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Incoterms 2010: What’s the difference between CIP and CIF Incoterms?

In this article we will talk about the difference between CIP and CIF Incoterms 2010, given the confusion they may generate. With this article any doubt you may have will be cleared, and you will be able to discuss the difference between both perfectly, as well as the reasons you would use either CIF or CIP Incoterms.

The majority of enterprises and people linked with International Commerce know the CIF Incoterms (Cost of Insurance and Freight) perfectly.

However, when you ask about CPT (Carriage Paid To) most won’t know the difference. In fact they could be the same physically, but not conceptually.

CIF are maritime Incoterms, whereas CIP Incoterms are multimodal Incoterms.

Incoterms 2010 CIF and CIP may look similiar but are very different indeed

This implies that CIP may be used with any transport (maritime, fluvial, road, air train and the combination thereof as in multimodal transport.) This takes us to the heart of the question.

When we utilize CIF Incoterms we may only agree upon a delivery place if it is a destination port.

That is to say that, for the seller, CIF means to leave the merchandise within the depot of the ship, which is tied up in the destination port. This is the only possible situation because CIF Incoterms are only for maritime use. However, CIP Incoterms have much more flexibility since, besides for being usable with any type of transport mode and combination thereof, you may agree upon any point of your destination country for delivery, whether it is an airport, a train terminal, a port, your client’s home, a transporter, etc.

Case of use:

Note that at some point there may be a CIF Barcelona, or CIF ship – Barcelona port coincidence.

For multimodal Incoterms we ought to define the delivery site with higher precision, since the mode is variable.

Why not use FOB Incoterms with a container in Incoterms 2010? (Part 4)

In this fourth and last article of the series  “Why not use FOB Incoterms with a container in Incoterms 2010?” we will further analyze more, very specific and specialized criterions due to which we should not utilize FOB Incoterms with containers.

There are many reasons not to use Incoterms FOB with Containers

• Risk control. Misuse of Incoterms 2010 will carry a great amount of risks in an international transaction. The risk of assuming costs sellers should not assume in the first place (such as the cost for the stay of a container in an exit port terminal in case the ship is delayed), risk of robbery, for example during the same period as the previous example, risk of a contract breach, etc.
• Logistical concept. At a logistical level the natural point for merchandise cession is not a ship, but a terminal for containers within a port. It is the point where all may arrive, that won’t affect any of the parts involved in case a logistical problem takes place, where no costs are duplicated and it is the natural point where containers are left in a port (within the containers terminal). As such, the Incoterm to be used would be an FCA for the containers terminal inside the port of origin. Note that the International Chamber of Commerce (ICC) in modifying the guidelines for the Incoterms 2010, has created a new Incoterm that may be used for any mode(s) of transport (it is multimodal), named DAT (Delivered at Terminal). It is an Incoterm thought solely and exclusively to leave merchandise at a terminal, which would be the most logical and natural logistical point for costs and risks transfers, as well as the one that adapts best to the logistical operations of merchandise transport.
• Professionalism. To me, the main reason why we should correctly use an Incoterm, not only why not to utilize FOB Incoterms with containers, but also why we should properly use Incoterms 2010 in general, is professionalism. That means that, if we are International Commerce professionals, I believe we should be able to adequately make use of the tools within our reach, and in this case, that means using them 2010 properly.

Well, I hope you enjoyed this article series about FOB Incoterm and I’m looking forward to receive your comments. Thanks to everyone, we’ll stay in touch.

Why not use FOB Incoterms with a container in Incoterms 2010? (Part 3)

Continuing the article series ‘Why not use FOB Incoterms with a container in Incoterms 2010?’, the time has come to get to the subject and analyze why the use of a container with FOB Incoterms is inadvisable.

