define the responsibilities of sellers and buyers for the sale of goods in international transactions. Of primary importance is that each Incoterms rule clarifies the tasks, costs and risks to be borne by buyers and sellers in these transactions.
How to Choose the Right Incoterm for You
Several variables can influence the decision of which Incoterm to choose, such as the country of export, existing agreements with customers, and the geographical proximity of the customer to the production site.
For an example of how the country in question can affect which Incoterm you choose, we look to Mexico. Exporting to Mexico can also be complicated because of local idiosyncrasies. In this case, many companies opt to have the customer pay for everything.
If, for example, your U.S. subsidiary must get the goods from the parent company in Europe to send to a customer in Mexico, consider paying for the shipment to the U.S. and then having the customer pay for everything else.
One crucial detail to note is that the transaction qualifies for drawback if a product is shipped from abroad into the U.S., only to be turned over to a customer in another country. U.S. customs provides a reimbursement known as drawback for items that were not consumed within the U.S. [This topic is covered in another logistics inSite.)
United Cargo Management provides a helpful explanation of each of the Incoterms. The chart below, provided by noatum logistics, gives a good overview of each classification.
Business Norms
Generally speaking, DAP (Delivered at Place) is a commonly chosen Incoterm. In this case, the only fees the customer pays are the customs and taxes for import. This differs from DDP (Delivered Duty Paid), where the seller pays for absolutely everything. EXW (Ex Works), which is also common, is not normally used internationally, since the buyer must pay for everything. (For companies with U.S. subsidiaries, this tends to be uncommon since the seller (a.k.a. the parent company/manufacturer) typically at least pays for the costs associated with getting the product into the U.S.)
In Conclusion
Whatever Incoterm you choose for your shipment, be sure that the choice is deliberate and considers all variables. If you don’t choose Incoterms properly, you will have to pay unwanted fees and taxes, which will quickly eat away at your margins. Furthermore, it is advisable to find an international shipping partner and stick with it, rather than constantly shopping for the best rate. You may occasionally pay more, but dealing with someone who knows your company and your product can be helpful in many ways. Plus, they might provide discounts and incentives the more you work with them.