Incoterms 2010 help reducing costs in our transactions

• In the first place, because the International Chamber of Commerce suggests so. Both in the 2010 and previous editions of the Incoterms, the ICC (International Chamber of Commerce) has discouraged the use of FOB Incoterms with a container. Is there any greater motive not to utilize a container with an FOB than having those who created the guideline, say so explicitly? To me, this is the greatest motive to make good use of Incoterms. You may verify this comment, by reading the book Incoterms 2010 by the International Chamber of Commerce ICC (ISBN 978-84-89924-46-8), concretely in the fourth paragraph of page 97.
• Because a container is an Intermodal Loading Unit. (ILU). A container is an ILU and serves the purpose of combining distinct transportation modes. A container arrives into a factory inside of a truck, then it’s loaded on another truck that will take it to a port to be loaded on a ship (the same container), and afterwards, in the destination port, that same container is loaded on a train that will follow its route towards the destination country, where a truck will pick it up again and travel across the final stretch until it reaches the buyer’s facilities. That ILU –the very same container- has been carried through distinct transportation modes. Hence, we can conclude that we require an Incoterm that allows us to use several transportation modes and the combination thereof, and this will be a multimodal Incoterm. FOB Incoterms are solely and exclusively maritime rules, which don’t permit the combination of distinct transport modes.
• To reduce costs. With an FOB, the seller must take charge of the manipulation expenses in the port of origin. These expenses are named differently depending on the country, THC, RAC, etc. and concern the port load and stowage manipulation. With FOB Incoterms, it is the buyer who takes charge of the freight and, in many occasions this includes both load and stowage. These operations are already included in the THC paid by the vendor. We may note that the same operations are paid for twice, one by the buyer and one by the seller.

In the following article of this series we will continue to inquire about the variables because of which it is inadvisable to use a container in FOB Incoterms.

These are the variables we will be working with:

• Risk control
• Logistical concept
• Professionalism

Why not to use a FOB factory with the Incoterms 2010: the RAFTD are to blame.

On several occasions we have received enquires as to why not to use a FOB factory, in the seller’s facilities with the new Incoterms 2010. Normally, individuals or companies that ask these questions are accustomed to using the RAFTD acronyms. These are trade operation terms created by the U.S Chamber of Commerce. RAFTD stands for Revised American Foreign Trade Definitions. In other words, they are the equivalent of Incoterms for the Unites States.

Blame RAFTD it is all its fault

Under these rules, the term FOB could be used with collection from the seller’s factory, so therefore, it’s logical that some companies still follow this concept, especially those based in the United States or that have worked with companies there.

The RAFTD were created in 1941 and abolished in 1985, although many companies continue to use them, even in the Incoterms 2010. In fact, where an Incoterm was listed (when the Incoterms 2000 were in force), in contracts and official documents, the source had to be stated. In other words, it was obligatory to add Incoterms 2000 ICC (International Chamber of Commerce) in order to distinguish which terms were used and state their source, since there was more than one regulation.

In the new Incoterms 2010 things are different, because these are the only existing terms so it is not necessary to cite a source (International Chamber of Commerce).

According to the Incoterms 2010, the Incoterm FOB is a maritime Incoterm and can only be used for sea transport. The point of cession of risk and cost is the ship’s hold when it is moored in the port of origin. What’s more, this Incoterm should only be used for bulk goods and/or general cargo and not for containers.

Why can’t FOB be used with a container in the Incoterms 2010? Part (2)

In order to better understand the use of the Incoterms 2010 and more specifically, why using FOB Incoterms with a container is not recommended, we should examine a little of this Incoterm’s history.

In 1936, The International Chamber of Commerce (ICC) created the first series of definitions of the Incoterms that we can consider predecessors to the Incoterms 2010. The first official edition of the Incoterms 1936 included the Incoterm FOB.

Why not use a FOB with a container

It’s worth noting that among the eight Incoterms 1936, six were for sea transport. It stands to reason that in those days, transport was ostensibly by boat, a little by train and seldom by truck, given that important infrastructures barely existed. The truck was generally limited to short distances, and the container didn’t yet exist.

Malcolm McLean was the father of the container concept, and in 1956, the first journey in container was conducted. The concept of a unit load came into existence during World War II, and it wasn’t until 1965 that containers were standardized with the ISO standard. From this moment on containers started to gain ground as a unit load component in international transport.

FOB Incoterms were created for sea transport and freight transport loads that were used in transport in those days, so FOB Incoterms were not designed for use with containers.

Incoterms 1936 included other Incoterms such as FOT (Free on Truck) and FOR (Free on Rail), designed for transport by truck and by train. The revision of the 1976 Incoterms was the first to include an annex for the Incoterm FOB that mentioned FOB Airport, given that air transport had undergone an important evolution and a solution was required, but handling and loading onto the airplane were not included.

In the revision of the Incoterms 1990, the International Chamber of Commerce included a new revision of the Incoterms rules, factoring in the evolution of international trade and significant changes in international transport, particularly in the use of containers and in combined and multi-modal transport, in addition to Roll-on Roll-Off transport, which led the ICC to incorporate a new Incoterm called FCA. This new Incoterm is associated to all-purpose transport, in other words any
method of transport and the combination of all of them. FCA replaces FOB in the use of containers.

As we can historically verify, FOB Incoterms were not created for containers. Bad adaptation, accumulated habits and limited training (over 20 years of misuse) have generated the continuous misuse of FOB with containers.

This is the second part of this article read the first part here.

Why can’t FOB be used with a container in the Incoterms 2010? Part (1)

Chris Taylor, one of our customers who bought our Practical and easy to understand Incoterms 2010 Guide found this information on it and asked us the following question:

Why can you not use FOB and CIF Incoterms for container shipments by sea, all my customers do ?

Thanks to Chris we realized we need to clarify that point in depth.

Using a FOB with a container in the Incoterms 2010 is a big mistake

Many individuals and organizations constantly ask us this question, given that it’s a very widely practiced custom to do so in companies dedicated to international trade. In fact, this change isn’t specific to Incoterms 2010, but also formed part of Incoterms 2000 and previous versions.

In this article we are going to pinpoint the reasons for the misuse of the Incoterm FOB. It’s worth pointing out that the ICC (International Chamber of Commerce)
defines each of the trade terms (Incoterms), both parties’ obligations and who should assume the costs and risks. They also provide recommendations for use, above all in this latest edition of the Incoterms 2010.

To start with, I believe that inappropriate use of FOB Incoterms stems from various factors.

1. The force of habit. The Incoterm FOB is one of the oldest and has been used for many years, although international trade has been constantly evolving
   and the International Chamber of Commerce has progressively modified its regulations. Nevertheless, companies have continued to apply a now
   outdated Incoterm when using certain modes of transport or types of goods.
2. It’s okay. Many users ask us: “But Remigi, I’m using FOB for air transport or with a sea container and the goods always arrive, we seal the deal and nothing ever goes wrong.” These users may be right, but they’re not aware of what could potentially happen. In actual fact, international trade is conditioned by the good will of both parties, the buyer wants to buy and the seller wants to sell and in the majority of cases, minor differences are smoothed out with good will. But if the operation goes wrong, the costs of a bad pact and a bad choice of Incoterm can escalate to great heights. Not just that, but a good choice of Incoterm provides improved efficiency, lower cost and better risk control of the operation.
3. Lack of Knowledge. Training in Incoterms and international trade in general isn’t great. The majority of individuals who work within companies that operate in other markets obtain their knowledge through experience and daily practice. Today we still find companies and trainers saying things like “Always use FOB for selling, always
   use CIF for buying.” It’s also common for companies to make a special effort to reduce production costs wherever possible, but subsequently disregard important aspects and generate enormous costs in logistical transport processes. It’s evident that knowledge can help us to conduct operations better and reduce costs and risks.

This is the first part of a 4-article series that we hope you like it.

Dedicated to Chris, thanks for asking.

Incoterms 2010 and services

We continue with our articles concerning the Incoterms 2010.

In our previous article, we analyzed how the new Incoterms 2010 solve a serious problem.

In this article, we would like to refer to the gap that exists and the unresolved problem of Incoterms management when it comes to services.

Unfortunately there is a huge gap on Incoterms 2010 about Services

The world is indisputably globalizing, economic transactions between countries are increasingly important and companies understand that their market is the entire world, whether they’re buying or selling.

What’s more, while transactions of physical goods make up the majority of transactions at an international level, international commerce in services is also increasing at a spectacular rate, above all in the most developed countries.

Without a doubt, the Incoterms regulate the physical flows of goods, but they are not designed to regulate services provided.

So what can the Incoterms regulate? They can regulate who pays for the materials, expendables, or instruments derived from the provision of services, who assumes the costs of maintenance, who pays for the trips, and when a service is understood to have finished and the delivery is made, cuando se entiende el servicio por finalizado y se realiza la entrega, among many other aspects.

As we already know, this year the International Chamber of Commerce, (ICC) has revised Incoterms 2000 and will present a new version: 2010. However, these has come into effect from January 2011.

I believe this was an ideal moment for the ICC to surprise us with the incorporation of an Incoterm that would resolve and facilitate international transactions for services, but it has been’t possible.

If you want to know how to deal and use correctly with the new Incoterms 2010 do not hesitate to read the following articles, or contacting me using the comments section on this page.

How the Incoterms 2010 solve a serious problem

The previous article on how the ICC should explain the Incoterms 2010 outlines some of the current problems we encounter with the Incoterms 2000.

One problem solved by the 2010 version that exists in the 2000 is the incompatibility of use of EXW with a CMR.

Incoterms 2010 solves a serious problem present on the deprecated Incoterms 2000

In the previous 2000, the EXW informs us that the seller must leave the goods in the loading bay of the seller’s factory or warehouse. The goods should be perfectly packed and labeled on the date that has been agreed.

In addition, the seller must provide all documents required for the dispatch. Loading onto the carrier vehicle must be assumed by the buyer or their representative, in this case, the carrier hired by the buyer.

Generally speaking, and especially when sending a full load (full truck)/, the carrier that comes to collect the goods must abide by the CMR agreement.

This international ground transport agreement regulates loading onto the transport vehicle, which must be assumed by the seller (loader). Carriers do not load their own trucks. As we can see, there’s a problem when the seller applies the Incoterms, and specifically an EXW, which does not permit the seller to load, and the carrier abides by the CMR agreement, which does not permit the carrier to load the vehicle either.

Evidently, one of the two will have to break the rules. I think it would be very interesting if the new revision of the Incoterms 2010 were to take this matter into account.

I understand that either of the two regulations could be modified but I think it’s important to make the most of this opportunity, and that the new 2010 should incorporate a solution to this problem.

We’ll have to wait another couple of months to see whether the ICC experts have considered this problem. They get my vote of confidence, and I’m sure they have.

Check for news on Incoterms 2010 and leave comments, questions and suggestions right on this page.

Incoterms 2010: The ICC should explain them to prevent errors

I enthusiastically celebrate the fact that new revisions (Incoterms 2010) have been made to the Incoterms 2000 with the new Incoterms 2010. This will be one of the most accurate revisions of the Incoterms in a long time.

It’s vital to adapt to the new facets of International commerce.

The International Chamber of Commerce (ICC) customarily revises the Incoterms every ten years (or has done so to date with the latest versions).

The ICC should explain them to prevent errors

Continuing this good practice, this year the ICC offers us a new version of the Incoterms. It will be presented in 2010, but will come into effect in 2011.

I found the Incoterms 2000 publication to be lacking in an explanation of how to use the Incoterms. It’s essential not just to explain what an Incoterm is, but also how it should be used and to detail the International Chamber of Commerce’s recommendations for use.

Organizations and professionals who use this material for training purposes need to apply special effort. It’s widely acknowledged that the Incoterms are used incorrectly as described in Common errors in the use of Incoterms.

Examples include companies who close operations in FOB, while the goods are sent via airplane.

On other occasions, sales are completed with EXW and the seller loads the goods onto a truck, or operations are conducted in which the goods are sent via container and a sea carriage Incoterm is applied instead of a multi-purpose Incoterm, etc.

Our understanding of the Incoterms 2010 would also be enhanced if the International Chamber of Commerce were to elaborate on the reflections and motives that have led them to modify the new 2010 version of the Incoterms. It would undoubtedly provide us with a more global and strategic vision of how to use them.

Find more information on Incoterms 2010 in this article.

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Incoterms 2010: They’re here now and you should know…

The Incoterms 2010 are here and our website: Incoterms 2010 brings you the latest news about their contents.

As you probably know, the International Chamber of Commerce (ICC) periodically revises the publications it creates. We currently use the 2000 version and we’re almost certain that the Chamber will now present its revised Incoterms 2010.

Finally Incoterms 2010 are here: is it worth the wait?

These publications reference the rules used in international commerce. The best-known rules are those concerning letters of credit or documentary credits, the latest versions of which are encompassed in the UCP 600 regulations and the Incoterms (International commercial terms) presently outlined in Incoterms 2000.

However, these regulations are being subjected to changes and modifications in 2010, which will appear in a new version known as Incoterms 2010.

The International Chamber of Commerce generally conducts revisions every 10 years; the regulations prior to the present version were known as Incoterms 1990, which was updated to become Incoterms 2000 and is presently in use, but this year, new Incoterms are to be introduced.

As you will note from this article’s headline, it is not yet certain whether the new Incoterms will be referred to as Incoterms 2010 or Incoterms 2011. In fact, at this very moment, the subject is under debate, as the presentation of the newly revised Incoterms will take place in 2010 but will not come into effect until January 2011.

For this reason, it is not yet certain whether the International Chamber of Commerce will retain its 10-year pattern, and name the latest Incoterms revision Incoterms 2010, but I suspect this will be the case.

In forthcoming articles we’ll bring you the latest updates on changes to the Incoterms, but for now, rest assured that these are not radical changes. Incoterms 2010 is not a revolution, but an evolution of the existing system. For this reason we recommend trying to optimize current use of them and to avoid common errors.

If you want to meet one of the new Incoterms 2010, check it out now.